Blockchain technology is somewhat like the internet when it first came about. It was really difficult to understand for the layman and yet had the potential to change the world. Similarly, blockchain technology has the potential to change the way we exchange digital and physical goods, information, and online platforms. The good news is that like the internet, you don’t have to understand how it works to derive its benefits. But to make the most of the technology, it could be highly beneficial to find out how it works.
A single proper definition for blockchain technology is quite difficult to come up with as the technology is still quite new and is always evolving. It encompasses a multitude of technologies which can be implemented according to a particular objective. According to Assistant Professor Christian Catalini of MIT Sloan, an expert in blockchain technologies and cryptocurrencies, “At a high level, blockchain technology allows a network of computers to agree at regular intervals on the actual state of a distributed ledger. Such ledgers can contain different types of shared data, such as transaction records, attributes of transactions, credentials, or other pieces of information. The ledger is often secured through a smart mix of cryptography and game theory and does not require trusted nodes like traditional networks. This is what allows Bitcoin to transfer value across the globe without resorting to traditional intermediaries such as banks.”
DELOITTE HAS EXPLAINED IT MORE SIMPLY:
You (a “node”) have a file of transactions on your computer (a “ledger”). Two government accountants (let’s call them “miners”) have the same file on theirs (so it’s “distributed”). As you make a transaction, your computer sends an e-mail to each accountant to inform them. Each accountant rushes to be the first to check whether you can afford it (and be paid their salary “Bitcoins”). The first to check and validate hits “REPLY ALL,” attaching their logic for verifying the transaction (“Proof of Work”). If the other accountant agrees, everyone updates their file.
Blockchains record any kind of transactions in a chronological order and once recorded, cannot be manipulated. Clusters of transactions are stored in blocks which are then chained to one another, hence the term “blockchain”. The transactions can be private or anonymous, depending on how the technology is used.
One of the biggest advantages of using blockchains is the reduction in the costs of transactions. Every organization and business can make substantial savings by incorporating blockchain technology in their dealings. Each transaction requires a verification which is not always easy. An organization may be well acquainted with its clients, partners, and customers through years of interacting with them. But eventually, there will come a time when a problem arises, which may require an audit to sort out. Auditing is a very costly procedure. Not just monetary, but in terms of time as well. Resources diverted towards auditing could have been spent on more profitable endeavors.
Blockchains eliminate the need for auditing. If a transaction needs to be verified on a blockchain, the organization can always go back to the records at no extra cost. This is the very reason cryptocurrencies like Bitcoin and Ethereum are gaining traction recently. It is possible to transfer money from one part of the world to another at almost zero transaction cost, with the ability to be verified at a moment’s notice. Intermediaries like banks or even PayPal have not required anymore.
In the longer term, blockchains can reduce the cost of running secure networks. Although experts like Mr. Catalini believe the technology is at least a decade away, he believes it will disrupt online transactions even further. Mr. Catalini foresees a future where blockchain technology coupled with cryptotokens can eliminate intermediaries like Uber or Airbnb which still charges customers a rent for using their services. With further developments in this technology, customers and service providers can exchange tokens directly using a highly secure network.
Blockchain can increase privacy options for individuals and businesses. In elementary terms, bartenders only need to verify age before serving. However, a driver’s license or a passport reveals much more than just a person’s age including your address, your blood type, and much more. Similarly, in a business transaction, all both parties require is to know whether their partners are reliable and trustworthy. But in today’s model, they have to reveal so much information just to prove their trustworthiness.
Blockchain would eliminate the need to provide private information by incorporating a model where individual attributes can be verified as true or false, using a decentralized structure, but the information does not constantly have to be out there. Think of it as an Uber score or an Airbnb score, but instead, it will be one rating which applies across all transactions.
CENTRAL BANKS: The central banks in Singapore, Canada, and the UK are exploring options to incorporate cryptocurrencies in their transactions. Adopting cryptocurrencies will allow central banks to lower settlement risk, more efficient taxation, faster cross-border payments, interbank payments, and novel approaches to quantitative easing.
FINANCE: This sector has seen the most applications of blockchain till now. Financial institutions are creating a faster and more efficient financial infrastructure which is capable of tracking and exchanging financial assets of any type.
MONEY TRANSFER: Transferring money between individuals could become extremely fast and costless in the near future. Digital wallets allow for the transfer of tokens using blockchain technology anywhere in the world. These tokens can then be exchanged for fiat cash (regular money) at various online exchanges.
MICROPAYMENTS: Blockchain enables micro transactions to take place for a minimal cost. For example, people do not have to pay a subscription for a newspaper but pay just for the articles they read. Freelance workers such as editors, or writers can also be paid for their work. The blockchain would verify the legitimacy of both parties and enable cheap transactions. A company called Brave is already attempting this.
PROVENANCE AND OWNERSHIP: Physical properties can be recorded on a blockchain to ensure authenticity and prevent fraud or counterfeiting. EverLedger, a company based in London, is using this technology to record and track the movements of diamonds. They are also expanding their services to include fine wine in their records.
AIRLINES: The current model of purchasing and obtaining airline tickets are vastly inefficient and can increase the risks. Often, it could take up to 45 days for the cash to reach the airlines from the moment a customer pays for, exposing the airlines to a prolonged period of risk. The money may travel through multiple locations before eventually reaching the airline. The airline incurs a lot of transactional costs which is passed on to customers. A blockchain technology can bring down the payment time from 45 days to 45 minutes. The International Air Transport Association (IATA) is considering developing their own cryptocurrency to make the process more efficient and less risky.
The opportunities with blockchain technology are endless. As more of its functions are developed, we are likely to see even more novel innovations. But this technology will not hit the mainstream for at least another ten years according to experts. It is still in its infancy and like all technologies in the modern world, are vulnerable. There are a few instances of blockchains being used for nefarious activities, the most prominent of which is the use of bitcoins to facilitate the drug exchange Silk Road. If an entirely private network is developed, it could even lead to funding terrorism in a totally anonymous manner. On the other hand, the same privacy options can be used to protect people’s health records and prevent instances of healthcare breaches which occurred earlier this year.There is still a long way to go, but there are no doubts that if used correctly,
There is still a long way to go, but there are no doubts that if used correctly, blockchains have the potential to change our lives for the better.