Hardly anyone understands what Blockchain is, but everyone has high expectations of it. Let's start with the digital cryptocurrencies such as Bitcoin so that we can understand this technology's potential for the industry.
When we're talking about Blockchain technology, everyone thinks about cryptocurrencies. But what can Blockchain do and how can it be useful to the industry? To answer that question, we've got to go back ten years to when it first came about. It marks the moment of Bitcoin's birth. The 2008 recession led to a lot of people losing faith in the financial sector. Large banks’ and insurance companies’ investment decisions proved to be wrong, which had disastrous consequences for a large number of state budgets.
An alternative for transactions without intermediaries
With Bitcoin, Satoshi Nakamoto (a pseudonym) created an alternative to the pre-existing financial sector in 2008. It is an alternative form of payment, which should do well without the supervision of governments, banks, and large companies. Nakamoto’s whitepaper «Bitcoin: A Peer-to-Peer Electronic Cash System» also explains the technical and economic principles of cryptocurrencies. It is supposed to allow one party to make payments to another online, without a reliable broker being involved.
Although cryptography does exactly what institutes, such as banks, supervisory authorities, and central banks also do, i.e. checking the legitimacy and guaranteeing the integrity of the financial assets they are based on, this all takes place without an intermediary.
How Bitcoin transactions work
Bitcoins do not have any physical form and do not exist as a digital file. What actually happens is that each transaction is made in a public register (ledger). The more people have a copy of the ledger the harder it is to commit fraud. If someone transfers a Bitcoin to a recipient address, the addressee's credited increases or decreases accordingly. The addresses are also referred to as a wallet. All transactions are transparent so that a secure transaction is able to work. Every Bitcoin user is able to see any transactions that have been carried out with the Bitcoin Blockchain. However, the identity of the person behind the transaction itself is encrypted. The legitimacy of the transactions is verified be decentralised "miners". They clarify if the sender has any Bitcoin credit, what the value of it is and how they intend to carry out the transfer - just like an accountant. According to the Blockchain log, it takes about ten minutes to carry out the check. Each recipient is only able to decide for themselves as to how many miners he wants to put on their Bitcoin transaction. The higher the number of verifications, the longer the delivery takes and, importantly, the more secure it is.
Enormous power consumption for the control mechanism
The mining process described above depicts Bitcoin's consensus mechanism, the so-called “proof of work”. This model creates a public register, which everyone can trust, but which nobody has to control. The "miners” use a lot or processing power for checking the transaction. A fee is charged for the accountant's processing power during the mining process. During this, the miners consume an enormous amount of electricity. According to Digiconomist, it came to around d 37 terawatt hours (TWh) at the end of 2017. As a comparison, Switzerland consumed 62 TWh in all of 2014. This is enough to deter anyone who might have bad intentions. Hacking Bitcoins would require an enormous amount of computing power, electricity and money. If hacking were actually successful then it would result in a drop in the value of cryptocurrencies. For that reason, an attack just doesn't make any sense from an economic perspective.
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