No spam. Not selling anything. Max 1-2 newsletters a month.

Kaveh's Blog logo

Personal blog

Kaveh Tehrani

What is Blockchain Actually Used For?

Published on
5 mins read

You may have heard blockchain described as a decentralized ledger, distributed database, shared records, etc. which don't quite explain what use blockchain actually has. Blockchain is also often equated with Bitcoin or referred to as a payment system. It is neither. While the bitcoin whitepaper introduced blockchain as a technology, it also introduced bitcoin as its most famous use case. Bitcoin is primarily used as a store of value similar to gold. Blockchain's use cases however, go beyond transfers of value.

So what real-world problem does blockchain actually solve?

Blockchain is a technology that enables verifying whether something is unique digitally, without the need for a trusted third-party.

Blockchain is a combination of mathematics and computer science concepts that were widely used before the publication of the whitepaper. Satoshi invented neither decentralized ledgers nor cryptography. Ever used a password before 2008? Chances are the technology behind your authentication used more or less all the technology that bitcoin uses to this day.

The real innovation of the blockchain technology is combining them to provide a real solution to a real world problem.

OK, why is that important?

Before blockchain came around, there was no real way to verify uniqueness of a digital asset without involving a trusted third-party.

In order to understand why a third-party is needed without involving blockchain, we need to take a quick trip to the early days of the internet. The internet as we know it today was mostly developed in the US universities and military institutions. Its main goal, and hence primary focus of development, was the transfer of information. It does however, a terrible job at transferring value.

A copy of a text document, an audio file, an executable, etc. are all equal to each other. There is no real and fast way to know which is the copy and the original. That is completely fine if you are only interested in sharing information. Sending a cute cat photo to your bff doesn't need to involve verification of which is the original and which is the copy. A PDF of an academic paper is as good as the original. You both have exact copies of the same thing.

What is the problem then?

This makes a terrible system for transfers of value, e.g. payments. If I send you a dollar, you absolutely would need to know that I didn't send the same dollar to another person, a problem known as double-spending. That's the primary reason for payment processors to exists. In the US where the current largest and most-developed financial system exists, it takes at least three entities to send an ACH (Automated Clearing House) transfer which powers most of your every day non-credit transactions, including Venmo, Wise, among other popular apps.

Still don't see the problem?

The first obvious issue is with each middle party comes extra fees. If you have ever traded a stock listed on US exchanges, you probably paid fees to the Depository Trust & Clearing Corporation without even realizing it. That's over 2 billion USD in fees paid every year, taken from nearly every security transaction that is skimmed for what is quite literally, the digital equivalent of physically moving around paper stock certificates from the 1960s. That is not an exaggeration.

And on top it still takes 3 business days to settle even the simplest of transactions in the most advanced financial system in the world.

Blockchain by the virtue of providing a trustless mechanism for moving value eliminates all middles parties and allows transaction to reduce to just the transferor and transferee. It is exactly how unregistered securities such as bearer bonds could be exchanged between two individual before digitization and regulation introduced a plethora of rent-seeking middle parties.

The second issue is that in the current financial system settlement is tightly controlled with enormous frictions especially when it comes to international transfers. Ever tried to send money to someone who is not from your country? Even sending money between similar financial systems such as the US and Canada is an uphill battle with the only viable solutions being some fintech firms such as PayPal, Wise, or Revolut. Not all are available in every country, all have fairly high fees, and you are trusting the platforms to safeguard your money. Contrast that experience to this 6 billion USD transfer sent over the bitcoin network, where the total fee paid was less than 5 USD at the time, and settled in less than 10 minutes.

Alright so it's just for sending money then?

Blockchain solves a real-world problem which happens to be exceptionally suited for transfers of value. That is largely the premise behind Bitcoin. There is a whole sub-sector under the umbrella term of Decentralized Finance (DeFi). That said, blockchain has plenty of non-financial applications such as decentralized governance, proof of identity, funding of projects, etc. Here is an excellent talk by Vitalik that lays out some non-financial use cases.

Before you go, if you remember anything from this article, let it be that blockchain is a technology that enables verifying whether something is unique digitally, without the need for a trusted third-party.