Blockchain is a buzzword, but it’s often difficult to understand, this guide will help clarify the subject
The modern human species has been around for nearly 200,000 years. We started off as ape-like creatures, scavenging for survival, but over time have become a dominant species, able to shape the future of our little blue planet.
Roughly 6,000 years ago, after the first civilizations, it is interesting to observe that the progress of our society has often been exponential rather than linear. New technological innovations have changed the status quo suddenly and rapidly, opening new frontiers and enabling a myriad of opportunities.
One example of this would be gunpowder. Before its creation, warfare had been largely the same for thousands of years; swords, spears, bows and arrows of different shapes and sizes were used all over the world.
When gunpowder came along, it changed the course of history, collapsing civilizations that had endured for centuries. Once gunpowder was widely adopted and became the norm, the same thing happened again. Multiple gun manufacturers arose, each capturing a slice of the market by producing a slightly different product, and evolving it in each iteration.
The Internet has had a similar effect on the global economy. When the public was first introduced to the idea of the internet in the 1980s and was viewed by many as something out of a science fiction movie.
Since then, the internet has revolutionized our world, creating entirely new industries. Some of the largest companies in the world are now from the technology field; Apple, Google and Facebook to name just a few.
Today, the idea of the internet is well understood with innovations developed every day.
But there is one less understood innovation that has the ability to ignite a spark and launch an entirely new industry. Except perhaps, the Blockchain.
What is this blockchain you speak of?
In October 2008 the world was in the midst of a global financial meltdown. Stock markets had hit historic lows, banks had failed and billions of tax dollars were spent on bailouts.
The public was enraged, and the confidence in governments and centralized institutions had hit rock bottom.
At this point, a concept emerged in the form of a white paper, written by someone known only as Satoshi Nakamoto. The paper described the now infamous cryptocurrency of Bitcoin and the underlying concept on which it operates — now referred to as the blockchain.
While Bitcoin is merely one application that uses blockchain, it is this underlying technology that is the gunpowder that will spark the launch of an industry.
In the most basic of terms, the block chain is a distributed public ledger. Instead of data being accounted and stored on a central server’s database, it is encrypted, and a copy is stored on every node connected to the network.
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There are as many copies of the ledgers as there are nodes connected to the network. The implications of this architecture are truly revolutionary as it solves some of the oldest and most challenging problems faced in the economy.
What’s the big deal about a distributed network?
Blockchain uses its distributed network strategy to revolutionize the process of verification and transfer of ownership. This provides numerous advantages over current centralized network systems like security and preservation of data.
As an analogy, let’s say someone needs to prove their identity. How would they go about proving the documents are valid? Well, there would be two ways of going about it:
- Using official documents like passports, birth certificates, etc.
- Getting people to vouch for your identity, like family members, relatives, and friends.
Method one is representative of a centralized network. The person approaches a recognised government body, that legitimises the identity via information that is cross-checked their database to give an answer.
The second example represents the blockchain system. Everyone in the network knows the person and then can validate the claim.
In the digital world, storing all data on the central server is akin to putting all the eggs in one basket, and we all know that is an accident waiting to happen.
If a central server’s integrity gets compromised, the data stored within can be hacked. But if a database gets distributed amongst multiple nodes, it becomes much harder.
Anyone wishing to tamper with the data in a blockchain network would need simultaneously to alter the ledger on 51 per cent of all the nodes on the network. If they do not get altered simultaneously, the blockchain nodes will automatically realize that the modified copy is a forgery and correct the changes.
Also, each block in the blockchain is encrypted, making it impossible to change after it gets authenticated and ‘chained’ to the previous ‘link’.
Simultaneously hacking thousands or millions of computers to would require hacking multiple nodes spread across the globe, an unpractical mission even for the most resourceful hackers.
In today’s internet age, privacy is hard to assure. Online services are almost always able to monitor usage, and often use information for marketing purposes. They sometimes provide information to government authorities and when signing up for a service, most of us regularly agree to the service provider terms and conditions, but few of us read the finer details.
Services like Facebook which has over a billion users has a clause that states it has the license to use your content in any way. Imagine all your photos and personal information being passed around on the internet and there is nothing Facebook users can do to challenge them.
On the blockchain, however, all transactions are identified by a code, so the actual user identity is kept private. Only those with the appropriate code or key can access the relevant information.
This anonymity has enormous benefits. Records cannot be stolen, and accounts cannot be frozen, as there is no central power. Because no central command exists, nobody has the authority or access to facilitate these types of actions.
Instant, seamless, and unhindered
Traditional industries and institutions are mired in by the classic problem with middlemen, an issue that has plagued us since the dawn of civilization.
The issue is two-fold.
Firstly, the intermediary always charges a fee, either in the form or a commission or a price markup. Secondly, consumers are forced to be at the mercy of the middleman, and no matter how reputable and fastidious they may be, mistakes are bound to happen.
Also Read: How Bitcoin is doing in Indonesia, and its opportunities as an investment commodity
Errors occur because intermediaries operate like a central server of a network, all the information flows through them.
The blockchain does it differently.
Using its distributed network architecture, the same action of sending money to someone in another country works differently than the standard money transfer system.
When transactions get made, the blockchain simply updates. Each transaction is a block and gets chained to the account number or public key. After a transaction takes place, it gets processed by a ‘mining node’ (computers on the network), then validated, and a new block gets added to the chain.
A new copy of the chain is updated on all the ledgers on the network. And this happens, without costly fees and delays due to regulations or human error.
Transactions like this can take place without any interference from a central governing body.
What can blockchain technology be used for?
Transactions of any kind and keeping an account.
It has far reaching applications in a diverse range of industries and services far beyond cryptocurrencies.
Here are a few use cases.
- Secure electronic voting and voter authentication
- Smart legal contracts
- Peer-to-peer payments
- International money transfers and cross-border transactions
- Transferring ownership of equities and clearing settlements
- Digital stock trading
- Decentralised patient health records management
- Digitally recorded property assets and transfer of ownership
Potential for so much more
Applications for blockchain technology are still getting discovered. Governments and private institutions are only just beginning to realize its potential applications. New ideas are getting developed, and millions of dollars are being invested.
But as with all new technologies, the challenge with blockchain remains in its development and application to new services.
If it can take off, the mass popularity of blockchain will lead to massive financial shifts as intuitions that work as intermediaries become obsolete.
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Arnav Kumar is the CEO of SliceBread, a company that works with leading financial institutions across Asia to develop proof of concepts for cutting edge solutions to big industry problems to support corporate innovation.
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