Of all the trends we have discussed by now, blockchain is probably the most complex and least understood. But potentially, it is one of the most impactful. Remember that in the first module, FAB events has drawn a parallel to this technology and what Internet was to communication in 1994. Or what personal computers were to computing even before that. First of all, let us try to understand in what context blockchain technology can be useful. To avoid confusion we will take an example that is not linked to digital money or cryptocurrencies. Imagine that you want to buy a house in the countryside. You found one advertised in a forum with a short description and nice photos posted by the owner. Would you trust what you see? Probably not. You want to make sure first that the apparent owner is the really the owner. And ideally, you'll want to have an objective record of what happened to the house. When was it built? How big is it? Was it renovated recently? Does it fulfill certain standards and regulations, and so on. Traditionally, this information would be stored in a ledger. A bookkeeping that includes all the asset history. The ledger would typically be stored centrally under title authority, basically, an intermediary that you should be able to trust, and that, therefore, facilitates the transaction between you and the owner of the house. This intermediary authority will guarantee that you are buying the right asset from the right owner. It will also be the one that will keep records of your purchase and you will refer to it later when you need to prove your ownership. Also it probably takes some time to update and consult the ledger. And the title authority will charge you a fee for that. But it's the best you can get until blockchain came to play. So how does blockchain make buying a house different? To answer this question, let us spend some time discussing what blockchain really is. Given the time limitation, we will focus on the general idea of blockchain, and not go into technical implementation details like the exact role of cryptography or the consensus building rules. Simply speaking, blockchain is a ledger, a ledger built in a way that allows you to trust its information without needing an intermediary authority. In our example, it will include all the records on the house you want to buy. But this digital ledger is fundamentally different from the one that we described before. And there are two characteristics that make it different. Firstly, it is open, and secondly, it is distributed. What does open mean? It means that anyone can have access to it and either read from it or write new transactions into it. This fact makes it a bit more problematic to maintain trust in the ledger contents. So in the ledger, you need to have a protocol which accepts only the transactions that make sense. For example you can only transfer the ownership of a house if you yourself happen to own it. To verify this transfer, every record or transaction that is written in the ledger includes a digital signature that uniquely identifies who has written it. The combination of few transactions and their signatures is what we call a block. If the transactions within the block are allowed by the ledger protocol, the block is then signed by a unique key that validates the records. When the next transaction is created, a reference to the first block is included at the start of the second black to guarantee that the sequence of transactions is respected. Then, the same validation process starts again and again. Through this process, dependencies between the records are created. Like in a chain, that's why we call it blockchain. If at any point in time someone wants to change the content of a block, he needs to change its key. Then change the keys in all the following blocks. If you make it hard enough for a key to be generated for a block using cryptography, then tampering with the ledger becomes very difficult, even impossible. So, this is how an open ledger works. Now, let's see how to make it distributed. First of all, the reason you want to make it distributed is precisely to get rid of the intermediary authority. If everyone has a copy of the ledger, then you don't need the intermediary to store it. By the way, it is interesting to note here how memory inefficient this will become. Instead of starting it once, you are basically duplicating the ledger in every laptop, every computer. You can think which one of the three fundamental laws we have talked about in the previous video makes this possible. In a distributed ledger, whenever someone wants to add a record he or she would need to announce it to the full network. All copies of the ledger are then updated accordingly. In practice, though, it is not that simple. To validate a transaction, you make the network members compete to solve a difficult random mathematical problem requiring a lot of computation. For each block, the winner of the competition validates the transactions, signs the block, and adds it to the chain. In this construct, if a single person wants to insert fraudulent transactions in the block chain, he needs to have more computing power than the rest of the network combined. This is how blockchain as a distributed open ledger got a lot of traction. Not simply because it stores information, but because it creates trust without the need of any third party intermediation. This also explains why the natural start of blockchain was in the financial industry. A system that relies on a lot of trust in its institutions. In 2008 Satoshi Nakamoto, not his real name, wrote a paper describing a protocol to transfer digital cash between individuals without the need of a back intermediation. You have certainly heard about it, it's called BitCoin. Before going any further let me kill a popular myth, BitCoin and blockchain are not the same thing. Blockchain as a technology has many other application areas beyond creating digital currencies. We will discuss this in more detail soon. Nevertheless, BitCoin generated a lot of interest from investors in the overall technology. And investment in Blockchain startups peaked in the first quarter of 2015 at almost $300 million. The volatility of Bitcoin, however, as a cryptocurrency and few other incidents that happened over time, brought the investment amount down, over the years. But it also prompted tech entrepreneurs to build new blockchain or blockchain-based applications. Their objective was to completely disintermediate established players.
