Blockchain Technology: It’s Transformative Potential
‘a new decentralised cryptocurrency isn’t the most exciting thing to come out of the bitcoin craze. More so, it is the technology that underpins bitcoin: the Blockchain.’
Amidst the turmoil of the 2008 financial crisis, the trillion dollar bailouts and rampant panic pushing the world economy to the brink, in a small serene corner of the internet, the pseudonymous Satoshi Nakamoto — whom today is considered the founding father of the digital currency and payment system Bitcoin — first published a paper describing the technology. This paper, little did he know at the time, would set the foundation for a cryptocurrency that would reach a circulation of 15.4 million bitcoins and growing, worth $6.5 bn USD, with almost 7 million users.
The currency can be used to buy anything from pizza and digital content like apps and games to hotel bookings and payment for cars. As bitcoin becomes an increasingly ubiquitous and legitimate form of payment, it probably won’t be long before you can buy just about anything with the digital currency; especially in an age where mobile technology has enabled the telling of a coming of age story of mobile payment systems. But bitcoin’s journey was far from a smooth ride. Bitcoin and blockchain technology was met with controversy in the public eye when it was portrayed as the accomplice that hid users behind a window of anonymity on illicit online marketplaces like Silk Road, an online black market where the likes of meth, MDMA and heroin were a few clicks and a bitcoin transaction away. The technology also made headlines in 2013 when Mt. Gox, the largest bitcoin exchange at the time, came to its demise from a toxic concoction of theft, fraud and mismanagement which prompted several lawsuits, imprisonments and the seizure of million dollars from bank accounts.
Seeing beyond the unglamorous applications and few individuals who tried to exploit the system, bitcoin is heralded as the single biggest breakthrough since the arrival of the Internet. But a new decentralised cryptocurrency isn’t the most exciting thing to come out of the bitcoin craze. More so, it is the technology that underpins bitcoin: the Blockchain.
A bit about how bitcoin works. All bitcoin users make up the entire bitcoin network which together, monitor and verifies both the creation of new bitcoins through a process called ‘mining’, and the transfer of bitcoins between users. For any transaction to occur, it must be verified by the whole network through mining which details the transaction in the shared public ledger. This is the blockchain. All confirmed transactions are included in the blockchain which detail the users involved who are identified with unique encrypted bitcoin addresses alongside the balance of their bitcoin wallets. Miners are individuals and companies who contribute computing power to the network in order to add transactions to the blockchain which involves taking the data and applying a mathematical formula to it, turning it into a ‘block’ that can be stored. This requires an enormous amount computing processing power, bandwidth and electricity but miners are incentivised to do so because they are rewarded with bitcoins in exchange for their contribution — this has led to professional outfits dedicated to mining. Because the computer code in each time-stamped block builds on the previous one, it becomes virtually impossible to go back to alter earlier blocks, thereby preventing tampering of the shared ledger and making it extremely transparent, secure and reliable. This is what makes blockchain technology so appealing.
The whole premise of the blockchain that the bitcoin network is built upon is to do away with a third centralising party. Instead, it relies on users to police and secure transactions, thereby acting as a collective decentralised system to maintain the network’s integrity but at the same time no one body governs the network. It allows people who don’t know each other or necessarily trust each other to undergo a transaction by trusting a shared record of events.
Today, global organisations and startups alike, are experimenting with or indeed using blockchain technology as the main engine behind innovative new applications and platforms. Most investment has focused on the financial sector, notably fintech company R3 CEV has brought together a consortium of 42 banks to create standards and protocols for using blockchain in financial services. Major Wall Street banks are also experimenting with using blockchain software in Credit Default Swap transactions, which are essentially insurance contracts that pay off if a bond goes bad. CDSs are notoriously known for their role in the subprime mortgage crisis of 2008 that infamously brought down Lehman brothers and Bear Stearns. With mounting pressure to improve transparency and regulation, this is the most real proof-of-concept to date. The test replicated a month’s worth of trading totalling $6.7 trillion and included major banking players such as Bank of America, J.P. Morgan and blockchain technology innovators Markit and Axoni. It certainly isn’t far-fetched to say that blockchain is disrupting the financial services status quo and it holds huge potential to upend traditional business models that have held static for some time. Several banks are trying to get ahead of the shift, running incubator and accelerator programs for fintech startups. Techstars and Barclays have partnered to createBarclays Accelerator to build and utilise the latest financial technology whilst UBS is running blockchain research lab in a space at London’s Canary Wharf.
