Here's everything you need to know about blockchains, the ground-breaking tech that could be as disruptive as the internet

Think of a blockchain as an ever evolving music playlist

Imagine that you start a new playlist on Spotify. Every time you add a song, you create a new version of the playlist, or a new "block" in the chain.  The new block contains your newly added songs and the previous songs. 

If your cousin decides to add some country music songs onto the playlist, she creates the next block in the chain. If that block is approved by all participants, a new block gets added to the chain and becomes the new version of your playlist. If your cousin also decides to delete one of your songs from the playlist, the next version of the playlist would contain a note that the song was previously on the list, but has been deleted.

 

 

They are most useful in situations where you need a trustworthy system of record

Blockchains are good for two things: recording events, and making sure that record is never erased. 

This makes them particularly useful in situations where two people want to make a deal but don't trust one another.

Some think blockchains could put an end to fraudulent deals, such as the Ponzi scheme that led to famed investor Bernie Madoff's demise around 2009.

Blockchains could eventually replace institutions like banks and law firms

As a society, we've developed institutions, like law firms and banks, to handle the exchange of property and money. 

But many of these exchanges can also be achieved using blockchain technology as a smart contract — or a self-executing contract. Smart contracts use rules to require that one thing happens in order to get a desired outcome. 

If Person A is leasing an apartment, for example, the smart contract could require that Person B transfer $1,000 to Person A in exchange for the apartment door code.

Blockchains eliminate the risk of having a middleman who defrauds someone on either side of the transaction or who takes the money and runs.

Bitcoin, the first blockchain ever, was created in 2009 to do just that

Bitcoin — the uber popular cryptocurrency whose price soared above $8,000 a pop this month — was the first blockchain ever created.

Bitcoin was created in 2009, following the instructions set out in a white paper written by a mysterious figure known as Satoshi Nakamoto, whose true identity is still unknown.

The original idea was to create an electronic form of cash that could be sent "peer-to-peer" without going through a bank — an objective which was inspired by the banking crisis during the 2007-2008 recession.

The whole system is "distributed," which means no single institution has control

Because there is no central server to hack or attack, hackers cannot just take over a single computer and make a change. This is compared to a bank, for example, which may have a central database of information, or a central vault in which all of the money is stored.

It also protects users from relying on institutions, such banks, which often make decisions in their own self-interests, and which can be volatile and susceptible to collapse in some regions.

Every change on the blockchain has to be approved of by the network

One of the reasons that it's so hard to edit blocks is that a blockchain lives across a distributed network of computers that all have to approve of any change that happens on the network.

This process is called consensus, and it's considered to be one of the major security benefits of working on a blockchain.

One major drawback of blockchains is that they are still pretty slow

Every application that is built on top of a blockchain processes the entire history of that blockchain every time a change is made. This means that transactions on blockchains are extremely slow when compared to normal computer speeds.

Bitcoin, for example, can only handle seven transactions for second, while Ethereum can handle around 13. This is compared to Visa, which as of 2014 could handle 56,000 transactions per second.

As blockchains like Bitcoin and Ethereum gain momentum, engineers will have to adapt the technology so that it is able to scale to its full potential.

When something does need to be edited, that requires a "fork"

Like a fork in the road, blockchain forks are when one chain diverges to become two. Forks are used in blockchains when there is a rule change or a block that needs to be removed.

However, because of the distributed network — which requires every computer to consent to any change — forks are not easy to achieve. Forks often become political issues in the communities that make such decisions.

Forks can get pretty political, especially when it comes to cryptocurrencies

The Bitcoin blockchain, for example, has seen several forks as the larger community works to create a blockchain that can handle more transactions-per-second than is possible on the original blockchain.

One of those forks took place in August with the creation of "bitcoin cash." The new blockchain has all the same history as the original bitcoin blockchain up until the moment that it forked. 

To take just one example of how political things got: the highly-valued cryptocurrency exchange Coinbase saw users flee in response to the company's decision not to host the new currency, bitcoin cash. The company quickly reversed its decision and decided to support the newly created currency. 

Ultimately though, most consumers will never notice a difference

Despite the hype, blockchains are designed to be a backbone for the transaction layer of the internet. While you may notice better tracking on items you buy online, or lower international transfer fees, most consumers won't ever interact with blockchains directly. 

Two of the most popular blockchains are Ethereum and Hyperledger Fabric

Anyone with the technical know-how can create their own blockchain, but many companies choose to build on top of existing blockchains with larger networks because the technology has been tested and improved upon with time.

Two of them most popular blockchains are Ethereum and Hyperledger Fabric, which both make it easy for startups and large enterprise companies alike to build blockchain tools.

Ethereum is more popular with startups

Ethereum is a public blockchain, which means anything that happens on it is publicly visible. It was created in 2013 by a 19-year-old named Vitalik Buterin, who has since become the face of the technology. 

Ethereum blockchain has its own cryptocurrency called ether — which costs around $400 a coin. But the blockchain has also become host to an array of startups who are building a range of products — from apps like uPort which aims to replaced state-issued IDs with an authenticated digital identity, to GridPlus, which uses the Ethereum blockchain to track energy consumption with the goal of lowering utility bills. 

Hyperledger Fabric lets corporations build private blockchain projects

Hypderledger Fabric is a hybrid private/public blockchain created by the Linux Foundation, which makes it easy for large corporations to create blockchain products with more privacy than other public blockchains allow.

It's been embraced by a host of large corporations like IBM, Cisco, and Oracle, which use the technology in their own blockchain products.

IBM is using it to track food around the world to improve food safety.

IBM has a few different blockchain projects, including a product that aims to prevent food-borne illnesses by improving the system that tracks produce from farm to grocery store.

The company is also teaming up with the fintech startups Stellar.org and KlickEx Group to use blockchain technology to process financial transactions across borders and currencies — a process which is often prohibitively slow and costly for small business owners, especially when they are in developing regions with smaller banking infrastructures.

Oracle is releasing a platform to let its customers build their own smart contracts

Oracle plans to release a product in 2018 that has "pre-assembled" tools for enterprises to use for anything that requires contracts, transactions, or tracking. 

It's one of the biggest projects to date which will let companies benefit from blockchains without having to interact directly with the complicated and hard-to-use technical infrastructure behind the technology.

Analysts predict that blockchain could be a $400 billion market by 2027

In October, the UBS Chief Investment Office published a report called "Cryptocurrencies: Beneath the bubble," which estimated that blockchain technology could about add $300 billion to $400 billion to the global economy by 2027.

"Investing in the blockchain wave is akin to investing in the internet in the mid-nineties," the note reads.

But the analysts at UBS are not without their reservations. The note said that while it could lead to "significant disruptive technologies" in the next 10 years, that there are still "technological shortcomings" which need to be resolved before it will be clear which applications will be the most profitable to invest in.