A Deep Dive Into Blockchain Technology
For a few years now the word blockchain has been creating buzz. In October 2017, a UK-based company added “blockchain” to its name and their stock price rose by 394%. Then, in 2018, the head of Nasdaq’s blockchain division announced that the technology could disrupt a host of different industries and said that he thinks it holds power to transform the financial sector. So what exactly is blockchain?
Don and Alex Tapscott, two technology mavens, define blockchain as an immutable digital ledger for economic transactions that can be programmed to not only record financial transactions but basically anything that is of value.
In short, all transactions can be recorded using blockchain technology, and these transactions can also be persisted and protected. It’s important to note the use of the words “economic transactions” since blockchain was developed only for the intention of recording cryptocurrency (bitcoin) transactions. However, if we extend it to other transactions like supply chain, for instance, then blockchain’s potential increases exponentially.
So now let’s take a look at blockchain’s history.
Satoshi Nakamoto (whose identity is controversial), wrote a white paper in 2008. In it, he detailed bitcoin, the world’s first cryptocurrency. Nakamoto also talked about the way in which the cryptocurrency would be traded from one bitcoin user to another. Bitcoin wouldn’t need any centralized database, which is unlike traditional methods. This method would be a peer-to-peer system. Meaning, it would live on whichever computers were part of the blockchain network.
Cloud-based computing is based on a centralized database, but when it comes to connecting to a blockchain, users would need to download a client. This would enable all “peers” to connect and make transactions between each other. It also makes blockchain effectively impossible to hack because a hacker would need to hack each user separately.
Here’s an example, if you are storing 10,000 notebook computers in a locker, then you can break into the locker and steal all 10,000. But, if you have 10,000 lockers with only one computer inside each, you would need to break into all 10,000 lockers. Thus, blockchain needs millions of “miners” (people who solve complex programming problems as a way to earn bitcoin) to support each transaction. Once confirmed, the miners assemble the transactions into “blocks” and add the blocks to the chain of transactions that have already been recorded. In sum, blockchain can be defined as a decentralized manner of recording cryptocurrency transactions.
The blockchain is buzzworthy because of the way it extends beyond cryptocurrency transactions to all economic transactions. An economic transaction handles concrete objects instead of abstract objects like cryptocurrency.
If blockchain technology is used to perform financial transactions, it could take the place of traditional payment models. Blockchain could also get rid of the need for intermediaries in places like human resources because personal information could be stored on a blockchain, and background checks could be performed without the help of a third party. It could also change the way software providers function because the need for third-party tools to collect data would be removed since information would be stored in a blockchain and accessible by whoever needs it.
Although blockchain has been accepted as a valid technology and many initiatives have been launched to use it in standard business practices, most have failed.
As per a report from Deloitte (via The Block), there have been 26,000 blockchain attempts from 2017 to 2019, but 92% of them are now extinct. There are many reasons why these efforts have failed, but the most prominent reason is that blockchain was not the proper technology for the job. That being said, blockchain technology’s success in the real world is likely to happen through something known as the “permission blockchain.” This would mean having a decentralized blockchain ecosystem but one that has a centralized authority that gives permission, or authorization, to participate.
An example of this model is Walmart employing IBM’s blockchain technology to trace its food supply chain. This blockchain would be restricted to the suppliers in the department store’s trading partner network, which is why it’s called a permissioned chain. However, we must wait and see if this initiative is successful, but we can expect more of these permission blockchains to hit the market as blockchain technology evolves.
Although blockchain is still nascent and the revolution is not upon us yet, it’s safe to say it will happen.
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