Another major development utilising blockchain technology is smart contracts — self-executing contracts written in code and stored on the blockchain that can automatically verify if contract terms have been met and performing actions accordingly. By solving the problem of trust without the need for middlemen, smart contracts can improve efficiency and reduce costs. Going one step further, smart contracts can be incorporated with the Internet of Things movement which could lead to infinite opportunities of using blockchain that reach far beyond the financial sector. An example is in healthcare: Combining a blockchain platform with a wearable fitness tracker, data spanning heartbeat or calories burnt can be encrypted and transferred anonymously to health professionals or doctors who can then provide guidance or recommend treatment.
One of the first non-financial uses of blockchain technology is Proof of Existence which offers a glimpse of how blockchain technology could one day have a substantial impact in the fields of intellectual property and law. The service anonymously stores an online distributed proof of existence of a document in real time which is encrypted and stored on the blockchain permanently to prove association with a unique document. The best use-case for this could be replacing patents. Companies that rely heavily on intellectual property ownership such as Apple might want to prove it created a technology at a certain date without filing for a publically-known patent to maintain secrecy of projects and ideas. If anyone challenges its ownership of a technology, it could later reveal internal documents that are linked to the transaction block, thus proving existence at the date specified on the blockchain.
Uses of blockchain have also appeared in the most unlikely of places: diamonds. One interesting development is Everledger, a permanent ledger for the certification and transaction history of diamonds. The London-based startup uses blockchain technology to keep track of provenance in a way that’s more robust and accessible than a paper trail. Throughout the different stages of a diamond’s value chain, documentation such as the producer, shipping and insurance were traditionally all paper-based, handled by different parties which leads to errors and they can be lost or forged at any point. Today, these different strands can be brought together. Drawing upon blockchain technology, Everledger provides an immutable record of the ownership of diamonds which allows individual jewels to be identified and tracked using a common database (i.e. the encrypted blockchain). The diamond’s serial number is registered on the blockchain and when required, companies or law enforcement agencies can access the entire history of a specific diamond, including details such as changes of ownership and insurance details. The technology can be extended to other items where immutable records are requisite and where provenance might otherwise be reliant on paper certificates such as high-end watches or fine art — areas that have long captured the attention of forgers.
It seems inevitable that blockchain technology will become a mainstream technology. The level of interest being shown across myriad industries demonstrates its potential for enabling the development of applications that will bring new approaches to old business problems. But, it is the social, legal and financial challenges that these changes will surface that may prove a much more difficult obstacle to overcome. The rebuilding of whole financial markets using shared ledgers and the inclusion of 7 billion people in the financial network through mobile. Those are the big-ticket items, herculean even, and they won’t be selling anytime soon. What history tells us is that when any new technology comes along, some innovation that shows small glimpses of its disruptive power, it is easy to imagine applications to use that technology directly — whether these are tenable or not is a different story. What is harder is to visualise applications that use the technology indirectly. And it is almost impossible to imagine applications that aren’t directly related to the technology but that couldn’t exist without the it. When we go back to the early 20th century, who when considering the advent of cars, could ever have predicted McDonalds? McDonalds has nothing to do with cars but of course it is unlikely to exist if we didn’t all drive them. That may well be the case with blockchain.
Having made a name for itself as the digital currency for online heroin and MDMA, bitcoin has given us a new way to do things — a blockchain-based system — that’s not quite like anything we’ve seen before. It is quickly emerging as a new paradigm in business and technology, and could potentially have far-reaching applications, that we can’t even begin to imagine. From something that started from the bottom, it might well make it to the top.
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This story was originally posted on Noise Corner, a digitally native platform for nuanced ideas, original thoughts and trending stories that are redefining our world.
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