Blockchain — It’s Not Just For Cryptocurrencies Anymore
Like it or not, blockchain is associated in the popular mind with cryptocurrencies. But will it always be like that? Pawel Kot weighs in.
The most popular description of blockchain is “the technology behind Bitcoin that no one quite understands”. Blockchain is the foundation of the cryptocurrency first described in 2008 by Satoshi Nakamoto, although it’s worth noting that the word “blockchain” itself was not used in the original paper.
In a nutshell, blockchain is a method of cryptographically signing conducted transactions and then storing them. The blockchain network stores grouped transactions (blocks) on a unidirectional list (a chain). Transactions are grouped with a specific heartbeat (every 10 minutes in the case of Bitcoin). Once it’s done, the group is verified and signed by the network using the proof-of-work cryptographic method.
The method ensures that the ledger is unforgeable — what’s stored in blockchain stays there forever. The consequence is that there is no need for a single point of trust or central authority that guarantees transactions. Instead, consensus protocol builds trust — as long as you trust programmers!
There is one more important concept introduced by Bitcoin — a “smart contract” which is basically an agreement that is automatically created, monitored, and executed by Bitcoin protocol and implemented algorithms. It’s also worth noting that the original Bitcoin implementation is decentralised rather than distributed.
The most recognized blockchain start-up, Ethereum, is a decentralized platform that provides the possibility to create and activate applications that can use basic blockchain features such as the auditability and immutability of recorded transactions as well as the concept of smart contracts. It enables the creation of solutions based on the history of unquestionable transactions such as cryptocurrencies, auction trading, and voting systems. The Ethereum project is supported by multiple banks, including J.P. Morgan Chase and the Royal Bank of Scotland.
Bitcoin and Ethereum are public networks, which means that anyone can join and have the same status on the network. It means also that all data stored in the blockchain is publicly available but can be limited using encryption methods — some blockchains, such as Zcash, have privacy as their primary goal.
Another useful blockchain advantage is anonymity. Users are identified by their numerical addresses, and when you deep dive into exploring stored transactions you will see only some meaningless numbers. You are not required to forfeit any personal data to join the network, though there might be some apps (like cryptocurrency exchanges) that require some data. A user’s identity can be traced only by looking their off-chain activities — for example, if you wanted to convert your bitcoins to some fiat currency and cash them out from your bank, you could be traced through your bank account.
Many people still see blockchain through the prism of Bitcoin. However, cryptocurrency is only one of many possible applications for blockchain. In the world of financial corporations, the most important bitcoin features, such as anonymity, access for everyone, and the lack of a central controlling institution are not essential. This is contrary to other features such as controlled distribution, immutability, and the auditability of recorded transactions.
There are already multiple solutions that establish a so-called “private” blockchain. Private blockchains have distinctive features. They work in a controlled environment, so you determine who can access the network by making them authenticate themselves. As private blockchains work in an environment with some level of trust, different cryptographical protocols can be used to ensure blockchain integrity and validate transactions. That implies that private blockchains usually do not have proof-of-work as the consensus mechanism and in turn do not require so much energy fuelling computation power, meaning that transactions can be conducted much faster than in a Bitcoin network.
One of the most recognized private blockchain solutions is Hyperledger Fabric. The project is hosted by the Linux Foundation and is backed by major technology companies, such as IBM. Hyperledger Fabric allows for the deployment of a solution in a controlled environment where every network member is authenticated. Moreover, some of the network members can play dissimilar roles, establishing a kind of “trusted” network to confirm and validate all transactions. Hyperledger Fabric also allows for the creation of private chains, which are visible only to invited parties — full privacy and confidentiality are guaranteed.
It’s important to remember that blockchain, whether it is private or public, is not just for payments. Blockchains are usually related to cryptocurrencies, but there are a few other areas where blockchain features seem to be a perfect match, the first of which is identity services. The identity issue is one of the biggest that we currently face, and a platform for building identities and having other blockchain users confirm them seems to be a novel and useful concept.
Another potential use is for tracking supply chains, a process where there is typically zero trust between parties. By using blockchain (and some other off-chain components) it’s possible to know what is going on in the process without any doubts. It’s easy to see where the process failed, where something got lost, where something got broken, or where something got delayed.
A further case is a representation of physical or virtual goods. The connection between virtual goods and blockchain tokens seems straightforward. Some more work would be required to match a physical good with a token, but blockchain could then be used as a medium to transfer ownership.
Whether blockchain can change the future of the financial world is a controversial question, but it is certainly the subject of substantial financial investments. By the end of Q1 2016, the total value of blockchain start-up investments already exceeded USD 1.3 billion. Still, widespread blockchain adoption will take time. It is uncertain at present what the optimal use cases for blockchain technology are, and the technology itself might not be mature enough to fully adapt mission-critical systems to utilize it. There is still time to learn the technology, to experiment, and to see how it can best fit your organization.