Metadata is information that can be inserted into a transaction by the sender. Metadata will be stored in the blockchain together with the transaction.
Typically blockchains store transactions, a transaction says how many coins were transferred from address A to address B and when was it. Nobody nows why the transaction was made, and nobody knows who own those addresses, only the participants know about it. And that’s good for us in the cryptocurrency space but its not good for the legacy financial world there’s an enormous amount of value in the metadata of the transactions.
In the Traditional bank transactions are able to carry some additional information that specifies their reason or context, and we know it as a REFERENCE number. A sender of a transaction can insert a reference number in order to give meaning to the receiver, for example, I can do a transfer from my bank account to the landlords bank account and set RENT as the reference, in that way when she receives the money she is able to identify that is the money for the rent.
Also a receiver of a transaction can ask the sender to insert some text into it for identification. For example, when you use an exchange like Binance or Coinbase or a broker for the stock market you’ll see how they give you a reference number that is tied to your user and that’s how the match the payment to your profile.
So, as we can see this is very useful in the traditional banking system. So why don’t we bring it to the crypto world, when precisely what the govenrnments and traditional finantial institutions are saying they don’t trust cryptocurrencies because its impossible to know from where the money is comming and and they need to know that in order to fight terrorism and money laundery activities.
Therefore eventually the crypto land will have to talk to the legacy financial system and how we can provide them with the additional information they need? The answer to that is metadata, and metadata can contain the story behind a transaction. Metadata refers to ‘data about data’. In other words, it describes the context, content, and structure of records.
Is information that can be inserted into a transaction by the sender. Metadata will be stored in the blockchain together with the transaction. Everybody can easily find any transaction stored in the blockchain so everybody can also see metadata. And also only a sender can sign a transaction by the private key so it is basically proof that the sender inserted the context into the transaction.
The problem is that metadata is incredibly personal and private and it has a big difficulty in the cryptocurrency space because all the transactions here are permanent, they live on a blockchain they’re transparent and the minute that we would attach metadata to a transaction here we’d run into a situation where we could be potentially exposing very sensitive information to the general public, I don’t want to attach my name to transactions for everybody to know how much cryptocurrency I own.
And that’s why Metadata can be whatever a sender and/or receiver consider meaningful. It can be a text, specific structured text, number, hash, a combination of that, etc. If the context of metadata should remain secret then it is the responsibility of the sender to encrypt it.
Metadata in Cardano can have a maximum of 16KB or around 8000 words, to give you a reference the bitcoin whitepaper has 3,219 words in 9 pages so you can store the bitcoin white paper as metadata in Cardano in a single transaction but cannot store a movie.
A common practice is to create a digital fingerprint (hash) and store it instead of the original text. The text is then stored externally. The digital fingerprint can be later used to verify that the reader has the text that has not been changed. In other words, that it is the original form of the document.
Notice that the privacy could remain in the hands of the sender. The sender is able to prove that she has sent a lot of transactions.Is that useful? It depends on the context. If you wish to obtain a decentralized loan then it can be useful to prove that you have paid off some in the past or regularly pay for electricity.
This feature can be used by parties that need to issue digital proof that somebody has received some certification or diploma. This information can be stored in the blockchain. Everybody can find it and verify that it was issued by the expected issuer. An owner of the certification can easily show the information in the blockchain and prove it to others. There is no need to use paper certifications and diplomas that can be easily forged. Using blockchain is much safer, more trusted, and it can be cheaper.