There it is again, blockchain technology. By now most of us know that it’s probably beneficial in one way or the other. You’ve maybe already heard about its global payment feature, censorship resistant database or no more need of a third party. But what a lot of us want to understand is how it’s working exactly.
But do you really?
In our experience working with and investing in blockchain technology we have had some important realizations. Let me list and explain them to you so you can realize that really understanding blockchain technology is neither something you want nor something that will help you determine a blockchain technology investment. Here they are:
- Blockchain technology, like any new technology, is abstract
- Blockchain technology is extremely technical in nature
- Blockchain technology nowadays, has more than a dozen different shapes it can express itself in
Let me explain the points above. We’re living in a time defined by digitization. This has been very beneficial for us. For instance, access to Information, communication and finance have already seen so much improvements with the rise of internet technology. But unfortunately, anything that is not materialized or easily imagined as physical is very hard for us to understand. Try for instance imagining a megabyte or electricity. This is why understanding how internet technology works is no easy feat. We can physically see a postcard and understand how it travels from one place to another. But we can’t see the email travel from one place to another. So also we are used to visiting websites starting with ‘http://’ or ‘https://’, we take for granted that if we click ‘sent’ in our messaging app our message will shortly arrive, but we never ask the question about how this all works exactly. The technical foundation is usually very abstract to us as an end-user, and do we really want to know how it works?
Let’s look at an example like ‘http’. This is what http means: ‘HTTP means HyperText Transfer Protocol and it defines how messages are defined, formatted and transmitted and how webservers should respond to commands.’ Let’s assume for a moment that such a definition is not enough for you to really have a satisfying understanding of what the internet is, so you would probably visit Wikipedia, lets do this for a moment. Here we find terms like ‘transmission control protocol’, ‘slow start mechanism’, ‘request methods’ and ‘safe methods’. For a regular user like us these terms and concepts just won’t help in our understanding. It’s to technical, it’s too abstract.
Just like the HTTP protocol, blockchain technology is abstract and technical too. See for example the Bitcoin whitepaper itself. In the whitepaper of Bitcoin and the Wikipedia about blockchain there are many, almost endless terms and concepts that are difficult to understand. To name a few, which you can easily verify: SHA256, Merkle–Damgård construction, hash functions, block ciphers, proof of work, proof of stake, nonce, etc. And with all these difficult technical functions, people have created more than a dozen of different applications. There’s Bitcoin using one protocol, there’s Litecoin using a variation of it. There’s Monero or Zcash that has improved privacy features. And there’s Ethereum that allows smart contracts, again another function of blockchain technology that’s too abstract to understand easily. And like Ethereum, many other projects are working on smart contracts, but again in a different way Ethereum does it. And the list goes on, there are now more than thousand different applications based on fundamental concepts of blockchain technology.
So, unless you really want to start developing applications on a blockchain, or build your own blockchain, these highly technical concepts are just too difficult to understand. The level that we can understand is general descriptions like we’ve seen with http above.
Blockchain technology means: ‘Based on a peer-to-peer (P2P) topology (layout of a network), blockchain is a distributed ledger technology (DLT) that allows data to be stored globally on thousands of servers – while letting anyone on the network see everyone else’s entries in near real-time. That makes it difficult for one user to gain control of, or game, the network.’ And we can assure you, it works. Bitcoin has been working for more than 10 years. Ethereum has been developing applications on blockchain technology for more than 5 years. There are many thousands of projects, software developers, investors and traders and just a handful of them really understand, on a technical level, what blockchain technology is. And this is fine.
The technology itself is proven; it works. Just like you can use a mobile phone to communicate with anyone on the globe, you can use a cryptocurrency for payment. And just like we could invest in Amazon and Google using internet technology, we can invest in Bitcoin and Ethereum who are using blockchain technology. Don’t get sidetracked by the technicalities.
If you’re an investor looking for affirmation and confirmation of a blockchain project’s success, look for instance to the amount of fees paid to miners, number of transactions every day, number of developers working on the project or different applications build on that specific blockchain. These will serve as the perfect indicator to know if the underlying technicalities are sound or not. For some examples check out our post about the developments in 2019.