Blockchain is here. It is real and goes far beyond “Bitcoin”. However, is all the hype true? What can we trust and how wary should we be? The answers to these questions will drive the future success or demise of the Blockchain technology.
What is Blockchain?
Let us start with the fundamental question of what the Blockchain is:
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
– Don & Alex Tapscott, authors Blockchain Revolution (2016).
A blockchain is, in the simplest of terms, a time-stamped series of fixed and unchangeable records of data that are managed by a cluster of computers not owned by any single entity. Each of these blocks of data (the block) are secured and bound to each other using cryptographic principles (the chain).
The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but also a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible.
Does that raise a Red Flag in that everyone can see my data and records?
This is where a change in mindset is vital. Blockchain is a decentralized system. What this means is that the data is stored along the chain and no single entity owns it. The idea is very simple. In a centralized system, one entity stores all the data and you have to interact solely with this one entity to get whatever information you require.
An example of a centralized system is banks. They store all your money, and the only way that you can pay someone or withdraw your money is by going through the bank. This system has worked for many, many years; however, in reality it is quite vulnerable.
Because all the data is stored in one spot, it makes it an easy target for potential hackers. If the centralized system were to go through a software upgrade, it would halt the entire system. If the centralized entity somehow shuts down for whatever reason, nobody will be able to access the information that it possesses. In addition, most importantly, if this entity is corrupted then all the data will be compromised.
In a decentralized system, the information is not stored by one single entity. In fact, everyone in the network owns the information. This is where the new mindset comes in. Storing the data everywhere is not the same as everyone having access to it.
This is the fundamental aspect of Blockchain and the reason it is safe for transactions, and secure from adverse access.
Why Should We Use Blockchain Technology?
Because blockchain is transparent and secure. That sounds like an oxymoron, but it’s not. A person’s identity is hidden and represented only by their public address. Therefore, if you knew and were able to look up a person’s transaction history, you will only see complex computer code, and you cannot access it.
The blockchain is a linked list, which contains data and a hash pointer, which points to its previous block, hence creating the chain. What is a hash pointer? A hash pointer is similar to a pointer, but instead of just containing the address of the previous block, it also contains the hash of the data inside the previous block.
This is what makes blockchain so amazingly reliable and trailblazing. Imagine this for a second, a hacker attacks block 3 and tries to change the data. Because of the complex properties of hash functions, a slight change in data will cause a chain reaction across the whole of the blockchain that could completely change the chain, which is impossible because of the volume of the blocks.
Peer-to-Peer Systems
The blockchain uses a peer-to-peer network structure, which basically means all the nodes, or computers, have the same privilege. The idea is to create an egalitarian network. The nodes are not given any special privileges, however, their functions and degree of participation may differ. There is no centralized server/entity, nor is there any hierarchy. It is a flat topology.
These decentralized systems are structured like that because of a simple reason, to stay true to their philosophy. The idea is to have a currency system, where everyone is treated as an equal and there is no governing body, which can determine the value of the currency based on a whim.
How Can You Use the Blockchain
- #1 Smart contracts
Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met. At the technology’s current level of development, smart contracts can be programmed to perform simple functions. For instance, a derivative could be paid out when a financial instrument meets a certain benchmark, with the use of blockchain technology and Tokens enabling the payout to be automated. Certain real estate complex contracts are under development to trigger liability and disclaimer provisions.
- #2 Sharing Companies
Sharing companies like Uber and Airbnb users who want to hail a ride-sharing service have to rely on an intermediary like Uber. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.
- #3 Crowdfunding
Crowdfunding initiatives are doing the advance work for the emerging peer-to-peer economy. These sites suggest people want to have a direct say in product development. Blockchain takes this to the next level, potentially creating crowd-sourced venture capital funds.
- #4 Governance
By making the results fully transparent and publicly accessible, blockchain technology could bring full transparency to elections or any other kind of poll taking. Smart contracts help to automate the process, which enables organizational decision-making to happen on the blockchain. In practice, this means company governance becomes fully transparent and verifiable when managing digital assets, equity or information.
- #5 Supply chain auditing
Consumers increasingly want to know that the ethical claims companies make about their products are real. Blockchain provides an easy way to certify that the backstories of the things we buy are genuine. Transparency comes with blockchain-based timestamping of a date and location that corresponds to a product number.
