Startups and Blockchain | Investing in Blockchain
It’s a fact of life that entire industries are built on centralized ledger systems which hold all our sensitive data. It’s also (probably) a fact of life that our identities are held by Dimitri from Moscow. But a new fact of life is emerging. New technology is coming in hot to fix our data woes. Startups are exploring applications of blockchain to offer new and improved solutions over established companies. Social network? Add some blockchain to that. Photo sharing company? Spice some into that too. Financial company? Don’t even ask. The world’s increased reliance on technology, coupled with the rise of cyber hackers, means that the future of data lies within the blockchain.
The word blockchain is mainly associated with Bitcoin, a.k.a. your Uber driver’s hot investment tip of 2017. But blockchain traces its roots further back than that. In 1991, blockchain started as an idea to improve the way e-documents were signed. This proposed technology would allow the document to be signed while “easily showing none of the signed documents had been changed.” The first application of blockchain was by Satoshi Nakamoto to transfer funds. This revolutionary innovation of the time was called… Bitcoin. Yes, Bitcoin was the first application of blockchain, but also definitely not the last.
Now, what exactly is blockchain? Many people are skeptical of the technology since Bitcoin has not lived up to its world-domination hype (yet). Just turn on CNBC and you have a solid chance of finding a bald 50-something bashing it.
It’s easy to diminish the technology because of Bitcoin’s shortcomings, but that would be a big mistake. Blockchain can be adaptable to many industries because of the inefficiencies across current ledger systems. Check out how Walmart is using blockchain to reduce the time it takes to track a package of sliced mangoes from 7 days to 2.2 seconds.
Current technology uses a central ledger, where all data transfer occurs. Each input is verified in the ledger and is then gathered in the ledger; however, this method is inefficient since all the transactions must go through the same place to be verified. This causes a problem when massive amounts of data are transferred to a company. Additionally, central storage of data presents a security issue, as all the data is kept in one place. If someone gets access to the data, as we had with the cyber-attacks at Yahoo, it can wreak havoc for millions of people.
This is where blockchain fixes the problem.
Rather than data being stored in one place, each piece of information is in a “block.” Then additional pieces of information get attached to the last, making a chain of blocks. Each block doesn’t have to represent one piece of data. It can hold pools of data from the same source. In the case of Bitcoin, there is an immense amount of transparency in the system: anyone can see the transactions happen. This system of oversight allows mistakes in the system to be picked up by anyone, and not one central body that “governs” the system. Finally, the security systems in place allow the technology to be safer than the traditional ledger system. There are many steps involved to make sure that the previous blocks cannot be changed, and that blocks can only be added to the end of the chain.
The security system begins with the initial user. Each user is given a secret key that is only known to them. Each key is usually a 32-bit string of letters, numbers, and characters, which makes it nearly impossible to guess, and definitely more annoying to remember than your 8-digit, 1 capital, 1 symbol, 1 number password.
Using this secret key, the user sends a piece of data to another user with a message that describes the data being sent and the purpose. This process creates a unique signature, using the message and secret key, that will be used when the other user receives the data. Blockchain uses a function called “sign” to process this. An example of the message utilized is shown below:
sign(message, secret key) = signature
This signature is then used to verify the user receiving the data. This part of the blockchain security uses a public key, which is a 65-bit key used to identify the receiving user. The “verify” function accomplishes this. An example of this is below:
verify(message, signature, public key) = true/false
If all the information is deemed as correct, the transaction goes through and the verify function allows the block to be created.
To verify the blocks themselves and make sure all the information in them is correct, blockchain has even more security measures. Each block that is created in the chain has its own “nonce”, or identifier. This, along with the transactions in the block, creates a unique “hash” for the block. These aren’t your fun hash’s either #cannabis. These hashes are strings of 0’s and 1’s that are unique to the data in the block. As seen in the figure below, hashes will change if either the transaction (shown by the watermark in each block) or nonce in the block is changed.
This process verifies blocks, but it can cause problems if the whole chain isn’t protected. To verify the chain, blockchain establishes additional security measures. First, the hash of the last block in the chain is used as the starting hash in the new block. In the next block, this starting hash is used as part of the algorithm that creates the final hash, making it harder to recreate. As shown below, a verified chain includes many parts, making it even more difficult to hack.
Let’s say that someone tries to hack into the system and changes the transaction in the block. This would verify the block; however, when the chain is verified, the final hash will be different and not match up with the next block, as shown below. The block after would contain the old hash from the previous transaction, and the chain would be “broken.”
Now let’s say the transaction and nonce of the block are changed to make a new hash, and then the new hash is attached to the next block. This would then create a good link between the two blocks, but this doesn’t account for the rest of the chain. This new starting hash would then create different final hash on the second block, which would not match the starting hash on the third block, thus creating a broken chain, as shown below.
