Feb 23, 2018

Blockchain Technology Explained

By United Capital

Photo credit: Getty Images

In 2008, a person (or a group of people) known by the pseudonym, Satoshi Nakamoto, invented the technology to power the cryptocurrency, Bitcoin, which was launched in 2009. Since then, blockchain technology has evolved so that today it is utilized by over 1300 different cryptocurrencies and additionally, it has expanded its applications into several other industries.

And though cryptocurrencies and blockchain technology have been all over the news recently, most people are still unsure exactly what it is, so I’m going to do my best to explain it.

First, some simple definitions might be helpful. “Cryptocurrency” is a medium of exchange – like the US dollar – but instead of being paper in origin, it is digital. All cryptocurrencies utilize encryption techniques to control both the creation of individual monetary units, as well as verifying the transactions when those units are transferred. “Blockchain” is the technology that allows cryptocurrencies to exist, and “Bitcoin” is the name of the best-known cryptocurrency.

What is Blockchain?

The best explanation I’ve heard comes from William Mougayar who wrote the book, The Business Blockchain. In the book he advises that we should think of blockchain as if it were Google Docs. “Before Google Docs, if you wanted to collaborate on a piece of writing with someone online you had to create a Microsoft Word document, send it to them, and then ask them to edit it. Then you had to wait until they made those changes, saved the document, and sent it back to you. Google Docs fixed that by making it possible for multiple people to view and edit a document at the same time.”

Blockchain does the same. It is a shared public database that allows everyone access to the same information simultaneously. With regard to digital currencies, it is a public ledger that records all cryptocurrency transactions, which are then instantly visible for all to see. It is a fully transparent platform. In addition, blockchain is decentralized, meaning it doesn’t rely on a single computer or server to function – it is hosted by millions of computers simultaneously. Also, because the blockchain database is not stored in one centralized location, it is impossible for it to be corrupted by hackers.

The Internet of Money

Just as the internet made it possible to freely distribute data online, blockchain technology does the same thing for money. The internet enabled all kinds of people to have a voice, without being forced to rely exclusively on newspapers, radio and television, which are typically controlled by large corporations. Blockchain and cryptocurrencies make it possible to transfer money around the world by also circumventing traditional corporate intermediaries.

For instance, if you sell a Bitcoin or send it to a friend, that information is publicly available on the blockchain. People may not know your identity, but they know exactly how much of the digital currency has been transferred from one person to another.

Many people see blockchain as an alternative to traditional banking. Instead of needing a bank or some other financial institution to verify the transfer of money, you can use blockchain and eliminate the middle man.

Blockchain Applications Beyond Cryptocurrency

Blockchain technology can be utilized to record not just financial transactions, but virtually anything of value. It could be useful in any business where people need to collaborate on documents and verify data transactions, like the legal business, for instance.

It is also anticipated that the technology could one day be used to help prevent voter fraud. Just as blockchain creates a public ledger for cryptocurrencies, it can also create a permanent and public ledger for votes as they are tallied, going a long way to ensure fair and democratic elections around the world.

Also, blockchain technology was recently used to provide 10,000 Syrian refugees with cryptocurrency-based vouchers. It was a means to bypass a traditional bureaucracy, and in doing so, allowed the refugees to have direct access to donations.

Blockchain technology is still in its infancy but by validating and recording the authenticity of transferred data and by creating an incorruptible, public platform, it has the potential to effect massive change on a global scale in a variety of ways.

United Capital
ABOUT THE AUTHOR

United Capital

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.