Monday, December 18, 2017

Is Bitcoin's Blockchain Technology Just Another Distributed Database?

Some skeptics think that Blockchain is over hyped, and it is just another type of Database.

This isn't true, and blockchain technology (the basis of Bitcoin) has the potential to revolutionize many fields, such as stock trading, real estate titling, and supply chain tracking.

A blockchain is more than a distributed database.  

Some quick definitions for everyone:

1. Centralized database (probably 90% of databases) - all parts and data stored and maintained in a single location.

2. Distributed database - the data is stored in different parts of a network but, ultimately,  there is a central point of control.  

    Two characteristics of central and distributed databases:

    A. They operate in a trusted environment.

    B. The owners of centralized and distributed databases can restrict read and write access to outsiders.  

3. Block chain, AKA Distributed ledger -  Uses cryptography to go further than a distributed database:
    A. They operate in a UNtrusted environments.

    B. Anyone has unrestrict read and write access.

Here is an example.  Individuals and companies like Goldman Sachs and J.P. Morgan want to buy and sell stocks.  They don't trust each other, so they use an exchange.  The exchange is a needed middleman, because of the trust issue.  The exchange itself has a distributed database which stores the transactions, but access to this database is done through the exchange's interface.  They settle trades in 2 days, and charge a fee.

A blockchain is used instead.  Everyone (Goldman Sachs, J.P. Morgan, your Aunt Sally's Schwab account) has copies and can read or write to it. None of them trusts each other, but they don't need to because the cryptography registers the blocks and prevents tampering.  The encryption process of future blocks depend on the encryption of previous blocks (a chain of hashes), so fraudulent transactions can't be inserted.  Now, there isn't a need for a middleman exchange with a fee, and transactions settle instantly.