Blockchain technology is designed to facilitate the transfer of digital goods (like money) without the need for any middlemen (like banks). One characteristic commonly mentioned as a benefit to the blockchain is that it “gets rid of the middleman.”
But why would we want to eliminate a middleman?
After all, the role of the middleman ensures a transaction is done honestly and one party receives the goods/services that another party pays for. The obvious downside is that the middleman oftentimes requires some percentage of payment from the transaction to ensure a trusted exchange.
In some cases, the middleman can take an unnecessary percentage from a transaction, simply due to the promise of safety and the lack of a better option for the other parties; who do not know or trust each other, involved in the transaction.
Blockchain technology not only guarantees a secure transfer, it can also be used to later verify which transfers have taken place, providing a permanent record of all transactions that have ever happened.
This immutable computer code ensures that nobody can change these records afterward.
Simply put – once information is added to the blockchain, it’s impossible to remove it.
Solving The “Double Spend” Problem
Blockchain solves an age-old riddle known as the Double Spend Problem. It makes all accounts and transactions public without revealing any private details. Since account balances are public, it would be obvious if someone used the same money twice. Once digital money (like Bitcoin or Ether) is sent, it’s publicly added to the receiver’s account.
How does the “Double Spend” problem work?
Digital money (like Bitcoin or Ether) is essentially just a computer file, in theory, it would be simple for someone to “counterfeit” that computer file by simply copy and pasting it. Now before blockchain came around, the only solution was for banks to keep track of the money in everybody’s accounts, so that nobody could spend money twice.
What does this mean exactly?
It may not seem like much, but solving the Double Spend problem is considered a pretty substantial breakthrough, as it allows digital goods to be sent directly from one person to another, without using ANY third party. Not needing a third party (like a bank) to handle accounts and transactions means they can faster and cheaper. In addition, all of your personal information can remain private since no third party is storing it.
The Craze Around Blockchain & Common Misconceptions
The keywords most important to understand are: no third party, no middleman and decentralized.
Perhaps the biggest misconception with regards to blockchain technology is that people can consider it a singular concept, incorrectly assuming there is only one blockchain. Please understand that “blockchain” resembles more of an umbrella term. Anyone can create a blockchain, and the use-case for them is almost endless.
Also, when people hear Blockchain they instantly think of Bitcoin or digital currency. It’s best to think of blockchain as a digital infrastructure and bitcoin (or another cryptocurrency) as the application of that infrastructure.
More on this as we go along.