September 19, 2016

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Understanding Blockchain-Part 3

Understanding blockchain technology is crucial, as on a blockchain bitcoin movement across the network is permanently stamped from the moment of its coinage. For a bitcoin to be valid, it must reference its own history as well as the history of the blockchain. Each bitcoin contains direct links to its genesis block and all subsequent transactions. Therefore, the blockchain must be preserved in its entirety. So important are the processes of mining— assembling a block of transactions, spending some resources, solving the puzzle, reaching consensus, and maintaining a copy of the full ledger. The system distributes power across peer-to-peer network with no single point of control. No single party can shut the system down. Proof of work method requires users to expend a lot of computing power (which requires a lot of electricity) to defend the network and mint new coins. The energy cost of overpowering the bitcoin blockchain would overweigh the financial benefits. Hence it is that much more secure and fool proof.

Anyone can download the bitcoin protocol for free and maintain a copy of the blockchain. It leverages bootstrapping: a technique for uploading the program onto a volunteer's computer or mobile device through a few simple instructions that set the rest of the program in motion. It is fully distributed across a volunteer network like BitTorrent. There is no middleman to go after anymore. The blockchain resides everywhere. The functioning of the blockchain is mass collaboration at its best. Satoshi programmed the software to reward those who work on it, and belong to those who hold and use its tokens, so that they all take care of it. It is programmed such that no matter how selfishly people act, their actions would benefit the system overall and cater to their reputations, however they chose to identify themselves. 

Additionally, blockchain technology promises to mitigate several forms of financial risk. 
  • Settlement risk, the risk that your trade will bounce back because of some problem in the settlement process
  • Counterparts risk, the risk that your counterparts will default before settling the trade
  • Systemic risk, the total sum of all outstanding counterparty risk in the system.

Rather than trusting big companies and governments to verify people's identities and vouch for their reputations, we can trust the network. For the first time ever, we have a platform that ensures trust in transactions and much of the recorded information no matter how the other party acts. Blockchain technology has certainly caught the eyes of many Wall Street titans since they are making millions of investment into FinTech startups.