Blockchain Technology: definitions, perspectives and opportunities not only in the Finance area

IQUII
IQUII
Published in
7 min readJan 19, 2018

Originating with Bitcoin/bitcoin, the Blockchain is experiencing a moment of huge global interest and its true value goes well beyond cryptocurrencies or the transfer of money

Backbone of the bitcoin cryptocurrency, Blockchain technology originated between 2008 and 2009 when Satoshi Nakatomo, creator of the Open Source Bitcoin project, published the Bitcoin* protocol in a Paper which describes the technological architecture designed to freely circulate a cryptocurrency without controls by central organs and without operation costs, as happens instead in the circulation of money.

This technology lends itself to be a new architecture able to support, in a disruptive and completely new way compared to the past, many types of transactions: from logging an event, to signing a document, to voting, to managing citizens’ identities and to contracts.

Testimony to the fact that it is anything but a fashion, there are already thousands of developers and dozens of companies that are experimenting with possible applications: forecasts reveal annual market growth rates that could reach 80% between now and 2022.

*Bitcoin with a capital B indicates the underlying technology that allows the circulation of virtual currency while bitcoin with a lower-case b, the currency.

What is the Blockchain

These brief premises are necessary because it is from that Paper that the key concepts of Blockchain derive, a term that generally indicates the technological infrastructure, thus moving away from the origin of Bitcoin/bitcoin.

Credits: PwC

To simplify to the maximum, the Blockchain could be seen as a large distributed database, protected by “public and private key” cryptography (i.e. asymmetric or symmetric algorithms based on the use of keys to encrypt and decrypt information) and hash encryption (in this case we are talking about unidirectional mathematical algorithms that are difficult to invert, often used for example in digital signatures) for the management of shareable transactions between several nodes of a network.

In other words, it is presented as a block-structured database (where each block contains the information of several transactions) connected to each other online: every transaction initiated on that network (therefore on that Blockchain) must be validated by the network itself and then through a sort of analysis and validation of each single component block of the network (or chain).

It is for these reasons that the term “trust” or “trust mechanism” is often used when analysing the structure and benefits of the Blockchain. In fact, this type of technological architecture introduces some concepts of a social nature that until now were not easily associated with the economic and technological world.

The “trust mechanism” on which the Blockchain is based, in fact, provides:

  1. The total absence of intermediaries;
  2. Free access to information from users;
  3. A global information distribution chain.

From here we deduce that in the Blockchain a central control organ is no longer necessary and that the chain is built on a trust mechanism where everyone can see and verify the whole Blockchain.

Control is then entrusted to “nodes” (globally distributed computers, not controlled by any type of central administration): each node in the chain is required to see, control and approve all transactions by creating a network that shares the archive of the whole Blockchain on each node (i.e. all the database, that is to say all the blocks containing all the transactions).

How the Blockchain technically works

The distributed database that is created with this “chain of blocks” contains different types of information:

  • transactions: the data of an operation, an identity, an action, an agreement, a contract;
  • the “traces” of how all these transactions are inserted in the distributed database: this type of information is in fact the real blocks of the chain.

This clarification is anything but trivial and has a profound importance because it is from the difference between transactions and blocks that we also understand the role of the so-called “miners”, those who create these blocks and place them in the Blockchain.

While transactions can be performed by any person/user who wants to participate or exploit a particular Blockchain, the blocks that contain the traces of these transactions must be created by miners.

In most cases, these miners are incentivized for their work through “reward” systems, that is, for the control carried out on transactions and the creation of blocks to be entered in the Blockchain. In the Bitcoin model, for example, it is a reward that includes shares of cryptocurrency. This is to avoid behaviour that would cause the “distributed trust” of the community participating in the Blockchain to fall.

Very often we hear talk of distributed ledger that indicates precisely the distributed database taking inspiration in the name from the financial world that recalls the “ledger” that is the accounts book of the banks where it keeps track of all transactions.

In Blockchain the distributed ledger is accessible by any user who makes a transaction and thus becomes part of the distribution chain.

Blockchain: a market that expects to reach 80% average annual growth

Today the Blockchain is considered one of the major trends of this year, due to its disruptive character and its technological nature, which foresees:

  • the disintermediation mechanism;
  • global access to information;
  • cryptography that guarantees very high levels of security and immutability/irreversibility of the chain.

Moreover, it could enable new forms of exchange, not just of money as originally for bitcoins, but of any asset, information or contracts, based on the mutual trust of all participants in the exchange.

It is indeed a concept that lends itself to completely revolutionizing the social, economic and even governmental and political models that today represent the pillars of our modern world.

Although scepticism and fear may accompany the path of evolution and maturity of the Blockchain, market analyses speak of a phenomenon destined to have substantial impact in the coming years.

Markets & Markets expects market growth from $411.5 million in 2017 to over $7 billion by 2022, with a compound annual growth rate (CAGR) of 79.6%.

A growth, say American analysts, driven above all by the reduction of the TCO (final Total Cost of Ownership of Blockchain) by faster transactions, by simplified business processes based on transparency and immutability, and of course by the increase in cryptocurrency`s market capitalization and ICO (Initial Coin Offering, the initial money supply).

A recent report by Tractica makes an even more in-depth and specific analysis on the Blockchain for the business application market and expects it to reach $19.9 billion by 2025.

Credits: Tractica

Tractica analysis indicates that this market will be composed of 29 key use cases among which:

  • payments;
  • transaction and settlement processing;
  • microtransactions;
  • management of assets and operations, especially in the Internet of Things, Machine-to-Machine Communications and Device Interaction projects;
  • analysis and forecast markets.

These use cases will also affect at least 19 different fields including the financial world but also healthcare, manufacturing, legal, government sectors.

Use case application of the Blockchain

At this time, the financial sector is that which leads the way in the analysis and understanding of Blockchain technology.

For example, many banks are joining the R3 consortium (a consortium formed by the world’s top 40 banks, including Italian institutes Intesa Sanpaolo and Unicredit) or by opening their own research centres where they can test and develop pilot projects, with the goal of understanding how Blockchain technology works by understanding all its opportunities.

Or still, the Commonwealth Bank of Australia is using the Ripple protocol, a private Blockchain, to transfer payments between its subsidiaries, verifying whether in terms of transaction speed and lower costs it may be worth taking full advantage of the block architecture.

Finally, as part of the so-called Travel Identity, Sita, a travel industry specialist, is developing a solution based on the Blockchain to provide travellers with a unique and secure biometric identity. The project, developed in partnership with ShoCard, a start-up specialized in Blockchain, starts from the idea that all passengers can have a verifiable token that contains biometric and personal data on their mobile and wearable devices. By simply exploiting the biometric data inserted in a Blockchain and verifying the identity through a simple token on a mobile device, the authorities could verify the identity of a person without having to ask for traditional documents such as a passport.

Even though these are experimental projects, from these examples we already understand the potential of Blockchain technology and the hypothetical business scenarios: it will still take some time before there is a real awareness of the phenomenon, going beyond the background noise of Bitcoin and cryptocurrencies, but the path seems to have already been set.

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