|By: Juan M. Villaverde
Big corporations have amassed giant treasure chests of customer data. They’ve stored the data in a central location. And they’ve connected their huge, centralized databases to the Internet.
In retrospect, that wasn’t very smart.
Despite the best firewalls anyone could possibly erect, they’ve effectively exposed their valuable data to anyone on the Web — four billion users and counting.
You’re probably well aware of this now. But for many years, most people had no clue how vulnerable their private data was.
Even in corporate boardrooms, they didn’t know. Or, more likely, they didn’t want to know.
They were trapped between a rock and a hard place — between the fastest, broadest diffusion of technology of all time (the internet) and the abject failure to secure it (from cyberattacks).
Result: Just with the five largest known hacks to date — at Yahoo, Hold Security, Marriott, Adult Friend Finder and Equifax — over 5.2 billion customer records have been compromised.
A big number? Darn right it is!
The 5.2 billion is 16 times the U.S. population. It’s nearly double the population of China and India combined. And unless something is done to fix the problem in a fundamental, sweeping manner, it can only get worse, a lot worse.
Blockchain must be part of the solution
Blockchain or, more broadly speaking, Distributed Ledger Technology (DLT), is a must-have piece of the puzzle to get out of this mess.
Why is it so secure? The main reason is a major paradigm shift on how data its stored: Instead of being centralized in one location or under the control of a central authority, the data is dispersed across countless locations with no single entity holding all the keys.
This is one reason why so many Fortune 500 companies are already flocking to blockchain. And it’s why the trend is bound to accelerate in 2019.
Indirectly, this is good news for cryptocurrencies. It will spur a major new influx of capital for blockchain research. It will attract tens of thousands of developers. It will put crypto on the map like never before.
But beyond that broad impact …
The blockchain solutions sought by most corporations have little to do with the public, open cryptocurrencies traded on exchanges.
To understand why, follow along with me as I walk you through a few simple steps …
Step 1. Don’t confuse blockchain with cryptocurrencies.
What’s the difference? Simple …
Blockchain is the technology. Cryptocurrencies were just the first application of that technology.
And now, as the industry evolves, we’re likely to see businesses and other institutions create new applications that have little or nothing to do with cryptocurrencies.
They will apply the technology to shore up the security of their mass databases.
They will leverage the technology to disrupt and transform the worlds of insurance, land ownership, supply management, even voting.
Some of these new applications will include a cryptocurrency. But many will not.
Warning: Right now, the crypto-focused media avidly reports any news about companies jumping into blockchain, but it often fails to adequately disclose that many of these efforts may have scant impact on exchange-traded cryptos.
Adding to the confusion, when corporations dive into blockchain, they sometimes launch their own cryptocurrency tokens for no apparent reason other than the PR effect. Like the red ribbon on a gift … or, if the application is fundamentally flawed, like lipstick on a pig.
Step 2. Be sure to understand the fundamental concepts.
A Distributed Ledger is a database shared by a group of people who agree to rules governing its usage.
Rules that are 100% unambiguous, totally transparent and … downright strict!
If you follow the rules, you can add new information to the database. If you break the rules, you’re kicked out — swiftly and permanently.
The rules are called “rules of consensus.” Adding new info to the database is called “writing to the ledger.”
A Blockchain — blocks of data linked together in a chain or chains — was the first kind of distributed ledger used in cryptocurrencies. But it’s not the only kind.
Decentralization is key. Right now, all corporations and nations are centralized to some degree. Plus, they’re hierarchical. Unless most participants obey the leadership most of the time, the organization sinks into disarray, even chaos.
What’s so innovative about distributed ledgers is that they are decentralized. There is no hierarchical leadership. And it works.
In theory at least, all participants are equal. No one person controls the ledger. No specific party is able to unilaterally force its will upon the other participants.
Trustlessness is another important concept: We say the distributed ledger is “trustless.” In other words, participants don’t need to trust an authority — let alone each other. As long as two individuals or entities stick to the rules, they don’t even have to know each other to build a relationship on the ledger.
