Every once in a while a technology comes along that changes everything. To most observers, the latest to follow that trend is blockchain. It has the potential to revolutionize everything from currency to supply chains. Moreover, blockchain has the potential to bridge the gap between the developed world and developing nations like Bangladesh like never before.
Imagine a day where the identity and reputation of your business is instantly accessible to potential investors; a day where the jewelry that you imported to your shop is securely traced all the way back to the mine; or a day where all the citizens of a country are on a central, secure, transparent ledger and where trust is absolute.
That’s the promise of blockchain. It is billed as the next General Purpose Technology (GPT) like the wheel, steam engine, electricity, semiconductors and the internet before it. The only difference is that unlike previous GPTs, blockchains will spread far more rapidly throughout the world due to the global communication infrastructure and developing countries like Bangladesh may soon see its impacts in a multitude of sectors.
So how does it actually work? What does the blockchain do that couldn’t be done before? We look at this below.
What is a Blockchain?
Blockchain is a general purpose technology whose most famous implementation up till now is Bitcoin. The cryptocurrency that has taken the world by storm. First introduced in 2009 by the pseudonymous Satoshi Nakamoto, it is the first example of what proper implementation of blockchain technology can achieve. But far from the last.
In technical terms, a blockchain is a decentralized, distributed, consensus driven, pseudonymous ledger of transactions. For the first time in history, it allows us to store value in digital form.
Put another way, blockchains are an exercise in contrast. That’s what they are. It is open, yet secure; private, yet distributed; trustless yet trusted. It does this by combining the fields of computer science to create the backbone and economics to achieve security through incentives — Cryptoeconomics if you will.
This makes it hard to understand for most. So we sifted through the literature and came to the acronym DICT to describe a blockchain to a wide audience.
Also, here’s a MASSIVELY simplified explanation from Richie Etwaru:
What are the Features of a Blockchain?
A blockchain is a DICT ledger. Meaning it is:
- Decentralized and Distributed
- Consensus Driven
Let’s look at each of this in detail.
Decentralized and Distributed
Each computer on the blockchain is called a node. And these nodes have the characteristic of being both decentralized and distributed.
This means that control of the system rests with all the nodes, instead of a few. It makes the blockchain fault tolerant, attack resistant and collusion resistant. [For a detailed breakdown of what this means, check out Ethereum co-founder Vitalik Buterin’s blog clarifying the topic.]
This also means that nodes in a “trustless” network generate trust by themselves and hence allow for disintermediation of middlemen.
Also check out the talk Buterin gave at TechCrunch disrupt, where he defines a blockchain as a decentralized network with shared memory.
The second key characteristics of a blockchains is that the records are immutable. Once a block is created, it is linked to all the blocks that come after it. This means that if you wanted to change the 3rd block in a blockchain with 100 blocks, you would have to change ALL the blocks starting from the 3rd to the 100th block.
This is incredibly difficult to do due to the distributed and consensus driven nature of blockchains. Meaning, the moment you tried something like this, all the nodes in the system would recognize and prevent it.
Blockchains can be both decentralized and secure because they rely on the participants in the network themselves to verify the transactions. This happens through the “consensus” of the participants to mitigate what is known as the Byzantine General’s problem. This is a situation where some nodes in the system are malicious and try to insert false entries into the ledger and have to be prevented from doing so.
Different consensus mechanisms are used to, in effect make blockchains Byzantine Fault Tolerant (BFT). For public blockchains, these include Proof of Work (used by Bitcoin and Ethereum) and Proof of Stake (the mechanism Ethereum is trying to move to).
For private blockchains on the other hand, popular techniques are Practical Byzantine Fault Tolerance (PBFT) and its variations and other newer consensus mechanisms like Proof of Elapsed Time (PoET).
Consensus Protocol Type of Blockchain Current Implementations
It should be noted however that consensus mechanisms are still being perfected and we still have ways to go before we arrive at a secure, all purpose method that can be used in both public and private blockchains.
But as it stands, there is a tradeoff between public and private blockchains in terms of security. This relationship is depicted below.
The final feature that blockchains bring to the table is that of transparency. Every node in the network can trace the chain of blocks (ledger of transactions) all the way back to the genesis block. That means, no matter how many transactions are added to the blockchain, the records can always be traced all the way back to the starting block.
This enables a level of transparency that was previously hard to achieve in traditional systems and almost impossible in decentralized and distributed ones.
What Are the Types of Blockchains?
There are broadly two types of blockchains. Permissioned and Non-Permissioned.
These blockchains are ones like Bitcoin where anyone can join the network by mining to validate transactions. They rely mostly on Proof of Work mechanisms (PoW) to validate transactions. This consensus mechanism makes the nodes in the network expend computer resources to add new blocks to the blockchain.
Any participant who wants to enter a false transaction into the ledger has to have the majority of the computer power in the system to make his transactions go through. This discourages such behavior as the resources that have to be spent to do this is far more than the payoff (in Bitcoins for example). This is how, in effect, cryptoeconomics works.
In this type of blockchain, participants are pre-selected to be part of the network from the outset. These are applicable in industry settings where participants in the value chain don’t want outside parties to be privy to their information. A prominent example of this is the framework built by IBM and the Linux Foundation called Hyperledger. It allows different industries to tailor and implement blockchains to their needs.
