Technologists everywhere are buzzing about a piece of technology that is already disrupting the financial industry and has the potential to do the same to many others; I am of course talking about blockchain. Blockchain was initially introduced to the world via Bitcoin as the data structure that gives the cryptocurrency its viability. In the real world if person ‘A’ wanted to purchase something from person ‘B’ they would use a currency issued by a government and trusted by both parties. However in the digital world it is not as easy to prove a transaction without having an intermediary such as a bank, and it becomes even more difficult with currencies such as Bitcoin which have not been issued by a trusted authority. Blockchain uses a distributed ledger to hold identical records on all of the nodes in the network. These nodes become the decentralized authority that verifies all these transactions, speeding up the process, and removing all subjectivity. Blockchain is a game changer.
Under the hood
When a Bitcoin is transferred from one party to another there is a process of authentication that occurs through Bitcoin mining. Miners, which are computers that form the blockchain network, all hold an identical copy of the digital ledger. Each transaction carries some code that contains the identities of both parties, the transaction details, a time stamp and a unique math based encryption signature. It’s this digital signature that is the key to the transaction being trusted and verified by the other servers through Bitcoin mining. Once verified another block is added to the blockchain and all of the distributed ledgers are updated simultaneously. This connectedness and transparency is what makes blockchain being so dependable.
The connectivity provides an audit trail of every transaction in the blockchain database. If there was an unauthorised change, all servers on the network would be notified and they would then verify if the change is to be accepted or rejected. This robust verification process in is underpinned by the philosophy that consensus means truth. Such objectivity makes the process more secure and transparent than if you had one master ledger and one intermediary verifying all the transactions. Naturally, the blockchain is difficult to manipulate, as the perpetrator would have to hack more than 50% of the servers in the database simultaneously to get the consensus needed to approve the fraudulent transaction.
Throughout this article we have explored blockchain through the use case of bitcoin and the financial industry. However the applications for distributed ledgers don’t stop at digital currencies. One of the alternative fields is agriculture, and in particular organic produce. How do you know the vegetables that your purchased actually followed the protocols needed for it to be called organic? At the moment we have to trust the word of the vendors that we buy them from, however with the proliferation of dishonesty in organic farming you may in fact be buying produce that has been grown using synthetic pesticides and herbicides. Using Blockchain, the entire supply chain of the product can be mapped in a secure and transparent fashion, giving you the confidence that what you are buying is indeed organic.
Members of the diamond industry also see Blockchain as a way of counteracting fraud, theft and the trade of blood diamonds. Companies like ‘Everledger’, use Blockchains asset data storage functionality to store diamond certificates. Whenever a registered diamond is sold, its movement can be tracked which will aid in its recovery if it is lost or stolen.
The ‘smart contract’ is perhaps the alternative use case that has the greatest potential for mass-market application. Smart contracts are in effect contracts that police themselves removing the need for a central authority. When placed on a blockchain the contract can authorise a transaction once certain conditions are met. For example a smart contract can be set up to release funds once a service provider has met its predefined obligations, removing the need for any disputes between the two parties.
Blockchain is not without its challenges. As with all innovations it is difficult for large organizations to adopt the technology and integrate it with their current processes. However this opens up the doors for start-ups who are developing blockchain businesses across all industries. The expense is another factor to consider. Due to the amount of servers needed to ensure Blockchains security, the network can be expensive to sustain. However these are just challenges, not barriers, and with blockchain set to continue its remarkable growth all organizations should be trying to figure out what their Blockchain strategy will be.