Since October 2017, when a British company added “blockchain” to its name and saw its stock price increase by 394%, the term blockchain has connoted an almost magical concept. Only a year later, the head of Nasdaq’s blockchain division declared that the technology has the potential to change a slew of industries and confirmed that he believes it will revolutionize the financial industry. Obviously, something this powerful can’t just be a buzzword, can it? In order to determine that, it’s time to explain blockchain and the impact it may someday have on the world we live in.
What Is Blockchain?
The most comprehensive definition of blockchain comes from technology gurus Don and Alex Tapscott: “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.”
In simple terms, using blockchain technology, virtually (no pun intended) all transactions can be recorded, persisted and protected. The “economic transactions” part is important because blockchain was invented only for the purpose of recording cryptocurrency (bitcoin) transactions. By extending it to other transactions such as supply chain, for example, the implications for blockchain increase exponentially. To clarify, a look at the history of blockchain technology is in order.
In 2008, Satoshi Nakamoto (whose identity is a matter of controversy), wrote a white paper explaining the world’s first cryptocurrency, bitcoin. Along with bitcoin, Nakamoto described the method for which the cryptocurrency would be traded from one bitcoin owner to another. Unlike traditional methods, bitcoin would require no centralized database. It would be a peer-to-peer system. In other words, it would reside on whichever computers were on the blockchain network.
Unlike cloud-based computing, which depends on a centralized database, to connect to a blockchain, participants would be required to download a client. This would allow all the “peers” to connect and transact with each other. It would also mean that a blockchain would be effectively un-hackable, due to the fact that a hacker would have to hack each of the participants separately.
To illustrate: If you had 10,000 notebook computers stored in a storage locker, breaking into that storage locker would allow you to steal all 10,000. If you had 10,000 storage lockers, each with one computer, you’d have to break into all 10,000 storage lockers to get the same result. The blockchain depends on millions of “miners” (people who solve complex programming problems in order to earn bitcoin) to validate all transactions. Once validated, the miners assemble the transactions into “blocks” and add the blocks to the chain of transactions already recorded. This is how we get the term blockchain. If this sounds esoteric, we can simplify by defining blockchain as “a decentralized way to record cryptocurrency transactions.”
If blockchain were just applicable to cryptocurrency transactions, it’s doubtful if it would have caused so much commotion. In fact, it’s the implication for economic transactions that provides the basis for the talk of “revolution.” Unlike a cryptocurrency transaction, an economic transaction deals with concrete, rather than abstract, objects.
For example, if a blockchain is used to conduct financial transactions, it could replace the traditional payment models (bad news for payment processors, as transactions would be handled on a peer-to-peer basis.) Blockchain could also eliminate intermediaries in areas such as human resources (personal information could be stored on a blockchain, and background checks could be done without enlisting the help of a third party) and software providers (the need for third-party tools to aggregate data would be eliminated, as information would be stored in a blockchain and accessed by whoever in the blockchain needed it).
The Permission Blockchain
With the acceptance of blockchain as a valid technology, there have been numerous attempts to put it to us in standard business scenarios. Unfortunately, most have failed.
In fact, according to Deloitte (via The Block), 92% of the 26,000 blockchain efforts over the past two years are now extinct. Without going into the reasons (they are many and varied), we can surmise that blockchain was not the right technology for the proposed jobs. However, the immediate success of blockchain technology in the real world is likely to be produced by something called the “permission blockchain.” This would entail a decentralized blockchain ecosystem but with a centralized authority to give permission, or authorization, to participate.
In this model, an intermediary could step in to run a blockchain-like transactional model within its own environment, limiting participation to authorized (by the intermediary and the participants) members of the blockchain. An example would be Walmart using IBM’s blockchain technology for food traceability. This blockchain would be limited to those suppliers in the department store’s trading partner network, hence the word permission. It remains to be seen how successful this effort will be, but we can expect more of these permission blockchains to spring up as the technology evolves. In fact, several major players, including Intel and Fujitsu, are also involved in the quest to develop permission blockchains.
Conclusion And Summary
The take-home lessons can be boiled down into these main points:
- Blockchain technology allows for the secure tracking, recording and persisting of transactions.
- Unlike virtually every online transactional model, blockchain requires no centralized database.
- Since there is no central data store, hacking into a blockchain (if someone could figure out how to do it) block would yield no wealth of information.
- Despite many failed attempts to launch blockchain projects, as long as the security and cost factors (eliminating intermediaries) exist, blockchain will continue to draw the interest of enterprises.
- Like the permission blockchain, other applications for the technology will continue to evolve.
In short, blockchain is still in its infancy. No, the revolution is not upon us yet, but its arrival is inevitable.