WTF (What the Finance) is Blockchain?
Continuing with my new WTF series that started last month with Bitcoin, today’s explanation (attempt!) is about Blockchain. A lot of people have been using Bitcoin/cryptocurrency/blockchain as interchangeable words, but they are not the same thing.
Cryptocurrency is a way for paying for goods and services with money that somebody made up and that is not backed by any country or central bank. Its value is the perception that it has value, not backed by any actual thing or taxing authority.
Bitcoin is a brand of cryptocurrency. There are many others. They include Litecoin, Ethereum, Zcash, Ripple, and Monero. Is cryptocurrency the money of the future? Maybe. Is Bitcoin the one that will last? Hard to say. Think of the early players of the internet age (AOL, Pets.com) that seemed like such giants at the time, but are no longer as relevant.
This brings us to the title of the blog – Blockchain. Blockchain is the method by which cryptocurrency transactions are tracked. But, blockchain can be used for many other things besides cryptocurrency transactions. In other words, Bitcoin needs Blockchain to function, but blockchain does not need Bitcoin.
Blockchain is Distributed Ledger Technology. It’s a way to track transactions that’s different from the currently used Centralized Ledger. With a centralized ledger, a trusted third-party controls data and sends that data out to the interested parties. What could possibly go wrong? Ask Target, Equifax, or any other large firm whose centralized data has been breached and sold on the black market to identity thieves.
With Distributed Ledger Technology, the transaction (purchase, contract, transportation, etc.) each party to the transaction has a copy of the data. The shared infrastructure is more transparent and the processing more automated. Each transaction has its own special code and cannot be deleted from storage. Data can be added to the Distributed Ledger, but not deleted.
Who is using this?
Companies as diverse as Walmart, L.L. Bean, Bank of America, Nasdaq, and, yes, Bitcoin are using blockchain technology to speed up transactions and safeguard data.
Here is an example. Say a large grocery chain has a report in the Denver area of tainted eggs that made some customers sick. With centralized ledger technology tracking transportation of the eggs, the origin of the tainted egg can’t be specifically pinpointed beyond the most local distribution center. Every egg from that supplier in the Denver area stores must be pulled from the shelves.
Using blockchain technology, each egg carton is tagged with a sensor that has a unique code. The sensor tracks the transportation of that carton to its final destination. The egg bought by the sick person can be traced back to the specific batch and supplier it came from. Only those eggs can be destroyed, saving time, money, and waste.
While Bitcoin futures would not be an investment recommendation from most long-term financial planners, watching the future of blockchain technology may be a more worthwhile use of research.