Blockchains can be described as
electronic records of information (assets, transactions, algorythms, identity
information) that are immutable because they are:
(i) Stored in multiple replica
versions on the servers of each user of the record and
(ii) verified by consensus of all the
users. Each change on the record is confirmed when more than 50% of the users
confirm it.
Public blockchains are open to anybody
and enable all users to participate in the consensus process. Private
blockchains are open only for authorized users, and only selected ones can
participate in the consensus mecanisms. If the blockchain is fully private,
only one party approves changes in the record; otherwise a consortium of
players is granted this permission.
Blockchain’s fundamental value is to
create absolute trust in the records without the need of a central authority or
a third party (e.g., a central bank, a broker, a custodian).
Its applications enable the storage of
basically any information in an immutable way. Blockchains have in this way
enabled the creation, among others, of:
(i) cryptocurrencies such as Bitcoin,
which combine an algorythm that creates virtual money and a ledger of
transactions, and
(ii) distributed ledgers that record the
ownership of assets beyond currencies, such as diamonds (Everledger) or
financial securities.
Blockchains can support smart
contracts, which are contracts that are immutable and execute themselves
automatically based on rules agreed between the parties. For example, a call
option can execute automatically once an exercise price has been reached,
reliably transferring ownership of the underlying security.
Another interesting property is that
transactions can be executed and recorded in blockchains much faster and
cheaper than with traditional methods. Transaction and intermediation costs are
cut dramatically, as verification systems and third parties become unneccessary.
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