Oct 15, 2018
Explaining the blockchain
I) What is a blockchain and how does it work?
- What is the purpose of a blockchain?
The blockchain allows a group of parties (people/companies/organizations) who do not know each other, or do not trust each other, to build confidence by using a secure and unfalsifiable way to exchange information, without any centralizing entity that would have played the role of trusted third-party. The confidence that was previously given to this third party is now placed in the blockchain algorithm itself, as it provides a specific, encrypted and secured procedure (described below) to write in the blockchain, shared by every actor, and that makes consensus among them.
- Technically, what is the procedure?
The blockchain is literally a chain of information blocks. To be more specific, those blocks are just receptacles which contains a set of individual information.
Let’s take an example with Bitcoin: the bitcoin blockchain is a list of blocks containing a transaction (more precisely a group of transactions). Therefore, the bitcoin blockchain is just a list of transactions, the account balances being completely determined by the succession of incoming and outgoing transactions.
Those blocks of information are ordered one after the other. For a better understanding of the way, each block is linked to the others: we are introducing the concept of signature (represented by the hash block in the following illustration).
Given the information contained in every block, we can generate a unique signature (hash block), using cryptographic methods. If 2 blocks contain different information, they will produce different signatures. It is impossible, given a signature, to retrieve the information that lead to its generation.
Let’s come back to our blockchain and consider a chain composed of one unique block containing a set of information. If a new block must be added to the blockchain, we will generate the signature of that unique block and add this signature to the set of information that is contained in the bloc we are adding. Therefore, if we add a third block to our blockchain, we will have to generate the signature of the second block, which is dependent on the signature of the 1st block.
Finally, every block signature will depend on all the blocks that came before. That way, you cannot modify any information written in the blockchain as it will modify the signature of the modified block, and the signature of every block which will come after.
To simplify it in laymen terms, the blockchain is a giant ledger with transactions that must be verified by everybody inside it. The identity of one block is comprised of the previous block’s identity plus its own. Think of it as a game of dominoes, you can’t remove pieces, you can only add to the existing pieces.
- Ok, but why is it so important to have such a level of protection?
Because this blockchain is shared and can be written by anyone.
If we were a bank and had to write the loans offered to our clients in our registry, we would not have this problem as we would be the only entity with the ability to write in this registry.
If we used a decentralized (shared) ledger for this purpose, then the commercial bank that is receiving the money also has the authorization to write into that registry (or ledger) and could potentially erase that loan (which is equivalent to stealing money…). Most of the time, the different actors that can access and write in the blockchain have opposite interests, and the blockchain allows them to communicate and share information/deals with the highest level of transparency, following pre-established but evolving rules.
II) What possibilities are offered by the blockchain excluding its use as a crypto currency?
The power of the blockchain and the trust it initiates among its participants has also been implemented into existing business models. Let us present what kind of purpose can be developed by using it.
- The blockchain can enhance the value of a product/service:
One recent example is the tracking of the origin of the food that is sold in stores through a blockchain. Using a blockchain to track food’s distribution chain is a very interesting approach as:
1) Current methods to assure the traceability of those products is complicated logistically and is subject to multiple human manual interventions
2) the quality of this traceability has often been questioned following sanitary scandals all over the world and the blockchain is able to ensure consumers that the product hasn’t been modified or manipulated.
Using a blockchain could lead to significant higher performances by allowing producers, markets and consumers to share their information, providing a fully transparent guarantee for the consumer.
- The blockchain can create new markets by making services purchasable:
Another very interesting use could be setting a blockchain that would store professional pictures and automatically manage the royalties it generates. Kodak tried to help their professional customers by presenting a blockchain that stores their pictures and allows any actor eager to use this material to pay the asked price to the photographer, through the acquisition of a token. The payment and availability of the picture are managed by the blockchain and does not require any human intervention. It also makes the picture accessible to everyone in the world, as the blockchain is shared and accessible everywhere.
- The blockchain can be seen as the final state of the ongoing digitalization process:
Currently, the fund industry does not benefit from this new technology. Traditional funds manage clients’ inflows and outflows in a very inefficient way, meaning that
1) The client is paying when he enters the fund
2) He also pays when he wants to get out of the fund
3) The invested minimum amount is often high and acts as a barrier to entry for the middle class of the society
4) The fixing of the NAV is done once a day, and this does not allow the client to invest or withdraw any time he wants…
We consider that all those constraints are outdated, and we aim to use the blockchain to build a very accessible way to invest in our fund, bringing us closer to our client than any other actor in the industry. Furthermore, the underlying management will be achieved without all those irrelevant fees and delays, as everything will be managed automatically by the blockchain, in total transparency. We are currently building this infrastructure, and we will soon be able to offer you a fund without any managing fees, with instant and free execution of your orders.
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