What Is Blockchain and How Does It Work? | NextAdvisor with TIME

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For everything you’ve probably heard about bitcoin, ethereum, and other cryptocurrencies lately, many financial experts say that it’s the technology behind cryptocurrencies that you should really pay attention to.

“The underlying technology that most cryptocurrencies are built on, which is the blockchain, is a transformative technology,” says lule demmissie, president of ally invest. “and cryptocurrency turns out to be one of those transformations.”

Reading: Bitcoin and blockchain explained

Some believe that blockchain technology has the potential to change almost every facet of our lives, far beyond the impact of cryptocurrencies on our financial portfolios. dr Richard Smith, executive director of the Foundation for the Study of Cycles, a nonprofit organization dedicated to studying recurring patterns in economies and cultures, calls it a “revolution.”

Even crypto skeptics see the value of blockchain technology. the real gem is blockchain, says chris chen, cfp of insight financial strategists in newton, massachusetts. He believes that blockchain is likely to have much more staying power than popular cryptocurrencies like bitcoin, which he calls a flash in the pan. “Blockchain will continue to change the way we do things.”

That all sounds great, but what exactly does it mean? Here’s what you need to know about blockchain and what a blockchain revolution would look like.

what is the blockchain?

Think of a blockchain as a new digital form of record keeping.

Blockchain is the underlying technology on which many cryptocurrencies, such as bitcoin and ethereum, operate, but its unique way of securely recording and transferring information has broader applications outside of cryptocurrencies.

A blockchain is a type of distributed ledger. Distributed Ledger Technology (DLT) enables record keeping on multiple computers, known as “nodes.” Any user of the blockchain can be a node, but it takes a lot of computing power to run. nodes verify, approve, and store data within the ledger. This is different from traditional record keeping methods that store data in a central place, such as a computer server.

A blockchain organizes the information added to the ledger into blocks or groups of data. each block can only hold a certain amount of information, so new blocks are continually added to the ledger, forming a chain.

each block has its own unique identifier, a cryptographic “hash”. The hash not only protects the information within the block from anyone who doesn’t have the required code, it also protects the block’s place along the chain by identifying the previous block.

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The cryptographic hash is “a set of numbers and letters that can be up to 64 digits long,” says Vikas Agarwal, a partner in PWC’s financial services advisory practice. “That is the unique code that allows the pieces of the puzzle to fit together.”

once information is added to the blockchain and hashed, it is permanent and unalterable. each node has its own record of the complete timeline of data throughout the blockchain, from its inception. if someone tampered with or hacked into a computer and manipulated the data for his own benefit, he would not alter the information stored by other nodes. the altered record can be easily distinguished and corrected, since it does not match the majority.

“The way the system works, it’s almost impossible for someone to replicate the computing power that’s happening on the back end to reverse engineer it and somehow figure out what all those hashes are,” says agarwal .

how it works

here is an example of how blockchain is used to verify and record bitcoin transactions.

  • a consumer buys bitcoin or ethereum.
  • transaction data is sent through the decentralized network of bitcoin nodes.
  • nodes validate the transaction .
  • after approval, the transaction is grouped with other transactions to form a block, which is added to an ever-growing chain of transactions.
  • the entire block is encrypted and the transaction record is permanent; it cannot be deleted or modified on the blockchain.

The bitcoin blockchain is public, which means anyone who owns bitcoin can view the transaction log. While it can be difficult to trace the identity behind an account, the log shows which accounts are transacting on the blockchain. public blockchains also allow any user with the necessary computing power to participate in approving and recording transactions on the blockchain as a node.

but not all blockchains are public. Blockchains can be designed as private ledgers, so an owner can limit who can make changes or additions to the blockchain. while the pool of participants may be smaller on a private blockchain, it is still decentralized among those who participate. private blockchains keep the data stored in the database secure using the same encryption methods.

The idea of ​​a permanent, decentralized and secure registry of information has sparked the interest of various sectors and offers potential solutions to many security problems, record-keeping processes and data ownership problems that we face today. day.

a future based on blockchain

Blockchain gives us the technology to move information securely, says Agarwal, and have almost complete certainty of knowing the authenticity of any information you want to protect.

Think, for example, of the stories that have circulated in recent weeks about meme subjects and celebrities who cashed in on digital property by selling nfts (non-fungible tokens).

Because the underlying blockchain ledger is immutable, nfts allows sellers to verify the authenticity of a digital asset. When you buy an NFT, that transaction is added to the blockchain ledger and becomes a verifiable record of ownership. For those who want the ability to verify the authenticity of a digital work, blockchain helps value digital art and collectibles similarly to their physical counterparts. In theory, this leads creators to keep value through things that earn royalties on copies made of digital art.

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“That can seem confusing to the rest of us who don’t value those things,” says Smith. “But what it’s really showing is that you can have a digital economy with digital property rights.” it gives you the ability to uniquely say “I own and control this part of the digital economy,” he says.

For many of us, one of the most impactful use cases for blockchain technology may be the protection and secure transfer of personal data.

Imagine if your banking information was stored on a blockchain. When you open an account with a new financial institution or transfer information between institutions, a blockchain ledger could help you quickly and securely ensure that the transfer or new account is accurate and legitimate using your already stored information. “That has the ability to reduce a lot of costs, a lot of overhead, and it also becomes a good way to reduce fraud,” Agarwal says.

He predicts that blockchain technology has potential in almost every industry, “because every industry has some type of information that they try to exchange in a very secure way.” a blockchain-powered election race could benefit from a voting record that is locked down and cannot be changed after the fact. companies could keep more accurate inventory records using blockchain. Blockchain could even help consumers make more informed purchase decisions with greater transparency in product supply chains. technology can help food suppliers more efficiently track recalled products or allow consumers to avoid products created through exploited labor practices.

Uses like this illustrate the appeal of blockchain not only for security, but also for what Chen calls information integrity. “Blockchain has the potential to give people more security and assurance around that,” Agarwal says.

investing in the future

Companies and governments around the world continue to test and implement blockchain technology, but none of this will happen overnight. If we ever get to a point where government currency is blockchain-based or medical records are converted to blockchain, it won’t be soon.

In the meantime, you can bet on the power of blockchain by adding a blockchain-based cryptocurrency like bitcoin to your portfolio, though that’s not the only way to invest your money in the technology.

You can also adjust more traditional investments to be blockchain-forward. For example, find out if your ETFs or mutual funds include companies that are developing blockchain technologies or starting to use blockchain in their business operations.

There are even ETFs made up entirely of these types of companies, known as Blockchain ETFs. One example, launched in 2018, is the Siren NASDAQ Blockchain Economy Index (BLCN), which has outperformed the S&P 500 overall both year-over-year and on a three-year average. these funds do not put any of their money specifically into crypto; Instead, they invest in stocks of select companies, ranging from long-established companies like IBM to lesser-known startups like Galaxy Digital.

While not yet a guaranteed return, this may be a more conservative alternative to putting your money directly into the notoriously volatile cryptocurrency market.

chen compares the difference between speculating in crypto directly and investing in blockchain companies to the California gold rush two centuries ago. “A lot of people scrambled to dig for gold, and most never made any money,” he says. “The people who made the money are the ones who sold the blades. the companies that are supporting the development of blockchain are the sellers of shovels.”

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