Why Use a Blockchain Part 1

Decentralization and Authentication of Transactions on Blockchain Networks

 

Blockchain is a complex technology that is most known as a way of recording financial transactions on cryptocurrency networks.

Bitcoin was the first cryptocurrency and the first project that has used blockchain technology to record transactions in a transparent, tamper-proof manner, which is why most people associate blockchain technology with Bitcoin in particular and cryptocurrencies in general, yet the technology itself can have a much wider array of applications that just digital currencies.

Blockchain technology has a lot of potential because of its unique properties and this 2-part article will explain 5 reasons to use blockchain technology.

 

Reason 1. Decentralization

One of the biggest reasons to use blockchain is the decentralization of technology. Decentralization means that blockchain networks do not have a central point of authority. This is important for two reasons.

First, it is much harder (but not theoretically impossible) to attack a decentralized network. It is harder because a decentralized network by definition does not have a central point that can be attacked. A bank has a central server or servers. So do most organizations and businesses, but a blockchain network doesn’t because it stores information in the blockchain, which is a ledger that exists on the computers of the network users called nodes. The bigger the network, the more users, and nodes it has, the harder it is to attack.

The second reason why decentralization is so important is that the authority running a centralized system can fail. 2007/2008 world financial crisis is an example of such a failure. The crisis has occurred in part because of the subprime mortgage crisis in the United States. In turn, the US subprime mortgage crisis happened because Wall Street banks, insurance companies, and lenders were basing their approach to home financing on the erroneous assumption that home prices can’t go down. This was a failure on the part of the banks, but it was also a failure on the part of the government because the government did not do anything to prevent the activities based on this assumption. Because of the assumption, banks were giving mortgages to people that couldn’t afford the mortgages.

The logic of the banks was the following: we don’t care if a person can afford a home and a mortgage because the prices of homes will be going up. Therefore, the price of the home tomorrow will be more than the price today. If we give a mortgage for today’s price, tomorrow the borrower will owe less than the price of the home because the price will be going up and the loan amount will not be going up. In the worst case scenario, the borrower will be able to sell the home at a higher today’s or tomorrow’s price and pay off the mortgage at a lower yesterday’s price.

This house of cards has collapsed when the prices of homes started going down. Companies such as Bear Stearns and Lehman Brothers declared bankruptcy and went out of business. Others went deep into debt.

When this happened, the government decided to bail them out because it was afraid that if a large number of big players collapses, the entire economy of the country will collapse. Altogether, the US government gave to banks, insurance companies, mortgage lenders and other institutions over 700 billion dollars. You can see the full list of where the money went at https://projects.propublica.org/bailout/list

It is important to notice here that not a single chief executive officer of a company on the list, which is a list of companies that have failed their shareholders, went to jail. All CEOs and managers were getting high salaries when running the companies during the bubble and kept their money after the bubble collapsed.

The money for the bailout came from the US Treasury, which is the same as to say from the United States taxpayers. Practically speaking, this means that the US government has shifted the responsibility for the actions of a small number of companies to the taxpayers and bailed out the companies with taxpayer money.

This is just one of the examples of what can happen with a big centralized authority such as federal government.

With blockchain, this scenario is not possible because a blockchain network does not have a centralized authority and this is the first reason to use blockchain technology.

 

Reason 2. Authentication and authorization

Blockchain networks have a unique way of transaction verification that makes the networks and transaction records very secure. The Bitcoin network applies the technology to the verification of financial transactions, but the technology can work in many other industries.

One of such industries is car industry. When buying and selling a used car, buyers want to know the history of the car. Currently, they have to rely on the seller to provide them with a list of service records and a list of payments for car parts. If the car industry were to start using blockchain, every car could have a history log with all the service records and part replacements. Just like users on the bitcoin network can see all the transactions for a bitcoin address, users of the car blockchain network could use a unique car identification number to see all car maintenance records, which would bring full and complete transparency to the car industry. However, it is important to understand that it is authentication of transactions that makes the transparency possible.

Another example of an industry that blockchain networks could disrupt is medical industry. Currently, doctors’ offices keep patient records separately. When a patient switches doctors or needs to provide information to one doctor from a different doctor, the process of information exchange is long and inefficient. During the process, errors can happen. The documents can get lost or stolen. In the same way, a car blockchain could contain all the information about car repair history, a medical blockchain network could contain a verified record of patient history.

On the bitcoin blockchain, verification occurs as a transaction collects confirmations. A confirmation means that there is a record of a transaction in a block of the bitcoin blockchain. The blocks of the blockchain are connected with via hashes. A hash is a relatively short string of code that allows for quick verification of information. To be deemed valid by the Bitcoin network, a transaction requires at least six confirmations, meaning that data containing information about the transaction needs to appear in at least six blocks of the blockchain.

The Bitcoin network serves as proof that authentication of transactions via confirmations and blockchain technology works for financial transactions. This same principle can apply to a variety of different industries and is yet another reason to use blockchain technology.