Learn Blockchain to Understand Crypto
3 min read

Learn Blockchain to Understand Crypto

Transactions are all around us, sitting on ledgers

Crypto gets a lot of attention with its wild price swings. But most people don't realize that crypto is based on a new technology called blockchain. Blockchain will impact everything because transactions are all around. Unless you look carefully, you don't realize that we live in such a web of transactions. Not everyone understands this nor pay attention to but it can be lifechanging. You can get smart about what is to come by learning about blockchain. Understanding blockchain may not be the most important thing right now while you deal with life's other urgencies but spending time on it will set you up for success.

Transactions are all around

Blockchain is not introducing any new technology. It is just a combination of existing technologies like ledgers, linked lists, peer-to-peer networks, encryption, and databases. What is the big deal? Businesses continuously transact with other companies, governments, institutions, etc., forming business networks and creating a series of transactions. Any object you see around you has reached you after changing hands multiple times across various parties. We live our lives surrounded by a web of transactions transferring value between parties.

Tracking transactions is costly

Keeping records of transactions is key to our daily lives. A record of those transactions sits on ledgers everywhere. As you sit in your room with the lights turned on, your utility company continually records the amount of electricity used. A continuous record is maintained about your electricity consumption and the money you owe. What you bought, a record of that sits on some ledger, along with what you paid in exchange. We continuously keep an account of happenings around us. Transactions can be completed quickly, but settlement can take much longer, and maintaining records of these transactions can be time-consuming and error-prone. It also adds to the cost of doing business.

For example, you press the “sell” button, and you sell the stock in your online brokerage account. The settlement of this trade will involve various parties who have their versions of the ledger for the same transaction. There is no shared ledger and they spend time and effort reconciling the records. A transaction provides value to both parties. That is why the participants agree to the transaction. The transaction happens at an equilibrium. Tilting that balance of the transaction in their favor is of interest to all parties. Then the question arises of whether you should trust the other parties' records.

The need for trust

Societies need trust for transactions to continue. In the social sphere, we have a sense of ethics and morality that encourages trustworthy behavior to maintain one's reputation. Similarly, societies enact legal rules and laws governing the boundaries and conditions of transactions in order to discourage untrustworthy behavior. We don't trust the parties to act in accordance with moral norms and the law, so we have implemented various checks and balances. These measures take the form of auditors, third-party trusted organizations, legal structures, etc.

Together, these factors create trust.

Let’s take the example of financial transactions. By swiping my credit card, I can buy groceries in a store without handing over any cash. I can do this because both me and the merchant trust a third party—the financial system. I am willing to leave my money in the banks, knowing quite well that I might wake up tomorrow and find that my account balance is zero. I have confidence that the bank wouldn't mistreat me, because they want to protect their reputation and stay in business. Even if a bank went rogue government has laws to protect me.

The trust technology

Blockchain focuses trust on technology rather than people or institutions. It enables us to eliminate the costs associated with infrastructure built solely to provide trust. Transactions on the blockchain are transparent to all. Intermediaries aren't required to certify, reducing costs. Companies today typically keep separate records of their work when they do business together. Occasionally, the records will be inaccurate, causing disagreements that are frustrating and time-consuming to resolve. The blockchain provides an elegant solution to the sharing of records.

On top of that trusted and shared set of records, you can now explore automated business processes. Trusted data facilitates smoother workflow between organizations. By creating this underlying infrastructure, blockchain facilitates collaboration between competitors.

And that is why you should care.

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