One of the most talked about developments in the financial world is the rise of
blockchain technology. Its nature is fairly ambiguous. How do you define it? How does it help a business grow? How does it relate to
Bitcoin?
The simplest explanation of what a blockchain is, is a spreadsheet. Not a very glamourous way to describe something that has been hailed as a means to “
Change the world”, but its basic nature is essentially a database. What sets a blockchain apart is what is
inside the database. It is a list of records that is constantly growing and linked through cryptography, a “hash” algorithm pointing to other blocks in the chain, and a timestamp of when the blocks have been changed. Blockchain is designed to be impossible to cheat.
Blockchain started as a cryptocurrency tool, but now everyone from governments to shipping companies are capitalizing on its capabilities.
Origin
As a concept, blockchain dates back to the early ‘90s, but it wasn’t until 2008 when Satoshi Nakamoto put the first blockchain into action as the main recorder of Bitcoin, the first
cryptocurrency. As a public ledger, blockchain eliminated the “double spending” flaw of digital currency where someone could pay for multiple items with the same token.
Not much is known about Nakamoto, or if he’s even a real person or a conglomerate of several people. Theories range from computer scientist
Craig Steven Wright to
Tesla CEO Elon Musk.
As more data was recorded onto Bitcoin’s blockchain, the file size grew. From 20 gigabytes in 2014 to over 100 gigabytes by 2017. This increase in data led to more sophisticated coding and made it clear that there was more potential behind blockchain’s practical uses than just serving as Bitcoin’s ledger.
A 2015
Economist article theorized a wide range of possibilities.
Other applications for blockchain and similar “distributed ledgers” range from thwarting diamond thieves to streamlining stock markets: the NASDAQ exchange will soon start using a blockchain-based system to record trades in privately held companies. The Bank of England, not known for technological flights of fancy, seems electrified: distributed ledgers, it concluded in a research note late last year, are a “significant innovation” that could have “far-reaching implications” in the financial industry.
This new lease on life for blockchain paved the way for the term “blockchain 2.0”. The chain could now automatically pay an invoice when a shipment is received, among other leaps in intelligence.
What it is and how it works
Despite its complexity, at its most basic nature, blockchain exchanges information without the oversight of an authority, like a person or a bank. As a Bitcoin ledger, it doesn’t exist on one computer or data centre, it lives across an international network of private computers. Each computer serves as a node contributing to the blockchain network. That network records everything about every transaction and adds it to its chain.
Each block builds upon the previous blocks in the chain. As each block builds on the chain, it also answers a complex mathematical problem created using the hash algorithm from a previous block. This makes it virtually impossible to hack, since these math problems are happening all the time.
A common occurrence in blockchain is a
fork. This is where a blockchain splits into two separate chains because two distinct sets of rules are battling to take over the chain. Either new features have been given to a blockchain or there is a bug that needs to be reversed that leaves it vulnerable to hacking. Bitcoin has
forked several times in its history and many of those forks were to increase its block size limit.
Relation to cryptocurrencies like Bitcoin
Cryptocurrencies are transparent and decentralized. When two strangers exchange money over the internet, it requires a middleman, like PayPal, or a bank, who takes a percentage of that transaction. That transaction is vulnerable to hacking. Cryptocurrency is recorded in the public ledger of blockchain.
The program that allows a user to buy and sell Bitcoins is a
wallet. Each wallet has a private and public key to protect it from being hacked. Every transaction from buyer to seller generates a digital signature that is cross-referenced by the blockchain’s nodes and is specific to that one transaction.
There are some risks in dealing with Bitcoin. Anyone can make a transaction over the open-source network, but no one physically manages it. This means if there is an error in code, any Bitcoins made in that transaction are lost forever and there is no customer support to call for help, even for problems as simple as a lost password.
An official version of Bitcoin’s wallet software called
Bitcoin Core can keep a password and private key secure.
Cryptocurrency users have full control of their value. There’s no bank or credit union holding an account, taking significant transaction percentages, or limiting access. Transactions are very fast, typically verified within minutes and anyone can verify a blockchain transaction, increasing its transparency.
Industries it will change
Blockchain technology is still in its infancy stage, but change is already happening. The Government of Canada is testing a pilot project to administer grants and contributions. The National Research Council of Canada is using
Bitaccess’ Catena Blockchain Suite to allow public institutions to publish complex datasets into the Ethereum blockchain. Ether is the 2
nd most popular cryptocurrency to Bitcoin.
Grants and contribution data from universities to tech companies are published in real-time
online. The partnership is still in the live trial phase. Company co-founder Moe Adham calls the software suite a simple and low-risk way for clients to validate public information. Bitaccess provides blockchain access to companies to service their core infrastructure, compliance, security and support services.
Global shipping and trade is another industry that is analyzing how it can incorporate blockchain and the first companies to put it into effect are two of the biggest. Computer company IBM and transporter / shipper Maersk.
This new enterprise will offer a global trade digitization platform built on open standards and will be used by shippers internationally.
In a news release, IBM noted that this new company will provide more transparency and simplicity to shipping goods across borders.
Through blockchain, shipping companies can establish a shared record of all transactions in-real time, potentially replacing tedious paperwork. Multiple trading partners can also streamline their transactions without compromising confidentiality.
The World Economic Forum estimates global trade could increase by 15% by reducing international barriers. More than $4 trillion in goods are shipped each year and 80% of goods used daily are shipped by ocean carriers. Given regulatory approval, software solutions from this joint venture are expected by Q3 2018.
The food industry could also be revolutionized by blockchain.
Bloomberg reported in December 2017 that Harry Smit, a senior analyst at Rabobank International advised food companies to adopt blockchain to lower transaction costs, improve efficiency, and create new business opportunities.
Companies such as Walmart, Nestle, and Dole Food Co. are joining in to reduce a food-fraud problem that is estimated to cost as much as $40 billion a year.
Forbes contributor Tina Mulqueen
wrote extensively on how retail will be revolutionized by blockchain. Customer data is crucial to a businesses’ success and the internet has made this data far more intricate.
“But when we merge in blockchain technology, all private databases such as banks, third party apps on a mobile device, and credit card companies can open customer databases to share and monetize data with required customer authorizations recorded on a secured, incorruptible, transparent, chronological, append-only, distributed ledger called the blockchain,” Mulqueen explains.
One of the most obvious industries that could be overhauled through blockchain is banking. Business specialist Don Tapscott founded the
Blockchain Research Institute and in an interview with the
Financial Post, says this revolution is already underway.
“For small businesses, it would speed up the metabolism of their operations,” says Tapscott. “There’d be no three-day settlement for basic transactions, because payment and settlement on the blockchain is instant.”
Bitcoin’s blockchain isn’t the only game in town and the number of blockchains out there vary as greatly as the jobs they’re capable of fulfilling.