A Simple Understanding of Blockchain

What is Blockchain?

Blockchain is the technology behind the cryptocurrency, Bitcoin. Blockchain is like a digital ledger, housing all transactions that occur across the entire Blockchain network. This digital ledger is stored on every computer that is using or transferring cryptocurrencies. Every time a digital transaction occurs, the information is reconciled with multiple digital ledgers (this is referred to as peer-to-peer). There is no central ledger, which means all information is public and verifiable.

The open and reconciled ledger greatly reduces the ability to record fraudulent transactions. For example, if an individual tries to fraudulently increase the amount of bitcoin on their ledger, the transaction must be verified across multiple ledgers. When the other ledgers cannot verify this transaction of data, the transaction is unapproved and not recorded on the individual’s digital ledger.

Blockchain also makes it more difficult to hack an individual’s data. Because the transactions are recorded on every ledger simultaneously, it is much more difficult to trace where the transaction originated from.

Why is It Called Blockchain?

A single block is a record of new transactions. When the block is verified by multiple notes, it is recorded to the digital ledger. In other words, the digital ledger is a chain of blocks.

Each transaction is linked to a private password (a complex key made of random numbers, letters and symbols). These passwords are stored by Bitcoin users to confirm their ownership. Usually, the private passwords are stored in a Blockchain wallet, similar to a banking app. The use of private passwords and peer-to-peer software removes the use of a middle man; banks are not required to verify the transfer of money.

The Future of Blockchain

Central bankers in the United States, Singapore, Britain and Canada have conducted experiments on how cryptocurrency and Blockchain technology might be integrated into the financial system. In September 2019, a board member of the Central European Bank described Facebook’s cryptocurrency, Libra, as a “wake-up call” to electronic payments.

Blockchain technology has the potential to go beyond transferring cryptocurrencies. Currently IBM, JP Morgan, Apple, Google and other financial and tech firms have invested over $2 billion into Blockchain research projects. In June 2019, Google announced Chainlink, a software used to connect Blockchain to cloud applications.

Central bankers in the U.S., Britain and Canada have also conducted experiments on how Blockchain technology might be integrated into the financial system. In as early as 2014, China formed a cryptocurrency research group around the creation of a national digital coin.

Blockchain has its advantages and disadvantages, but it is clear that this technology is not going away. As more companies develop Blockchain-based software, it is important to understand how this technology works and the impact it could have.

 

About the Author

Cami L. Grimm, CPA, is a Manager at Brown Schultz Sheridan & Fritz (BSSF) with over five years of public accounting experience. Cami specializes in providing accounting and auditing services to for-profit and nonprofit entities and has worked within a variety of industries.

 

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