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Blockchain 101

Chances are, you’ve heard of Bitcoin, Ethereum, or cryptocurrency in recent months. The market capitalization and price of these assets has sky-rocketed and the resulting media frenzy has perked the interest of the general public. But what exactly is a Bitcoin or Ethereum or cryptocurrency?

Before diving in, a little bit about me. I am a current second year MBA student and prior to Yale, I spent 5 years at Bank of America Merrill Lynch. Most recently, I was the TA for Mgt 843 – FinTech, co-taught by Professor Marina Niessner and Lecturer Steve Daffron, founding partner of Motive Partners, a FinTech venture capital firm. Over the next few weeks, I’ll be doing a deep dive into what cryptocurrencies are and what it’s like to be a student at Yale SOM who is interested in FinTech. Future blog posts will include:

  • Bitcoin 101
  • Ethereum 101
  • Overview of Mgt 843 – FinTech
  • Student involvement with FinTech club leaders
  • Discussion with Hexa, a Yale student run cryptocurrency startup

So back to the question: what exactly is a Bitcoin or Ethereum or cryptocurrency? In order to understand this question, we first need to take a look at blockchain because blockchain is the underlying idea or logic that all cryptocurrencies including Bitcoin and Ethereum, rely upon. Blockchain has a few characteristics:

  • Connected network of computers
  • Each computer holds the same series of ‘blocks’
  • Each block is a list of transactions

Lets break this down and walk through this. If I were to sell a pen to someone and receive a virtual coin in exchange, that would be a transaction. Several of these transactions are linked together into a list and this list is linked to other lists. This means that all transactions are ultimately linked together, all in one list. This is referred to as the ledger. And this ledger is shared with all the computers that are connected to the network.

Whew. That was a lot. Okay, but what does that mean and why is it important?

Before the blockchain, the only method of keeping track of ownership and transactions was through a third party. This third party, typically banks, would provide trust and an up to date record of the value of someone’s account and resolve conflicts if needed. The blockchain eliminates the need for this third party by distributing the ledger to all the computers on the network, thereby ensuring that everyone has the same data. No one owns this ledger and no one can alter this ledger, except by conducting a legitimate transaction. Perhaps Marc Andressen said it best:

“[Blockchain] gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate”.

Marc Andressen is alluding to the idea that all data in this world lives in some type of database. Medical records, inventory, and bank accounts are all rows in a database, owned by an entity.  For security reasons, these databases are closed. It would be chaos if anyone could go in and make changes. But now with the Blockchain, some of these databases can be opened up. This eliminates friction, creates freedom of information, and reduces reliance on the institutions that own the database. The applications of the blockchain extend far beyond what you have heard about Bitcoin, Ethereum, or any other cryptocurrencies. Chances are, our lives will be made much better by the blockchain and much sooner than we might imagine.