Monday, October 30, 2017

Terminology Clarifications: Blockchain, Distributed Ledgers, Bitcoin and more

I have to admit that I am not the most technical person in the world. I don't know any programming languages and the maximum extent of my computing prowess ended with building my own computer.

However, as I learn and study more about crypto, one of the issues that always crops up is the people referring to WRONG definitions, and therefore their argument is literally wrong, though usually the idea that they are trying to convey is clear if you are willing to give a lot of leeway in the meaning of the specific words.

So anyway, let's get down to business.

Ledger = Database = Record / Table of information

"Ledger technology" is not freaking modern crypto magic. Cavemen wrote ledgers to record how many sheep their neighbours owed them. Ledgers are nothing new. Everyone knows how to make and read a ledger, and everyone has multiple ledgers of different things.

Ledgers are really no different from databases. It is just a set of recorded data. Nothing special, nothing unique.

"Distributed Ledger Technology" (DLT)

Distributed Ledger Technology is also NOT blockchain. A lot of people equate DLT to block. DLT IS NOT BLOCKCHAIN. Nothing about blocks and chains here.

Distributed ledgers is a technological improvement, but a very specific one - multiple copies of a ledger are updated independently.

The main benefit? You have redundancy, which means that taking down or manipulating a single copy of the ledger is futile, because there are still multiple copies of the "real" ledger available, and they continue updating to the "true" picture.

Blockchain

This is the term that confuses people a lot and gets wrongly used the most.

A blockchain is simply a chain of blocks. Every new block is able to PROVE that it is linked to the block before it, and that block and prove the link to the block before it, and so on.

This means that a chain can prove that all transactions from the start of its existence until now complies with a certain set of rules and that the data flow and update of changes is uni-directional - only happening in the future.

This is extremely important, because this means all previous transactions are set in stone and can never be manipulated. Changing any transaction, such as editing the value, changing the destination or even removing the transaction, would be detectable and future blocks will recognize that a change has occurred - and will reject that change.

Bitcoin

Bitcoin uses both blockchain AND distributed ledger technology to record down transfer of payments.

This is why bitcoin "technology" and is so powerful. It merges 2 very important technologies together.

No previous transaction can ever be changed - it is final.
Any tampering will the previous transactions will be rejected - manipulation is not possible.
Multiple copies of the ledger makes it impossible to manipulate all the ledgers.

Summary

I still get slightly annoyed when people discuss technicalities but still fumble with public blockchains (bitcoin, ethereum), private blockchains, public and private databases, distributed ledgers, tokens and currency.

Just to be clear, because some people have freaking ridiculous notions of what is possible and impossible - no large / serious nation that understands blockchain will ever issue their own national currency on a public blockchain. Never.

Someone may be appointed to act as custodian or facilitate the private-public cross-chain swap, but it would never be fully on a public blockchain.

Most likely a government would reserve themselves the ability to pre-mine and generate as many tokens as they want, and they would then issue those digital fiat equivalents with a 1:1 ratio with actual circulating currency. As mentioned, anyone that wants to trade such currency of a public blockchain would require a cross-chain swap, or a custodian to facilitate the issuance / guarantee of the tokens convertibility. Of course, if a government body is appointed to do this, it can be low/no cost because it would be non-profit or even subsidized. However, a private body could do this as well and charge a service for it. However, trustless cross-chain swaps between public and private chains could solve this in the near future, so I think there would be no third party required.

Looking at the state of things and how quickly things are being developed, I honestly would not be surprised to see a digital fiat equivalent (DFE) issued by a country within the next few years, even if it is initially not widely used.

1 comment:

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