A blockchain is a transaction database shared by all nodes participating in the network. A complete copy of a blockchain contains every transaction ever executed in the network.
Bitcoin is the original blockchain application with decentralized nodes, a decentralized system for maintaining the ledger (based upon miners that compete for newly minted bitcoins and transaction fees), where the values that are transacted within the ledger are called bitcoins.
Traditionally, a publicly used ledger is kept consistent by two methods: 1) the ledger is maintained by a centralized entity, or 2) the ability to transfer values between cells of the ledger is controlled in some manner.
For the public ledger of USD, both approaches are used. Banks and financial service institutions are regulated entities that have the authority to move values between cells in the ledger, and printed money is difficult to duplicate.
If I buy a cup of coffee for $3.00 with my debit card, a number of regulated entities are involved in deducting $3.00 from my cell, adding $2.66 to the merchant's cell, and dividing the remaining $0.34 among the cells of the processors involved. To ensure that none of these entities creates USD in the process (increasing the overall value of the USD ledger), they must file copies of their ledgers with the U.S. government, and are subject to audits. (Of course, loans can increase the overall value of the USD ledger, but this practice is also regulated and audited by the U.S. government.)
If I buy a cup of coffee for $3.00 with printed dollars, my cell's value is first reduced by $3.00, I am given three dollar bills that represent that change in value, I give those bills to the merchant, and then the merchant exchanges those bills at her bank to increase her cell's value by $3.00. To ensure that no bills are created in the process, dollars are made difficult to counterfeit.
In a blockchain like bitcoin, the ledger is public and distributed. Here, the transfer of values between cells of the ledger is kept consistent due to an immutable public history of the ledger, and the inability to transfer value between cells without a validation intrinsic to the originating cell. That is, in a blockchain, I cannot reduce the value of a cell without the numeric key for that cell, and the current value of that cell is reflected in the public history of the ledger.
Because of these differences, a blockchain ledger has the potential to be advantageous over traditional ledgers to the extent that traditional ledgers are less efficient. These inefficiencies can range from the costs of regulating ledger-modifying entities (i.e. the costs involved in auditing banks and transaction services), to the costs of insuring against asset duplication (i.e. title insurance).
Still, unregulated node decentralization (like bitcoin) isn't necessary to take advantage of the benefits of a blockchain ledger. For example, a stock exchange could run on a blockchain ledger, yet the distribution of nodes (and possibly clients) in that blockchain could be controlled by a central authority. One can also imagine a currency whereby nodes were run by government entities, and financial institutions ran registered clients.
Of course, there are costs and risks involved in the maintenance of a blockchain ledger. However, it is likely that blockchain ledgers will ultimately prove to be more advantageous to than traditional public ledgers for the management of some assets.
Whether or not the original blockchain application succeeds, I believe that blockchain ledgers will replace many traditional ledgers in the coming decades.
Thanks, that's very generous of you. Trying to explain my thinking pushes me to better scrutinize it, and often leads me to new ideas. These are some of the reasons I find blockchain applications compelling, and why I think they have staying power now. Still, this is just the beginning. I think these technologies are going to make for interesting times.
I don't know enough about to say, but my guess is that it is ahead of its time. I was just reading an update on ethereum last night, and it blows my mind how ambitious the scope is. Much of the complexity can be kept behind-the-scenes (like the internet), but I do have the sense that the users of the system can't be so conceptually decoupled from the architecture if you want widespread adoption, especially when something as fundamental as contractual law is concerned. Most people see bitcoin and ethereum as things that could blow away with the wind, whereas the bureaucratic and glacial nature of the legal system gives a perception of stability, which I think can be under-appreciated. Even if the functional reality is different, IMO it will take time before the reality is digested and then taken advantage of. Personally, I see the potential for a new type of value arising from coins that are inseparable from a widely-used blockchain. As people grow more dependent upon the network, the value of the coins is reflected in that dependency. If the blockchain network were to become as critical as the internet, imagine the perceived value of the currency that could not be decoupled from its function. The longer a single blockchain network can set this example, the more prevalent this perception of value will be. If at some point this value trumps notaries and legal devices, then I believe that something like blockchain contracts will get a foothold.
Mk, could you please explain ethereum to me. I saw that article about it, but it was all over my head. Any form of simple explanation you can give me? I would point you to some specifics of what I didn't understand, but the whole thing just seemed really foreign to me.
In all honesty, my understanding of ethereum is probably insufficient. From what I understand, ethereum is a blockchain application, similar in a number of ways to bitcoin, but instead of simply changing values in cells (send 0.5 bitcoin to X address), ethereum transactions can execute code (which are called contracts), and cells have persistent memory which can be altered in numerous ways by contracts. It costs ether to execute these contracts, which is a way to determine if the execution of the contract is complete, and prevents network-bogging loops. Theoretically, applications could be built within ethereum, allowing for the decentralization and public validation of the application itself. Thus, a voting application could run in ethereum, and it would be transparent to all involved. Obviously, one concern about ethereum's practicality is the potential size of that growing blockchain ledger. The development news I linked addressed some of the kinds of operations that might be performed in a contract, how the state of an address is altered or read by the operations, and about lowering the overall memory involved in some operations.
Okay, so you grasped it as I did. I wasn't sure on the whole code execution thing. Just seemed weird and I couldn't really comprehend why you'd want that. But I guess it makes sense in a currency of the future sort of way
I'm not exactly a layman, but I'd still love to read that