Using these measures, blockchain ensures that if any information is changed, the chain is #broken. If there were ever a discrepancy in information, the system would use the longest chain to decide what is “true”. The longer chain ensures that all the information in the chain is correct, since there are many factors causing a chain to break.
Blockchain cheats on Bitcoin, no comment from BTC
As stated before, Bitcoin is the most well-known use of blockchain, but there are numerous other uses. Along with fund transfer, blockchain can be used for asset management. This field needs to be highly secure, as the system handles people’s retirement and college funds: which is money that could make or break someone’s future. The current ledger system protects the industry as well as it can, but the spaces for error and hacks would be eliminated entirely using blockchain. If asset managers like one thing, it’s guaranteeing zero loss. Additionally, blockchain allows for complete customization, as the data can adapt to any special conditions in the ownership documents. The original ledger system works best for storing numbers, but in blockchain, the data can be anything.
This advantage of blockchain also applies to insurance claims. This industry uses a multi-step process to ensure thorough handling of information containing parts such as policies, claims, and payout details: all that can be stored easily on blockchain. Like the asset management industry, the insurance industry needs tough security. Fraud is inherent to the industry, and blockchain’s security measures can ensure that no information in the profile is changed.
One of the most quickly adopted uses of blockchain is property titles and deeds. Right now, the exchange of property occurs through a third party: realtors. Now, apps allow for easier transfers of property, but it still involves a fee. Using a system like blockchain, the transfer of property can happen between the two parties alone, completely taking out the need for a third party, and hence, removing the fee. If you’re living in New York City, you know the hell of “broker fees”. Blockchain could be the saving grace.
Although the method in which votes are counted in the US is set in stone, blockchain could offer an even more streamlined and secure way to overlook elections. In the past, there have been discrepancies with votes when they were uploaded. This flaw in the current voting system could cause major problems with the fairness of elections. With blockchain, the ID of the person voting can be identified easily, as their information cannot be changed in the system, and the votes cannot be edited once cast. This allows for total security in elections. Just ask Sierra Leone… or don’t.
It’s the early days of the internet. again.
Overall, each case of blockchain uses a different aspect of the technology for its own benefit, and there will likely be unlimited new concepts to conceive; however, there are some flaws in blockchain that must be considered. First, if a user gets their secret key stolen, it is almost impossible to track down their stolen data because of all the security measures in place. Also, tracking down the data would mean that there is a singular entity controlling that information, which is the opposite of blockchain’s goal. Additionally, the transparency of blockchain, which allows all users to see the transactions happening, may cause some problems in certain industries. Some companies may not like that all the employees can see the transfer of data throughout the company, as this would now allow for division of authority. Finally, to run blockchain an immense amount of computing power is needed to handle the system. This would not allow the public to invest in the technology, as they may not be able to afford the equipment needed.
Many established companies have started to adopt blockchain to make their company more competitive; however, more nimble startups are going all-in on the technology. One example of this is Bee Token. This startup offers a platform like Airbnb, where the users can discuss needs and wants and make extra money by renting out their homes to others. Blockchain allows the company to create a platform with zero commissions, verified security, and decentralized trust. Another startup that utilizes blockchain is Helbiz, which uses the technology to create a car-sharing solution, allowing users to rent out their vehicles to others through their phone with no central entity. As discussed earlier in the article, one of the widely known uses of blockchain is Bitcoin, or cryptocurrency in general. Metal Pay takes that idea and applies it to another use of blockchain: money transfer. This company allows you to exchange money with other users, and each transaction allows you to earn Metal Pay’s own cryptocurrency: Pop. The money earned from this can be deposited into an account at many widely known banks. This company, unlike the others, incorporates two unique uses of blockchain into one platform. Another startup, Ripe, uses blockchain in a very different manner. Ripe is a daily meal service catering to companies that provides a platform for easy communication of dietary needs and restrictions. All these startups use blockchain to make processes run more efficiently than large corporations, who still depend on outdated technology.
Blockchain startups are poised to capture market share due to its impressive security and data benefits. Blockchain offers many different uses to a variety of industries. Whether it be real estate apps, insurance agencies, or even asset management, blockchain offers a unique use to each industry to make their company thrive. Established companies have survived with the use of a ledger system, but with the sheer amount of emerging companies using the technology, everyone must change with the times.
Disclaimer: This article does not intend to provide investment advice. The companies mentioned are not currently or planning to raise funds via Slice Capital’s funding portal. Slice Capital does not view the companies mentioned as direct competitors to any of the issuers currently raising on Slice’s funding portal.
