Everything you’ve ever wanted to know about the blockchain

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It may seem like an unnecessarily complicated process for moving money. But the blockchain has its advantages.

With traditional methods of payment every transaction in the world is registered on privately-held databases owned by corporate and state entities. These databases are not accessible by the public and are therefore closed. They are also usually owned by one entity. Because of this nature, they could be open to fraud or to being hit by an attack that could cripple a network, unlike bitcoin’s blockchain. Now think about the blockchain as a beefed up database. It records all transactions in bitcoin, doesn’t allow repeat payments, and requires several parties to authenticate the movement of the digital coin.

Because the blockchain is not centralized, it also means that if one part of it went down, the whole network would not collapse. There are many different parts of the bitcoin network that require it to work. So even if one miner went out of action for example, transactions would still work.

Problems with bitcoin’s blockchain

Bitcoin’s blockchain was designed to be a decentralized network. With that, however, has come a number of problems.

One big issue is that transaction times and costs in bitcoin have soared as the network has become more congested. This has actually led to disagreements by a number of parties that uphold the network regarding how the technology should develop in the future in order to address these issues.

For example, last year, a group of developers that didn’t agree about the future of bitcoin, broke off and split the underlying blockchain. This led to the creation of a bitcoin offshoot known as bitcoin cash. Another so-called fork happened, resulting in bitcoin gold.

And forks bring their own problems. New coins that are created are often dominated by a smaller number of miners. Should a miner control more than half the mining power of a cryptocurrency, they could potentially falsify the blockchain ledger. This has happened recently with bitcoin gold.

A number of other issues have also been flagged up, including the presence of illicit material buried in the bitcoin blockchain. We know that a single block contains data required for a bitcoin transaction to go through. But within that data, researchers have found some instances of content such as child pornography. These standard image or video files would be encrypted alongside the legitimate bitcoin data and so are very difficult to find.

One other weakness of bitcoin’s blockchain is also the very thing that makes it attractive: rewards. As mentioned earlier, miners who maintain the network are rewarded in bitcoin. But mining costs a lot of money in the form of energy to run the purpose-built computers and specialist hardware. There are different estimates as to what price bitcoin has to be to be profitable. One of the most recent studies came from Wall Street analyst Thomas Lee of Fundstrat who said $8,038 for one bitcoin would be profitable for miners. But if bitcoin remains below that for a long period of time, many miners could theoretically walk away, causing transaction times to increase further and pushing users away. The result could be a meltdown of the bitcoin network. So far, this has not happened.

But this kind of volatility and infighting is clearly not fit for business. Therefore, many companies began looking at the principle of blockchain technology and adapting it to what would work for their business. The parts of blockchain technology that have so far attracted companies include the ability to have a shared ledger of activity to help to make transactions more efficient, a reduced number of intermediary parties involved, and lower processing costs. When we delve into real-world examples of blockchain technology, it’s clear that many of the things that have caused problems with the bitcoin blockchain have not been adopted.

What other blockchains are there?

The bitcoin blockchain is not really made for companies to build apps and processes on. But a number of other companies have created blockchain platforms to help firms interested in the technology build processes.

Ethereum, Ripple, Hyperledger, IBM, R3, are just a few names that have developed such platforms.

Ethereum is essentially a blockchain platform that specializes in smart contracts. It has a digital coin known as ether linked to it. This is the world’s second-largest cryptocurrency by value. Like bitcoin’s blockchain, Ethereum’s is also public. Think of how companies like Apple and Google release software developer kits to allow people to build apps on their various platforms. Ethereum does something similar, allowing people to build “decentralized apps” on its platform, leveraging its blockchain and potentially using the digital coin ether to power their product.

Smart contracts are contracts that automatically execute when certain conditions are met from all interested parties. The automation can help to speed the process up, ensuring no mistakes along the way.

Meanwhile, Ripple is a blockchain specifically designed for cross-border currency transactions. The movement of money from one currency to another across the world, particularly for large businesses, is expensive and takes a long time. The process involves lots of different parties from banks to clearing houses. Ripple’s blockchain system, known as xCurrent, helps to cut out some of the intermediaries, cutting down a cross-currency transaction to seconds.

Ripple also has a cryptocurrency attached to it known as XRP, but it is not necessarily needed to power its xCurrent product.

The financial services industry has been one of the first movers when it comes to experimenting with the blockchain. CNBC spoke to two major banks who are trialing the technology.

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