by Hank Vos –
Many people have heard of bitcoin, though not many understand it. But not so many people are aware of blockchain technology, the underlying technology that enables bitcoin. And very few understand blockchain technology.
But though you may not even be aware of blockchain technology, it’s about to change your world—for the better.
What Is Blockchain Technology?
Blockchain technology is essentially a distributed ledger. Rather than relying upon time-stamped transactions written to one centralized ledger controlled by a central authority and intermediaries, the ledger is shared across a vast peer-to-peer network of participants’ computers (“nodes”), eliminating the need for a central authority and intermediaries. Each node in the network owns a full copy of the ledger.
A blockchain consists of a continuously growing list of records called “blocks.” Each block contains a timestamp and a link to a previous block, hence forming a chain.
At the heart of a blockchain lies consensus among all participants. This consensus is key because, without a central authority, the participants must agree upon the rules (“consensus mechanism”), and how those rules will be applied. In short, the system records the chronological order of transactions with all nodes agreeing to the validity of transactions using the chosen consensus mechanism. The result is that transactions are agreed to by all (or many trusted) members of the network. This consensus provides assurance that all transactions are true and irreversible, i.e. permanent.
So, in essence, (public) blockchain is an immutable, unhackable, distributed database of digital assets that is totally transparent and auditable. It is a platform for truth and for trust. Once a record has been peer validated and recorded on a block, it is there forever in full view of the public. No central authority resides over, or may interfere with, that information. All transactions are built on consensus.
A Bitcoin Example
We can use the following imaginary bitcoin exchange to illustrate how a blockchain transaction works.
Let’s say that I transfer money (bitcoin, a digital currency that can be exchanged for fiat money) from my Coinbase bitcoin account to your Jaxx bitcoin account. I live in the Philippines, and you live in Germany. There is a fee involved (called a miner’s fee) but it is very minimal compared to other payment systems.
Let’s say it takes 15 minutes for our transaction to be validated (“confirmed”) by the network. The money is now yours and the transaction record is viewable online. It will never be altered; it is permanently recorded.
What really just happened?
Two parties were able to make an exchange of value without the oversight or intermediation of a third party, eliminating counterparty risk. Now compare that with traditional interbank transactions—they can take days for clearing and final settlement, and are subject to fees payable to multiple third-party intermediaries.
Finance First, But Spreading
The early use cases for blockchain technology were, understandably, from the financial industry: banks, FinTech, nervous regulatory bodies, opportunistic startups and, of course, large consulting firms wanting to get in on the action. These are not traditional bedfellows, but there has been a flurry of consortia being created in recent years to pursue the implementation and commercialization of blockchain technology.
The notable commercial banking-related implementers include:
- Digital Asset Holdings (includes Accenture, IBM and J. P. Morgan)
- Hyperledger Project (includes Accenture, IBM, J.P. Morgan and SWIFT)
- R3 CEV (includes RBS, UBS and BNY Mellon)
- Ripple (includes Santander, UBS and Standard Chartered)
There is now a move to smaller consortia consisting of several banks, non-bank intermediaries and/or regulators, not only on a global scale but increasingly centered on geographic regions such as Canada (Project Jasper), Russia (Russian Banking Blockchain Consortium July 2016), China (China Ledger Alliance April 2016, Financial Blockchain Chenzen Consortium May 2016) and Japan (Ripple Japanese Bank Consortium August 2016).
But there are now also collaborations popping up in other industries such insurance (B3i), commodities, transport-logistics (Dutch Logistic Group), healthcare (Hashed Health Blockchain Consortium), Internet of Things (IoT Blockchain Consortium), governments (Global Blockchain Business Council), telecommunications (Blockchain Consortium for Technology Carriers) and blockchain specific (Ethereum Blockchain Consortium).
The Internet of Value
Why should blockchain technology matter to you?
Quite simply, because it will revolutionize the world in many positive ways. As author Don Tapscott noted in Blockchain Revolution, blockchain takes us from the “Internet of information” to the “Internet of value.”
When you are sent an email, you receive a copy. The sender, and potentially many others, also have a copy. That’s fine for email; it’s a good thing for all involved parties to have a copy. But when it comes to assets (money, stocks, bonds, intellectual property, music, art, votes, etc.) it is not a good idea to get a copy.
Today we rely on big intermediaries—middlemen like banks, government, big social media companies, credit companies, etc.—to establish trust in our economy. As Tapscott wrote, “These intermediaries perform all the business and transaction logic of every kind of commerce, from identification and authentication of people through to clearing, settling and record keeping… they capture our data, which means we can’t monetize or use it to better manage our lives, and our privacy is being undermined… so what if there were [ ] an Internet of value? Some kind of vast, global, distributed ledger running on millions of computers and available to everybody, and where every kind of asset from money to music could be stored, moved, transacted, exchanged, and managed – all without powerful intermediaries”.
What if, indeed…
Just simply increasing the efficiency of financial transactions could save the world more than $2 trillion yearly. But the potential of blockchain technology extends far beyond financial transactions. The potential is truly revolutionary.
Consider the example of smart contracts. If you think of blockchain as an operating system for data, then smart contracts are its killer app. Smart contracts add complex logic and rules atop a blockchain that can automate traditional contract management. If the world is going to run on blockchain, much of it will rely on smart contracts to execute the data exchanges and to program-in rules governing how each code-triggered agreement works.
Just some of blockchain’s potential includes the following:
- Electronic voting: Blockchain’s pseudonymity allows each vote to be publicly shared without identifying the voter. Hence each voter could check public records to see if his vote has been counted.
- The end of patents: A company such as ProofOfExistence.com could be used to replace patents. Rather than filing for a publicly known patent, a technology company could have a technology document certified in the bitcoin blockchain.
- Smart contracts: As per the above, a factory might receive an order of 1000 widgets that requires investing in new machinery, and it will only recoup this investment if the customer follows through on the order. A smart contract may say “For every widget delivered, transfer $$s from customer’s bank account to the factory’s bank account.”
- Property titles: Every title change would be recorded permanently, eliminating potential fraud and abuse by government officials in less developed counties.
It’s true that there’s been lots of hype swirling around blockchain technology in recent years. But sometimes where there’s hype, there’s real reason for that hype. And time is likely to prove that such will be the case with blockchain.