Insights

Blockchain - A Short Introduction

Part 1 of the SPIRIT educational series

The year is 2021 and everybody is talking about blockchain.

Yet, people approach and describe blockchain in a slightly different way depending on their vantage point. What is blockchain anyway?

Broadly speaking, blockchain is a shared, immutable ledger that facilitates the recording of transactions in a network without relying on a trusted central authority.

In the future, blockchain will have profound implications for many areas of our lives. And it is far more than just an innovative technology. Although it may not yet be observable in everyday life given its nascent stage, the blockchain ecosystem is highly dynamic, fast-moving and ever-evolving.

Why Blockchain Matters

One way to look at blockchains is by thinking of them as a network, a technology and an underlying currency. Importantly, these things cannot be separated and none of the three can be dispensed with. Blockchains pay and transact in their own currency, usually referred to as token or cryptoasset, instead of using national currencies such as the U.S. Dollar. The assets recorded on the blockchain are purely digital and therefore intangible. They can comprise native tokens, non-native tokens – those underlying other protocols or applications - or intellectual property such as digital art and collectibles. Tokens on the blockchain can also be linked to tangible or physical assets such as fiat currencies, gold, securities (stocks, bonds) and real estate. Given the importance of money transfer for the future development and adoption of this new technology, financial applications are blockchains’ first killer application.

In their most abstract form, blockchains are a social coordination mechanism. They are a new way of organizing economic, social, and political activity. Fundamentally, blockchains are sovereign entities, free from outside interference. They are open and tamper-proof systems unable to be shut down by nation states or trusted third parties. They allow hundreds of millions - if not billions - of independent and untrusting participants to coordinate on a global scale. As Naval Ravikant put it, “Blockchains combine the openness of democracy and the Internet with the merit of markets.” In the context of blockchain, merit can refer to security, computation, bandwidth, storage or distribution, among many other things. Although blockchains are a new invention, they are an institutional technology - more similar to markets, corporations, and nation-states, than merely computing platforms.

Blockchain’s Breakthrough

Blockchain technology as we know it today originated from the 2008 Bitcoin whitepaper by Satoshi Nakamoto, an alias, who until today has not been identified. Although Nakamoto never referred blockchain specifically in the context of Bitcoin, calling it as a “chain of hash-based proof-of-work,” and a “chain of blocks” instead, the pseudonymous creator was the first to implement it in practice.

Contrary to popular belief, blockchain - also known as distributed ledger technology – is not the sole technology behind Bitcoin. Rather, blockchain is one of four foundational technologies behind Bitcoin which elegantly combines 1. blockchain, 2. a peer-to-peer network, 3. public-key cryptography and 4. a consensus mechanism for achieving agreement on the network called Proof-of-work (PoW). While blockchain is an integral part of Bitcoin, it cannot stand alone.

Put differently, what made Bitcoin work was not the blockchain itself, but its ingenious combination of a technical mechanism and clever incentive-engineering. Nakamoto solved a hitherto insurmountable problem with digital money which was how to prevent it from being spent twice, without relying on a central authority. In Bitcoin, blockchain was an under-the-hood invention that enabled the cryptocurrency and payments system to function. Unsurprisingly, other decentralized projects followed suit and emulated the Bitcoin protocol, either by largely replicating it or by introducing a new consensus mechanism, hashing algorithm or distinct features like smart contract functionality. Since then, open projects running on their own decentralized infrastructure are commonly referred to as public blockchains.

At the most basic level, the blockchain is nothing but list of records - called blocks - that are linked using cryptography. It is a simple data structure that grows over time as more blocks are appended. This data structure, with its inclusion of cryptographic hashes of previous blocks, ensures that potential alterations to past records can be easily detected and the database is consistent. Providing the database to every node in the peer-to-peer network ensures that it can’t be shut down or changed unilaterally. We will describe in a future blogpost in more detail how blockchains work from a more technical point of view.

In the following blogposts, we dive deeper into Blockchain and start by looking at Bitcoin and money and why it was invented in the first place, before diving deeper into the underlying technology. We show why money is a network and why blockchains and cryptoassets are inextricably linked. We will also shed some light on user-owned networks and illustrate why blockchain is the next evolution of the internet. We will then elaborate on the subject of decentralization, blockchain governance, smart contracts, blockchain applications and decentralized finance. All this will help you get a better understanding of blockchain.

Next step to learn more

Stay tuned for the next post of our educational series and subscribe to our newsletter or follow us on Twitter.

The next SPIRIT Blockchain Education Series post will be about:

  1. Blockchain – A short introduction
  2. Blockchain, Bitcoin and money
  3. Blockchain – A deeper dive into cryptography, hash functions and Merkle trees.
  4. Blockchain networks and governance
  5. Blockchain and decentralization
  6. Blockchain misconceptions and fallacies
  7. Blockchain interoperability

SPIRIT also offers educational courses on-demand. info@spiritblockchain.com

About SPIRIT Blockchain

SPIRIT aims to become a leading Blockchain & Digital Asset company focused on streaming, royalties and cryptoassets investments. The firm provides investors with a direct exposure to the sector, without the technical complexity or constraints of purchasing the underlying cryptoassets. SPIRIT’s strategy is based upon Management’s conviction that the Blockchain and Digital Asset ecosystem will register significant growth and outperform traditional asset classes over the medium to long-term. As a result, cryptoassets will become an integral part of diversified portfolios. Additionally, SPIRIT is building the bridge between North America and Europe/Switzerland.