Ye Olde CIO Explains It All
This Week: Blockchain-what are they , and are they another dang thing CIOs should worry about?
So…Aren’t Cryptocurrencies and Blockchain the same thing?
No. Cryptocurrencies were invented to be an alternative to government currencies such as the U.S. Dollar. When you electronically send U.S. Dollars – say, by paying with a credit card, or wiring money – the money is moved from the buyer to the seller by the banks as they resolve all transactions. Cryptocurrencies were invented for use outside the banking system, so there needed to be a way to create a record everyone could trust of exactly where each cryptocoin is, and who owns it. So blockchain was invented as a distributed ledger system to create an indelible record for cryptocurrencies.
So how does it work?
Each transaction is written to a block. Blocks are Write Once, Read Many. They cannot be changed or overwritten. Each subsequent transaction is written to a new block, which is then chained to earlier blocks, thus forming a blockchain. Blockchains replicate and synchronize in the background, and run checks to ensure that all records for a particular cryptocoin match exactly. So if Andrew sells his SIM Fellows Pin to Bob for SIMCoin AB22, and then Andrew uses SIMCoin AB22 to buy a Dot Autry Invitational Patch from Charlie, both transactions would be recorded on blockchain for Andrew, Bob and Charlie. Andrew and Bob would no longer be able to spend SIMCoin AB22, because Charlie has it. This is exactly how bank reconciliation works, but without the banks or centralization.
Umm…Isn’t that crazy?
Perhaps. It certainly creates some new and interesting challenges. Banks are not enthused about the loss of fees. Governments are REALLY not amused by all this. Think of it this way: Let’s say you make a Non-Fungible Token out of one your great vacation snaps, and you sell it to me for 1 Bitcoin, which is currently worth north of $30,000. That’s entirely between you and me. You send me the NFT; I send you 1 Bitcoin; everything gets recorded to blockchain…and we’re done. Now think of that same transaction, but using a credit card and U.S. Dollars. The credit card processor – say, Square – gets a fee. The bank with the merchant account gets a fee. Then the money is deposited in your account, and your helpful bank notifies the IRS that you have had a deposit of more than $10,000. Which will subsequently show up on your taxes.
So governments must not be happy with this
That’s an understatement. Governments large and small are fighting mad about this.
So why don’t governments just regulate cryptocurrencies?
Well, they’d like to, but they cannot figure out how. The problem is there is no Central Bank of Blockchain. So how do you track these transactions when the ledger could literally be anywhere in the world? The current plan seems to be launching national cryptocurrencies; there are discussions, for example, of the Federal Reserve Bank launching a cryptoDollar. The idea seems to be that this would then render all other cryptocurrencies into counterfeits, and users could be prosecuted for that.
Wait: If there is no Central Bank of Blockchain, how does anyone find anything?
Distributed Data Systems manage data where it is created and used. Properly designed, they are fast and reliable. You use one every day – the Domain Name System uses distributed data to locate things on the Internet.
Christopher J Feola is a SIM DFW Fellow. He welcomes comments and questions at Chris (at) Feolayden.com
The Fellows Blog is posted every Monday except holidays by the SIM DFW Chapter Fellows.