Jun 14, 2019
A Chain Of Blocks
How such a simple concept can change the world as we know it…
Most cryptocurrencies are a scam. And unfortunately for us because of its meteoric rise and fall Blockchains have become synonymous with it.
We can’t talk about Blockchain in the same sentence without its distant cousin Bitcoin, and for good reason; Bitcoin burst onto the scene in 2009 promising a decentralized currency without controls that could be used to buy, sell and trade virtually anything without a central authority. It is the first real implementation of Blockchain technology, and the first solution to solve the Double spending problem at scale.
Double Spending Problem? What’s that? Well, imagine I have an MP3 of Britney Spears Hit me, baby, one more time and I upload this onto the Internet for everyone to share. Even if everyone downloaded a copy (and they should its a classic), it doesn’t diminish the value of the copy I have. My copy of Britney Spears Hit me, baby, one more time is just as valuable regardless of how many copies made.
Not the case with a cryptocurrency. If I could send a Bitcoin to a friend, and then spend that same Bitcoin buying something online, it greatly diminishes the value of the coin to the point its not worth the electricity that generated it!
We’re not here to talk about Bitcoin though, and I’m definitely not here to try and sell you some ( ͡° ͜ʖ ͡°). We’re more interested in the technology underpinning Bitcoin, the Blockchain. This technology, when applied to the correct set of use-cases, can revolutionize the way businesses operate and disrupt existing business models.
What is Blockchain?
First and foremost, Bitcoin is not Blockchain. Bitcoin is a cryptocurrency. Let’s clear that up first. We hear these two terms used interchangeably. Repeat after me:
If you think about it at a high level, a Blockchain is nothing more than a transaction processing system, with accounts, balances, and transactions. If I send you 50 Bitcoins, the system first confirms I have sufficient balance, then it will reduce 50 Bitcoins from my balance and increase your balance by 50 Bitcoins. In the IT world, transaction processing systems are the most boring jobs in the world, and what Blockchains does is no different. However, how it does it is very interesting and worth understanding; because until Blockchain came along, we could not get the level of digital collaboration we see now.
Blockchains are nothing more than Transaction Processing Systems
The foundational building blocks for a Blockchain are:
Tokens
A token is nothing more than a digital asset that is stored on the Blockchain. Tokens can be purely digital in nature; a Bitcoin, for example, is a digital token represented by only 1s and 0s. Its ephemeral in nature, I cannot physically give you a Bitcoin-like I can give you a pen. Tokens can also be a digital twin to a physical asset, such as a kilogram of gold, a USD, fractional ownership of a piece of real estate, or a representation of a physical asset in a supply chain.
Wallets
Wallets hold your tokens and digital assets. Each wallet is unique and distinctly different to other wallets. The concept of a wallet is what helps a Blockchain solve the double-spending problem; my Bitcoin in my wallet is not the same as your Bitcoin in your wallet. I can send you 50 of my Bitcoins which will decrease my balance and increase yours (once again a transaction processing system). We use wallets to interact with the Blockchain.
Smart Contracts
Smart Contracts govern an agreement between multiple parties. Agreements (or contracts) between parties in business is common, and define the rules in which both parties communicate and operate. E.g. I will pay you 25 Bitcoin for your product or service.
Tokens, wallets, and smart contracts are concepts which model real-world business assets and business rules.
A Blockchain comprises of the following key technologies
Distributed Ledger
Like all transaction processing systems, the Blockchain has a ledger; which is nothing more than a list of accounts, transactions, and balances. I send you a Bitcoin, you send me a kilo of Heroin we have done a transaction.
However, unlike a ledger, in a Blockchain, every participant has a copy of the ledger. If you download the Bitcoin ledger now, you will have a list of every single transaction that ever happened since Bitcoin started in its entirety. Unlike a ledger, a blockchain is immutable and tamper-proof; each set of transactions are bundled into a block linked to the previous block, and then added to the ledger (all the way until the very first block).
To be able to corrupt the ledger we would need to break into at least half of all the machines hosting the ledger and corrupt the copy on the machine (at the same time) which is both impractical and expensive.
Programmable Ledger
The key difference between a transaction processing system and a blockchain is the programmable ledger (or ‘smart contract’). We can put any arbitrarily complex set of business rules onto the Blockchain and enforce these in a clear, transparent way for all parties to see.
We could create a contract whereby I agree to pay you 50 Bitcoins when you complete a task or deliver a product that is validated by a third party we have agreed to in advance. This could be encoded in a Smart Contract which could be deployed on the blockchain and run automatically without me doing anything beyond putting the 50 Bitcoins into the contract. We finally have a way to share data and business logic between multiple different parties without assigning a central authority. Btw this is very similar to what Enterprise Resource Planning (ERP) systems do within a single company
Consensus Algorithms
Consensus algorithms are a tool for validating transactions. It is used to confirm transactions and to check your copy of the ledger with everyone else’s on the network. The Consensus algorithm is a useful tool because it makes it extremely difficult to cheat on a transaction and tamper with the results because everyone else is checking and validating the results.
It is also a powerful tool for cybersecurity. In a centralized system, if I wanted to change the results I would only need to hack into a single machine. If I want to change my university grades or my Credit score, I just needed to break into a central machine and suddenly I’m an A+ student with a perfect credit score. With a blockchain, I would need to break into at least half the machines to make the same changes; which is neither easy nor cheap.
A consensus algorithm also makes a distributed ledger resilient to attack; machines that are knocked off the blockchain network can reconnect, resync their copy of the ledger and continue transacting again. As long as there are machines running and transacting on the ledger new nodes can join, download the ledger and start validating those transactions.
These 3 key concepts (tokens, wallets, and smart contracts) and 3 key technologies (distributed ledger, programmable ledger, and consensus algorithm) are what makes Blockchain tick; understanding these concepts will give you a fundamental knowledge of what is a Blockchain.
Why Do I Care?
Blockchain technology is revolutionary because while we could do digital collaboration before, there was no way to do this without assigning a centralized authority to manage it.
25 years ago, we had industry portals, similar to what we have now with blockchain consortiums. These industry portals promised digital collaboration in a closed system, and these failed miserably. Because centralized systems are opaque and dangerously anti-competitive.
Centralised systems are opaque and dangerously anti-competitive
Uber is the most valuable taxi company in the world; owning no taxis and worth more than all taxi companies combined because Uber has an information advantage which it leverages against the other taxi companies. At the end of the day, in a business environment involving trading and transactions; an information advantage gives one party a huge amount of power.
Centralized systems, or intermediaries, can become more valuable than the industry participants. Companies know this. That’s why most industry portals and consortiums tend to fail, with companies preferring more open internet-like operating models. No one wants to sign up to an industry portal and wake up one day realizing that the portal has become more valuable and important in the industry than they are.
What’s incredible about Blockchain is that it allows different parties to digitally collaborate with the same amount of benefits as an industry portal without having to assign a centralized authority to manage the portal. Each party can interact and transact on the Blockchain to share information and business logic and there is no central authority that will shut this down at any given notice or start charging exorbitant fees to use the system.
Finally, we can do a level of Digital Collaboration between multiple companies we couldn’t dream of doing in the past because it was too inherently risky from a business perspective.
Blockchain Use Cases?
The following are interesting use-cases which I’ll cover as the weeks and months go by
- Document and Asset notarisation and digitization
- Supply Chain, Brand Protection and Promotion, and Customer Engagement
- Trade and Trade Finance
- Distributed Contract Management
- Smart Mobility and Fractional Ownership
