If you’re reading this article, chances are you have an understanding of the term “Blockchain”. In fact, even if within the last decade if you have been following the banking, investing or even the cryptocurrency industry then this will definitely ring a bell as Blockchain is famously known for the technology behind the Bitcoin network:
So, what is the best way to summarise it? It it’s most basic interpretation of the word it would be simply considered a chain of blocks, however when we use the words block and chain in this sense, we’re referring to the digital information as the “block” and the public database in this context is the “chain”.
The blocks store information about transactions like the date time and amount. The block also store information about who is participating in these transactions and which parties are involved. The consumer and the retailer create a type of digital footprint.
Finally, the blocks store information that is unique to other blocks. Almost like a barcode acting as a unique reference. These are known as a ‘hash’ which is a cryptographic code created by special algorithms.
The technology is used widely in 2020 and is renowned for its security. Hash codes are created by a maths function that turns digital information into a series of numbers and letters, each unique top the last. It’s significantly important to security because any manipulation to that data will change the data and the hash will no longer act as specific to the intended.
To understand the complexity, we must understand the variables, currently, there are at least four types of blockchain networks:
- Public blockchains – With no access restrictions
- Private blockchains – Accessed by invitation only
- Consortium blockchains – Semi-private controlled by a group
- Hybrid blockchains – Combining benefits of both public and private blockchains
Another firm comparison is the way Blockchain as a technology that works like a ledger. In fact, it works like a distributed ledger, where every participant in the blockchain holds a copy. A ledger is simply a list of records which can be in any form, just like a notebook, an excel file or anything else. A greater understanding can be sought from the infographic below:
According to analysis carried out by the Harvard Business Review: “history suggests that two dimensions affect how a foundation technology and its business use cases evolve (and have) developed a framework that maps innovations against these two contextual dimensions, dividing them into quadrants.”
The first quadrant is labelled as ‘Single Use’ which is a low-novelty and low-coordination applications that create cost-effective, highly focused solution. The primary example provided is email technology which was a cost-effective solution to communications, replacing phone calls, faxes etc. It’s fully potential only emerged 10 years after it’s release, so is this the same story with Blockchain technologies like Bitcoin?
The second quadrant highlighted is ‘Localization’ as much of the initial blockchain-based development in the financial sector is often carried out within small networks of firm: “Bank of America, JPMorgan, the New York Stock Exchange, Fidelity Investments, and Standard Chartered are testing blockchain technology as a replacement for paper-based and manual transaction processing in such areas as trade finance, foreign exchange, cross-border settlement, and securities settlement.”
Substitution is the third quadrant containing applications that are low in novelty as the build on existing single use and localized applications involving broader and increasingly public usage. The perfect example is within cryptocurrencies which is now a well-established currency system that has far developed from the initial Bitcoin payment technology.
The final quadrant is ‘Transformation’ – one known application is embodied by Smart Contracts which is considered the most transformative blockchain application today. Payments can be automated and the transfer of currency as negotiations are met, many smart contracts have been early adopted by the banking sectors as the potential is still being tested.
If contracts are automated then what will happen to the common processes and structures we see today? Would the involvement of lawyers, accountants and negotiations at large be compromised? Like many technologies, we test and learn with time.