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Not a day passes without more information on cryptocurrency. Numerous cryptocurrencies are active on the market, but the oldest and most known is Bitcoin. Cryptocurrencies, like Bitcoin, are all based on the fundamental technology known as Blockchain. The cryptocurrencies are disruptive and have created a great deal of excitement, however, the Blockchain technology is based on the promise of revolutionizing any industry that relies on large amounts of data. Some have said that Blockchain technology will transform our lives in the same way that the Internet has had in recent decades. So, what exactly is Blockchain technology?
In his heart, a Blockchain relies on a system of "registers", which is certainly not new. The records have been around since clay tablets were used to record financial transactions. Double-entry accounting is based on permanent books in which new entries are added and the previous entries are not changed. Each transaction is based on previous transactions. Blockchain technology brings a simple ledger to a whole new, completely decentralized level. A blockchain ledger system is distributed over a peer to peer network. Everyone in the Blockchain network has an instance of the same identical ledger. Rather than relying on a trusted entity to keep the ledger, all participants have a validated log of each transaction. Transactions must not be financial in nature; they can be any digital data. Financial transactions, medical records, retail inventory, anything of value can be traced in a ledger distributed via Blockchain technology.
Blockchain stores information in batches called "blocks". These blocks are interconnected in chronological order creating a continuous "chain" of information. If you need to make a change to a previous block of information, do not overwrite it, just add a new block with the correct data. The new block records that "X has been changed to Y;" all representations of the data chain are kept intact and distributed to everyone in the Blockchain. This is a non-destructive way to track data changes over time similar to the centuries-old general financial ledger. The big difference is that no entity has control of the main ledger, all in the Blockchain peer to peer network have the same complete master register. Furthermore, each block contains a "hash" which is essentially a unique electronic fingerprint for that particular block. When blocks are added to the chain, they include their own hash and the hash of the previous block. Tampering or editing data changes the hash of that block. This ensures that data can not be modified or modified on any node in the computer network. The combination of immutability and distributed nature of the Blockchain creates trust in the data without a central authority required.
Before a new block of information can be added to the chain, some things must happen. First of all, to create the block, a cryptographic puzzle must be solved by the boot computer. Next, the computer that solves the cryptographic puzzle shares the solution with all the other computers in the Blockchain network. This process is called "job proof". The computer network will then test this "job test" and, if it is correct, the block will be added to the chain permanently. The verification process works by consensus, requiring the majority of computers on the network to validate the information before it is added to the Blockchain. The combination of a complex mathematical puzzle with the verification of numerous computers ensures that each block in the chain is reliable. Confidence in data is favored by the distribution of transparent peer-to-peer information, without a central data keeper.
By establishing trust in the data, Blockchain technology removes intermediaries from the data verification process. Many transactions today require a trusted intermediary such as a lawyer or a financial institution. We rely on these brokers to keep our information confidential and to verify the information of the other person involved in the transaction. For example, securities companies verify the "chain of title" on a piece of real estate before transfer. If the verified information was available in a Blockchain network, a history of all transfers of securities and other property rights would be immediately available and verified as accurate. Securities companies serve market participants by reducing risk, but they do so at a cost of time and money. Removing intermediaries and relying on reliable data would greatly reduce transaction times and costs while controlling risk. Blockchain provides a reliable interaction with data that completely changes the way we access, verify and deal with other parts.
Blockchain technology is currently in its infancy. It has been widely used by cryptocurrencies and its use in this sector has shown some of its weaknesses. The biggest cryptocurrency, Bitcoin, has a huge distributed ledger. Every transaction from the moment Bitcoin is born is included in the globally distributed Blockchain. Because Bitcoin is a monetary transaction, very few data points must be added to each block. Despite the small amount of data, every distributed ledger has grown to gigabytes of information. Bitcoin is proving that a large Blockchain audience has problems with scalability.
Bitcoin's Blockchain, due to its size, can process only about 7 transactions per second. Compare it with about 20,000 transactions per second that MasterCard can process. The time to verify a transaction is prohibitive according to modern standards. Imagine ordering your favorite coffee from your local bartender and trying to pay with Bitcoin; it may take 30 minutes to complete the transaction! In addition to the slow verification process, the energy costs of maintaining a globally distributed network are staggering. Forbes magazine reports that Bitcoin's global blockchain consumes enough energy to power a country like Switzerland every year or 1.5% of energy consumption in the United States. Most of this energy is the result of the demonstration of labor calculations, which is essential for the distributed ledger.
Technological advances will eventually solve some of Blockchain's weaknesses and overtime, Blockchain will change the way we do business. Sources of reliable data that do not require intermediaries in transactions will interrupt many industries including real estate. In a future article, I will talk about how Blockchain is used and could be used in real estate. As with any technology application, there are huge benefits and unintended consequences. The real estate industry is entering the big data era and the Blockchain technology will be part of the way we will interact with that data in the future.
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