Vrakas CPAs, Here Are Your Articles for Wednesday, January 30, 2019
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Just What Is Blockchain?

 

You don't need to know how the blockchain works to use it, but having a basic knowledge allows you to see why it's considered revolutionary. The blockchain is a digital ledger that can be programmed to record not only financial transactions, but also virtually everything of value.

Information on a blockchain exists as a shared and continually reconciled database. A blockchain database isn't stored in any single location—the records it keeps are public and easily verifiable. There's no centralized version for a hacker to corrupt, but it's accessible to anyone on the internet because it's hosted on millions of computers simultaneously.

By storing blocks of information that are identical across its network, the blockchain cannot:

  • Be controlled by any single entity.
  • Have any single point of failure.

Blockchain guarantees the validity of a transaction by recording it not only on a main register, but also on a distributed system of registers, all connected through a secure validation mechanism.

This is true because the blockchain network automatically checks in with itself every 10 minutes: a kind of self-auditing ecosystem of digital value. Each group of transactions is referred to as a block. A network of computing nodes makes up the blockchain—each is an administrator, making the network decentralized.

Blockchain's initial purpose was the development of cryptocurrencies such as Bitcoin—a secure and consistent financial system not under control of any government's central bank. But that's only the first of many potential applications. There are a range of other potential adaptations of the blockchain concept that are active or in development.

Anything that happens on the blockchain is a function of the whole network. Some important implications stem from this:

  • A new way to verify transactions, making traditional commerce unnecessary.
  • Stock market trades become almost simultaneous.
  • Types of recordkeeping, like a land registry, could become fully public.

As an example, Bitcoin has no central authority—it's managed by the network. The forms of mass collaboration this makes possible are just beginning to be investigated:

  • How about international remittances? The World Bank estimates that more than $430 billion in money transfers were sent in 2015.
  • The blockchain potentially cuts out the middleman for these transactions.
  • Transactions online are connected to identity verification. It's easy to imagine how the blockchain will transform other types of identity management.

And by storing data across its network, the blockchain eliminates the risks that come with data being held centrally. There are no centralized points of vulnerability that computer hackers can exploit.

With the internet, we all rely on the username and password system to protect our identity and assets online. Blockchain's security methods consist of public and private keys. A public key is a long, randomly generated string of numbers that becomes your user address on the blockchain. Bitcoins sent across the network are recorded to that address. The private key is like a password that gives the owner access to Bitcoin or other digital assets.

The promise is that if you store your data on the blockchain, it's incorruptible as long as you safeguard your private key. The blockchain gives internet users the ability to create value and authenticate digital information, and the expectation is that it will transform not just financial services, but also many other businesses and industries.

We're seeing just the beginning.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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