- #6 File storage
Decentralizing file storage on the blockchain brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost. A blockchain made up of completely decentralized chains has the potential to speed up file transfer and streaming times. Such an improvement is not only convenient; it is a necessary upgrade to the web’s currently overloaded content-delivery systems.
- #7 Protection of intellectual property
As is well known, digital information can be infinitely reproduced — and distributed widely thanks to the internet. This has given web users globally a goldmine of free content. However, copyright holders have not been so lucky, losing control over their intellectual property and suffering financially therefore. Smart contracts can protect copyright and automate the sale of creative works on the blockchain, eliminating the risk of file copying and redistribution.
The blockchain enables musicians to sell songs directly to audiences, as well as license samples to producers and divvy up royalties to songwriters and musicians — all of these functions being automated by smart contracts. The capacity of blockchain to issue payments in fractional token amounts (micropayments) suggests this use case for the blockchain has a strong chance of success.
- #8 Internet of Things (IoT)
What is the IoT? The network-controlled management of certain types of electronic devices — for instance, the monitoring of air temperature in a storage facility. Smart contracts make the automation of remote systems management possible. A combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms. The result increases system efficiency and improves cost monitoring. A natural extension of existing infrastructure controlled by incumbents, IoT applications will run the gamut from predictive maintenance of mechanical parts to data analytics, and mass-scale automated systems management.
- #9 Neighborhood Microgrids
Blockchain technology enables the buying and selling of the renewable energy generated by neighborhood microgrids. When solar panels make excess energy, blockchain smart contracts automatically redistribute it. Similar types of smart contract automation will have many other applications, as the IoT becomes a reality.
- #10 Identity management
There is a definite need for better identity management. The ability to verify your identity is the lynchpin of financial transactions that happen online. However, remedies for the security risks that come with web commerce are imperfect at best. Blockchain offer enhanced methods for proving who you are, along with the possibility to digitize personal documents. Having a secure identity will also be important for online interactions — for instance, in the sharing economy. A good reputation, after all, is the most important condition for conducting transactions online.
Developing digital identity standards is proving to be a highly complex process. Technical challenges aside, a universal online identity solution requires cooperation between private entities and government. Add to that the need to navigate legal systems in different countries and the problem becomes exponentially difficult.
- #11 AML and KYC
Anti-money laundering (AML) and know your customer (KYC) practices have a strong potential for being adapted to the blockchain. Currently, financial institutions must perform a labor-intensive multi-step process for each new customer. KYC costs could be reduced through cross-institution client verification, and at the same time increase monitoring and analysis effectiveness.
Those transactions identified as being suspicious are forwarded on to compliance officers. KYC allows customers to take a snapshot of key documents (passport, utility bill, etc.). Once verified this data is cryptographically stored on the blockchain.
- #12 Data management
Today, in exchange for their personal data people can use social media platforms like Facebook free. In future, users will have the ability to manage and sell the data their online activity generates. Because it can be easily distributed in small fractional amounts, tokens will most likely be the currency that gets used for this type of transaction. User privacy is the key precondition for creating a personal data marketplace. Blockchain techniques allow individual data sets to be split between nodes and at the same time and run bulk computations over the data group as a whole.
- #13 Land title registration
As Publicly accessible ledgers, blockchain can make all kinds of record keeping more efficient. Property titles are a case in point. They tend to be susceptible to fraud, as well as costly and labor intensive to administer.
- #14 Stock trading
The potential for added efficiency in share settlement makes a strong use case for blockchain in stock trading. When executed peer-to-peer, trade confirmations become almost instantaneous (as opposed to taking three days for clearance). Potentially, this means intermediaries — such as the clearinghouse, auditors and custodians — are removed from the process.
Blockchain is the evolutionary improvement of the internet. Where the internet was created for information access, it has evolved to the Blockchain. The Blockchain is not only information; it also incorporates transactions in an environment of security, transparency and ease of use. The future is upon us. We can either grasp it with enthusiasm and create unending possibilities, or we can hide in the corner and be afraid of change. How will you grasp the Blockchain?
“As revolutionary as it sounds, Blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. Above anything else, the most critical area where Blockchain helps is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.”
– Ian Khan, TEDx Speaker | Author | Technology Futurist