Part I: Understanding the substantial use of blockchain

Dear Intrachain Community,

In the past weeks I have stated my opinion on the most interesting blockchain companies, and have elaborated on the elements that make a blockchain company successful.

Today, I want to take a step back and talk about blockchain technology in general. More specifically, I want to talk about what elements of blockchain makes me trust it more than third parties, and about the substantial use of blockchain. Especially, I am going to elaborate how Smart contracts greatly expands the opportunities for using blockchain systems.

Blockchain technology is a revolution which is considered ‘magic beans’ by several of the industry’s brightest minds. However, before dreaming up high-level use cases for the application of blockchain technology, it is important to understand how it could be useful.

Blockchain as a database

Blockchain is useful for a lot more than bitcoin, meaning it is not just useful for creating digital currencies such as Bitcoin or developing new financial technologies. In fact, blockchains can be used for a wide variety of applications, including tracking ownership or the provenance of documents, digital assets, physical assets or voting rights.

True: Blockchain technology was popularized by the Bitcoin digital currency system. But, essentially, a blockchain is just a special kind of database. The Bitcoin blockchain stores cryptographically signed records of financial transfers, but blockchain systems are able to store any kind of data imaginable. Also, another important feature is that blockchains can store and run computer code known as “smart contracts”. (A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.) The special characteristic blockchain system has to offer is the fact that it doesn’t run on just one computer like a regular database. Rather, many distributed processing nodes collaborate to run it. There can be a full copy of the database on every node, and the system encourages all those nodes to establish a consensus about its contents.

Blockchain secures data

This fact boosts the confidence in the blockchain database and its contents. This is because it is difficult, if not impossible, to fudge with the database without others realizing it and correcting it which makes data stored on a blockchain tamper-proof.

In our society, we normally rely on trusted third parties, such as lawyers, courts, banks and governments to process and keep authoritative records about commercial transactions. We tend to trust third parties for reasons that are external to the database; lawyers are accredited; votes are counted by independent monitors; and courts run to established laws for matters such as oversight and the possibility of appeal. However, if those third parties fail or lie, it is us who has to suffer the consequences.

Blockchains offer much more trust than third parties, because the integrity of the contents of the distributed ledger does not rely on any specific individual or organization. Meaning, rather than relying on trusted third-party organizations to facilitate these commercial transactions, we might instead rely on a trusted blockchain system. In my opinion, the blockchain innovation might reduce tension in the economy, and creates completely new approaches of doing business with each other.

Smart contracts

I have mentioned the feature of “smart contracts” already earlier and that they greatly expands the opportunities for using blockchain systems. First, let me explain shortly what smart contracts are and then how they can be of benefit:

Computer programs are a special kind of data which can be stored in the distributed ledger of a blockchain system, and execute those programs while later transactions are being processed. In the Ethereum blockchain, these programs can be highly complex. These programs are known as “smart contracts”.

Those smart contracts have the ability to carry value, and can conditionally transfer that value according to complex business conditions based on the latest state of the distributed ledger. This means blockchain systems can do more than store information about commercial transactions; they can also process commercial transactions too. As I said, this greatly expands the opportunities for using blockchain systems.

Although many people think that smart contracts stand for self-executing legal contracts, they are written in a general purpose programming language and can thus be used to implement a wide range of business logic.

As Vitalik Buterin explains: in a smart contract approach an asset or currency is transferred into a program and the program runs this code and automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof. In the meantime, the decentralized ledger also stores and replicates the document which gives it a certain security and immutability.

Conclusion

Blockchain technology is still in its infancy. There is already a wide range of use cases for the technology that improves and/or solves many business use cases. The distributed ledger technology is especially useful in cases where trust services are needed by business applications.

Also, the technology will continue to progress, its applicability will only continue to broaden, ranging from efficiency improvements for commercial transactions through to a complete reinvention of the economy.

This week I elaborated on the substantial use of blockchain. Next week’s post I will highlight the fact that blockchain is especially important for large companies.

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