Blockchain Technology Basics

The Intelligent Blockchain Investor

Blockchain Technology Basics

We’ll start our analysis by attempting to understand the market we’re looking to invest in. I call it The Game Being Played.

The Game Being Played

Like any other opportunity, blockchain is an investing universe with its own rules and ideas. There’s things which ‘just make sense’ in the context of blockchain, and there’s other things which ‘just don’t work’.

To help explain some of the larger concepts in this unique an exciting investing universe, I’ve broken the analysis of The Game Being Played into four components, spread across two articles. The four components are:

1. Blockchain Technology Basics (This Article)
2. Opportunities Promised by Blockchain
3. Blockchain Challenges to Overcome
4. Future Moves in Blockchain

Quick Note. This information should not be considered investing recommendations or investment advice. It is simply a mental model which I’ve used in my own life and desire to share with others. Consider your own circumstances and do your own research :)

The Technology

What is blockchain?

If you find yourself asking this question, great work! You’re on the right path, and you’re definitely in the right place.

Defining a ‘Blockchain’

In its simplest form, a blockchain can be considered as a distributed database that stores data in blocks which are linked together via cryptography. New data is stored in a block, which is then chained to the rest of the blockchain in sequential order. Hence the term ‘blockchain’.

However, to understand The Game Being Played, there’s a little more nuance to this definition. We need to understand these things:

1. A blockchain must be immutable. I.e. once information is in the blockchain, it cannot be changed or altered in any way. This creates an irreversible record and timeline of events.
2. A blockchain should be distributed in some manner. I.e. multiple records of the blockchain should exist in various locations and somehow all be kept up to date with each other. This creates redundancy and a level of security.
3. A blockchain should be decentralised. This means that the blockchain network should be able to meet all the various requirements for interaction (security, fidelity, etc) with no third party verification occurring. I.e. for a currency transaction, two entities should be able to transact with no requirement for a bank in the middle.
4. Ideally a blockchain should be transparent. I.e. anyone should be able to view the contents of the blockchain at any time. I say ‘ideally’ because there is some information we might not want to be transparent (i.e. healthcare data). It might be more accurate to say that the blockchain should be as transparent as possible in any given scenario.

Why are those things important?

Right now you might be asking yourself: So what?

Why is an immutable, distributed, decentralised and transparent way of storing data important? What is the big fuss about, and more importantly, why is there so much money flowing into it?

You’ve just asked another great question about The Game Being Played.

Here’s a few ideas to bounce around in your mind:

1. Trust in a System (not a third party corporation). If an autonomous system can be trusted to undertake a specified action or set of actions, we remove the need for a centralised authority to coordinate actions. In a way, we delegate this trust to an autonomous system which cannot be modified.
2. Global Interaction (without requiring and intermediary). An effective decentralised trust mechanism creates a way for interactions between entities to occur without the entities having a previous relationship. This creates a way for anyone with access to the blockchain (theoretically anyone with an internet connection) to participate in the blockchains economic model.
3. More than just transactions. An effective blockchain storage mechanism means we can store more than just a record of transactions. We can store contracts which automatically execute when predefined conditions are met. We can store critical data which can never be modified. For the more technically minded reader, we can start to programmatically define certain interactions.

Pause for a moment to think about what it would mean if you could securely transact with someone you’ve never met, on the other side of the world, without:

1. Requiring a credit card provider or payment provider
2. Requiring a wait period of several days before the money appeared in your account

And where:

1. The funds were only released when they completed their part of the contract
2. There was only one fee, paid upfront, which was in the range of 5c (USD equivalent) or less

That’s the kind of promise of blockchain.

A Few Quick Terms

Right about now your eyes might be starting to glaze over. You’re thinking to yourself, “I read this article to learn about how to analyse the market, not all these weird terms!”

You’d be right. We’re here to develop a framework for investing, not ‘nerd out’ about blockchain.

Bear with me while I quickly outline a couple of terms I use in the rest of this series of articles. Then we’ll get into more of the investment opportunity.

1. Smart Contracts. Smart contracts are nothing more than contracts which execute when certain conditions are met. For instance, you could have a contract which says that every time I cross a certain boundary, I’ll pay a fee of 10c (USD equivalent). Once the contract is agreed upon, it is set in stone until the previously agreed upon finish date.
2. Non-Fungible Tokens. Non-Fungible Tokens are similar to a unique identifier. The difference is that they can be interacted with. For instance, I could have a piece of a computer chip assigned an NFT and progressively update it with the computer chip it goes into, the motherboard the computer chip goes into and the laptop the motherboard goes into.

Alrighty. Enough of the technology. Let’s start talking about the opportunity!

For the more technical readers out there, this was only a very brief introduction to the technology and skipped over a ton of information. If you’re interested, get in touch and I can recommend some more reading.

Next Stop: The Opportunity

The next stop in The Game Being Played is to explore some of the opportunities blockchain proposes to offer us.

As always, if you’re enjoying this series, take time to interact. Comments, claps, tweet mentions, LinkedIn mentions and sharing is a great way to interact with a community of people who can add to our exploration. A great way to stay up to date with this series as it comes out is by following me or signing up to our email distribution. A word of caution though — please keep it respectful, fun and polite. We want a safe place to learn and grow ❤

Articles in the Series so Far:

1. Hello World ❤
2. The Blockchain Investors Dilemma