Cryptocurrencies are the most popular application of blockchain we know today. In fact, the first successful distributed ledger and the first successful cryptocurrency share the same origin: Bitcoin.
But I repeat: A cryptocurrency is not the blockchain technology. It’s just one application of the technology — a digital asset that’s recorded on the shared database, the distributed ledger.
Digital assets are not new. The dollars in your bank account are also digital assets. So are most stocks and bonds. In fact, 92% of the currency that exists today is digital.
What makes cryptocurrencies different from all other digital assets is that there’s no central authority or government-based legal system to enforce the rules.
Step 3. Recognize that the digital world makes everything easy to copy and steal.
This brings us back to where we started: As soon as you create something of value in digital format on the Web, you make it possible for someone to download, steal, copy, share and copy again.
Like knocking off a Picasso with a simple click of the mouse. Not only can you make a copy, you can make one that’s absolutely identical in every conceivable way. Instantly!
You see, databases and digital assets are, in their essence, nothing more than computer files. And you can replicate them with two simple commands: Copy and paste.
Everything digital is vulnerable in that sense. The text you’re reading right now, for example. Just highlight this paragraph, press Ctrl-C (copy) and Ctrl-V (paste). Presto! You’ve got an identical copy.
This helps explain why billions of customer records have been hackers. And it’s why distributed ledgers are so revolutionary, so urgently needed. It’s the only technology in existence that can prevent illegal copying.
It’s also the only technology that can help distinguish between the real, original digital assets and fake copies.
But until distributed ledgers were invented, the only way to separate the originals from the counterfeits was by giving that task to a central authority — finance ministries, treasury departments, central banks. They and only they had — and still have — the final say regarding which digital money or asset is real and which is fake.
Step 4. Don’t forget when and why Bitcoin was invented.
It was in the wake of the debt crisis of 2008. The entire financial world as we know it was crumbling around us. And much of the blame lay squarely on the shoulders of the central authorities who abused their powers.
The problem: Governments and central banks were given far more authority than just validating real money and protecting us from counterfeits. They were also empowered to control or influence how much money there is and who gets the biggest shares.
Worse, they were empowered to abuse their authority — to print money in unlimited quantities … run perpetual budget deficits … devalue our hard-earned currency … foster an environment that encouraged extreme risk-taking … and create dangerous speculative bubbles.
Who has enough power to check that kind of central authority? Right now, no one.
That’s why Bitcoin was invented. It’s not controlled by any authority. Nor can it be confiscated by any government.
Whenever a Bitcoin transaction is sent, tens of thousands of independent validators are asked to check whether that money is real. If the answer is “yes,” the transaction is approved. If not, it’s rejected. Regardless of where in the world a sender and recipient are located, it takes only about an hour to confirm a Bitcoin payment. (And in the crypto world, that’s slow!)
Compare that to equivalent transactions in the banking system. With most international transfers, it can take two to three business days to send money from bank A to bank B. Try sending money to a remote country in Asia from the West and you could be looking at a week or two before your payment clears. This is because the centralized version of digital money requires a long chain of intermediaries, each checking back with the central authority of their currency before a payment can be confirmed.
Blockchain is vastly more efficient. It removes virtually all middlemen from the process, leaving only three parties: The sender, the receiver, and the blockchain itself. Alternative forms of distributed ledgers are even faster than Bitcoin. And in the years ahead, we’re bound to see these alternatives grow by leaps and bounds.
Step 5. Take a long, clear-eyed look into the future.
When you do, you will see some very amazing things:
Industries of all kinds will be disrupted — almost every single one in existence today.
This disruption will be far broader than just the world of money and finance. It could also impact almost every aspect of our lives.
Blockchain and other kinds of Distributed Ledger Technology will revolutionize society in ways we don’t yet fully understand.
But remember: Blockchain is the technology. Cryptocurrency is just one way of applying that technology. So, many of the innovations will not impact cryptocurrencies directly.