The disruptive potential of Blockchain technology
The true value brought by the technology, simply explained.
Since 2009, Blockchain has gained dramatic attention. Today, we no longer talk about a “geek’s thing” but rather a disruptive technology that has the potential to transform our economy at many levels.
But how exactly?
Blockchain is a broad and complex topic. Not only does it involve multiple technical concepts, but it is also a new technology where many areas are still blurred.
In this maze, one may not find easy to understand concretely what‘s the point behind the Blockchain hype. In this article we won’t spend time explaining how a blockchain works (cf. end of this article for resources on the matter) but rather what is the value brought by the technology.
Internet & transactions 🌐
Let’s begin with something we all know: Internet. You know this network of interconnected machines, communicating via standard transfer protocols.
Said like that, one can understand why in the 1990s, it was not straightforward for everyone to understand the technology’s disruptive potential (just watch this Bill Gates in 1995 trying somehow to explain it to a journalist). Well that’s the same thing if we try to understand Blockchain potential via tackling it from the technological angle.
Now back to Internet: 25 years later, what was obvious for Bill Gates, is now obvious for everyone…
Internet allows people to create, publish, store and share information in a free and decentralized manner.
And there we go: the real value brought by Internet is to generalize information access and freedom of speech. That’s where lies the huge disruption of Internet! And at the end of the day, that’s what people care about (not how transfer protocols work).
Now, althouhg it is pretty convenient to perform exchanges of information, Internet can’t support exchanges of value (transactions).
To understand this, let’s take a classic example: Person A sends a picture to Person B via an e-mail. Here the verb “send” isn’t quite right: technically, the sender can still access the picture (from his outbox for example). As a result, the picture hasn’t been “sent” but “duplicated”!
In brief, because Internet duplicates information, it can’t guarantee the unicity of assets exchanged (what is commonly referred to as digital scarcity).
Bottom line: Internet can’t support peer-to-peer transactions.
But then, how are transactions performed today?
Transactions in our traditional system 💳
Internet being unable to support peer-to-peer exchanges of value, digital transactions are currently going through intermediary agents — eg. banks, insurances, Neo-banks (Revolut, N26, …), online payment systems (PayPal), …
This centralized system based on intermediaries has certain advantages (eg. fraud prevention) but also meaningful drawbacks such as:
- Frictions — intermediation means transactions time and fees (eg. an international bank transfer can take up to several days and cost over 10 $).
- Restricted accessibility — to perform transactions, the sender as well as the recipient must be identified customers of the intermediaries — eg. today if you’re not registered to any bank, it can be difficult to send/receive money digitally.
- Control— intermediary agents has full control over your assets, during transaction processes and even constantly in some cases (eg. at anytime, a bank holding your funds has control to freeze your account).
- Lack of transparency — it is sometimes not quite clear how intermediaries handle transactions and assets (eg. how your bank uses the money deposited in your savings account). This also raises concerns of data manipulation.
- Cybersecurity breaches — transaction records and related information (eg. account data, private data, …) are usually stored on a single location: intermediary’s servers. If for any reason this node is compromised (eg. cyber-attack, system failure), so is all your personal information.
Now, that’s where Blockchain finally comes into play.
Transactions with Blockchain 💸
Blockchain is a technology built on-top of the Internet that enables peer-to-peer transactions in a decentralized, secure and transparent manner.
What does it mean? Basically, as Internet disrupted how we deal with information, Blockchain is doing the same with value:
- It decreases transactional frictions (no intermediaries)
- It improves accessibility (access via Internet)
- It enables trust between parties (transparency and decentralization)
To better understand Blockchain technology potential, let’s look at three core innovations: digital scarcity, smart contracts and tokenization.
1. Digital scarcity
In 2009, Bitcoin introduces a transfer protocol ensuring digital scarcity. For the first time in modern human history, it is possible to make digital payments without any intermediary (peer-to-peer payments).
We won’t dive into the technical details here — if you want to understand how the Bitcoin blockchain works, I invite you to look at the white paper.
2. Smart contracts
Enabling peer-to-peer payments is already a big leap forward. However, it is restricted to unidirectional flows (the asset goes from a person A to a person B). What if person A and person B want to perform an exchange? That’s where smart contracts, an innovation developped by second generation blockchains, come into play.
A smart contract is an algorithm which can perform operations on value.
When it comes to perform an exchange, rather than calling on to an external third-party, both parties write contractual terms into an algorithm (smart contract). The smart contract is securely hosted on a blockchain, making it tamper-proof and transparent to both parties. Once the contractual conditions are met, the smart contract automatically performed the exchange.
In brief, a smart contract essentially plays the role of an automated and transparent trusted third-party.
3. Tokenization
Smart contracts enable exchanges between digital assets. But what about physical assets?
In the previous example, the considered transaction was a property deal. Sweet Jesus, how an algorithm is supposed to manage a house?
The problem here is that we want to handle physical assets using digital infrastructure. The solution to this is called tokenization.
Alright, first of all, what is a token? A token is a digital ownership title associated with a part or a whole physical asset.
Tokenizing a house as a whole essentially means generating a unique digital property title of the house in question (you can also decide to tokenize a house in 200 tokens — in this case, one token will represent 1/200th of the property).
Tokens bridge the gap between the physical and the digital world.
When it comes to exchange physical assets, smart contracts perform operations with tokens associated with the physical assets. Once the transaction is made, physical assets can then be claimed via tokens.
Key takeaways 🎗️
- Internet enables peer-to-peer exchanges of information but can’t support transactions since it duplicates information.
- Blockchain is a technology built on-top of Internet enabling peer-to-peer exchange of value.
- Compared with the current transactional system, Blockchain decreases frictions, increases accessibility and enables trust between parties.
- The value added by Blockchain technology can be understood under three main innovations: digital scarcity (peer-to-peer unidirectional payments), smart contracts (transparent and automated digital contract) and tokenization (digital link with physical assets).
To better understand how a blockchain works, I invite to look at this visual demo by Anders Brownworth
Moreover, if you’re interested into investing in cryptocurrencies, here are two articles about general best practices & tools and how to keep funds safe.
I hope you enjoyed this article!
If that’s the case, don’t hesitate to share your feedback👏
Here is my personal website were you can find all my articles: BloomSphere
