Personal Finance Essentials
The Present: Blockchains Today
From Months to Minutes:
How Blockchain Is Rewriting Commerce
What is a Blockchain?
A blockchain is a ledger, a superior kind than the ledger systems that have been in place for thousands of years.
Your checkbook is a ledger. So is an Excel spreadsheet.
We use ledgers to record and track deposits and withdrawals, assets and debts, income and expenses, and inventories.
Traditional ledgers are private; only their creators have access to it. Those who control ledgers can also change, copy and delete data. It takes a lot of work, knowledge and skill to create, manage and maintain a ledger; businesses and governments typically hire accountants to do the job.
There is also a risk of fraud: If the operator of a ledger wants to cheat, they can create a second ledger and fill it with false information – and then show the fake version to others. (This is known as “a second set of books” and the reason the notorious gangster Al Capone went to prison.)
To detect fraud, banks and governments hire auditors to review the work of the accountants. Bank examiners then check the work of the auditors, and inspectors then check the work of the examiners. Lots of lawyers are involved, too. All this makes ledgers slow, cumbersome and expensive to use.
Now, imagine a different kind of ledger. A ledger that the whole world can see, in real time. And, anyone can add data to the ledger, but once data has been entered, the data can never be changed, copied or deleted. Instead, each entry is permanent.
And instead of this ledger being maintained by a single person or entity, it is automatically stored on tens of thousands of computers around the world, each of which constantly validates the data. This means auditors, examiners and inspectors aren’t needed.
This new kind of ledger is called distributed ledger technology or blockchain. And it’s revolutionary.
Blockchain technology uses cryptographic authentication to verify data. This means we no longer have to rely on trust. This is important to understand, because the traditional global financial system is known as the trust economy.
We do business with each other because we trust each other. But trust has limits; that’s why we hire all those auditors, examiners and inspectors.
For example, reliance on trust is what makes buying a house such a cumbersome and expensive process. After you sign a sales contract to buy a house, you hire a settlement attorney to conduct a title search – to verify that the seller really does own the deed and that the deed is a legitimate document. Then, you buy title insurance in case of flaws in the title search. Meanwhile, you apply for a mortgage, and the lender verifies that you really do have the income and assets you claim to have. All this adds months and tens of thousands of dollars to the transaction – and none of that cost increases the value of the house. You’re spending all that money on verification because we operate in a trust economy.
Blockchain technology eliminates all that. If the deed has been placed on a blockchain, it has been cryptographically authenticated; therefore, there’s no need for a title search. The buyer’s financial ability to purchase the house, as a block of data, is uploaded and validated. So is a block of data about the seller. And all these blocks of data are linked together, as though they’re part of a chain. A blockchain.
Because all the data have been validated, the transaction can be completed almost instantaneously – as quickly as you buy bananas at the grocery. No need for title searches or title insurance. No escrow payments. Instant mortgage approval.
Blockchain technology eliminates months of delay and saves you thousands of dollars in fees – and you get to move into the house the day you sign the sales contract, not months later.
It is impossible to overstate how transformative this is for global commerce. It’s also incredibly disruptive, because if you’re the settlement attorney or the title insurance company, you’ve just become as obsolete as the maker of horse-drawn buggies.
In fact, blockchain technology eliminates all middlemen, the intermediaries who are between buyers and sellers. Thanks to blockchain tech, we don’t need them anymore. Stockbrokers, attorneys, insurance agents, ticket resellers – everyone who processes paperwork to help buyers and sellers execute transactions are likely to be out of work.