Blockchain platforms such as Hyperledger are set to expedite adoption of the technology throughout different industries across the globe in the near future.
A brief comparison of the two types of blockchains are illustrated in the table below.
Blockchain Uses in Developing Countries
Due to the intensely connected nature of the world today, blockchain as a technology has the potential to have far reaching impacts in a relatively short amount of time. This means developing countries like Bangladesh may reap the benefits of the technology faster than with previous groundbreaking technologies.
Since blockchains are a form of decentralized, distributed, immutable and transparent ledger, they have the potential to disrupt industries throughout the economy — even in emerging markets.
Some examples of such applications are illustrated below:
This is the application where blockchain started off in. Cryptocurrencies like Bitcoin and Ethereum have demonstrated the secure application of decentralized technology as a store and transfer of value.
Developing countries like Bangladesh can pilot such currencies in closed, token based systems to increase transparency in sectors like customs, governance and law.
Tracking physical goods through the supply chain is one of the most touted applications of blockchain technology. Firms like Everledger are trying to implement this by tracking high value items like diamonds throughout their lifecycle on a global scale. Moreover, even traditional giants like Walmart are getting into the action. The company is experimenting with blockchains to ensure food safety throughout their supply chain.
Since goods provenance is a major problem in developing countries like Bangladesh, this may be a key area of focus in terms of implementing blockchains. Sectors like food supply chain tracking, government open market sale tracking and customs transaction tracking of import export may be key areas to watch out for.
In addition, blockchains have also been used for innovative applications like delivering development aid to those in need across the world. A prominent example of this is how the World Food Program (WFP) used blockchain technology to disburse aid to Syrian refugees living in Jordan.
If international development organizations like the World Bank and ADB implement token based systems to disburse development aid to countries like Bangladesh, then it will bring about a massive change in transparency in the sector, where as much as 50% of donations may go unaccounted for due to misappropriation and corruption.
Blockchains have the potential to change how services industries ranging from financial institutions to legal establishments work. The mix of blockchains, smart contracts and Decentralized Autonomous Organizations (DAO) has the potential to enable services transactions to happen seamlessly in a decentralized, secure and fast way.
If this is implemented properly, developing countries like Bangladesh can leapfrog counterparts in institutional development by automated legal procedures, customs payments, ownership transfers, business transactions and allowing widespread disintermediation across industries.
To this day, records of ownership, citizenship and other forms of identity are stored in centralized databases to keep them secure. However, this poses a problems of tampering because of the intermediaries involved. Blockchains open up a possibility of decentralized, public, immutable and consensus driven ledger of records that may one day invalidate the need for intermediaries.
An early example of this is Estonia’s E-Citizenship Program which stores citizens’ information on a blockchain. The application of the technology can also be extended to include organizational information, where one day a company can have one identity stored in a Master Blockchain that can be accessed by all stakeholders ranging from supply chain partners to customers to tax authorities.
These applications become more relevant for developing countries like Bangladesh as it presents a scope for bringing the entire population under one platform [think of a central, countrywide blockchain of all citizen data]. It will make providing citizen services like ownership transfers, voter registration and subsidy/tax transfers much easier and more transparent.
This can also be extended to company data, whereby the identity of a company will be centrally available on a blockchain for reference by any stakeholder doing business with the entity. This will allow unprecedented transparency and speed in business activities and transactions ranging from vendor payments to tax filings.
Smart organizations are a concept that will be made possible by smart contracts built on top of blockchains. Smart contracts are self-executing programs that are event triggered. An example would be delivery of a good prompting automatic payment through a smart contract. This can be expanded to a scenario where entire organizations are run and administered on the blockchain; be it commercial or political ones.
These will be the logical consequence of widespread blockchain adoption and will be relevant for developing countries like Bangladesh for increasing transparency and opening up new market opportunities across the economy.
For a more thorough understanding of how blockchains are currently being used and its future prospects, you can refer to the research papers below:
Hack the Future of Development Aid — DANIDA
Economic and Institutional Implications of Blockchain — Aalto University
Brief Framework for Implementing Blockchain in Industry
Since blockchains are a new technology, implementation frameworks are being designed on the fly and hence are quite fluid and non-standardized.
However, the following framework can be used as a rough guideline for implementing the technology across sectors.
In addition, Below is a presentation by Capgemini on potential frameworks for implementing blockchains in different industries.
Even though there are certain limitations of blockchains at present, these are being worked on by a global community and have the potential to be solved soon. This will allow the technology to be implemented in systems where there is a lack of trust and a need for disintermediation.
Finally, one of the most exciting aspects is that this technology may be available to developing countries like Bangladesh around the same time as more developed countries adopt them. This has the potential to level the playing field of development to a large extent across countries — both large and small.
Further Reading [Key Resources]
IBM Blockchain Essentials (NOTE: It is highly recommended that you do the Blockchain Essentials course from IBM. I completed the free course and found it enriched my knowledge of blockchains significantly. You get an achievement badge to boot so try it ;)
This article was originally published in Techonomics. A blog on strategies in career and business. For more strategic goodness, SUBSCRIBE to our soon-to-be released newsletter, The Strategy Pill.