How the Blockchain Will Change the World.
You’ve probably heard enough about bitcoins but cryptocurrency goes far beyond bitcoins. Conceptualised in 2008 by the mysterious Satoshi Nakamoto as a direct response to the Global Financial Crisis, the cryptocurrency has since been the subject of endless debate.
Proponents of the bitcoin see them as the bringer of a democratic libertarian world, whereas its sceptics suggest that it is little more than nerd money. What these polarised views fail to account for however is that the bitcoin and its variants are merely an application on an enormous platform, the blockchain.
The blockchain has become arguably one of the biggest innovations in computer science since the Internet and the biggest milestone in the history of commerce since double-entry bookkeeping.
Almost anything of value can be put onto this fabric. One-of-a-kind features like the decentralisation and disintermediation, which is capable for revolutionising the world.
Cryptocurrency, the Angry Birds of the Blockchain
Cryptocurrencies represent a very basic use of blockchain technology. You can think of them as the first apps, the Angry Birds to your smartphone. Notwithstanding this, their distinctive characteristics already make them both a revolutionary concept and an extremely unique investment.
There are many reasons to believe why they might be digital gold. In the first place, the supply of bitcoins is capped at 21 million units, in stark contrast with stated issued currency where supply is subject to monetary policy.
Limited supply renders the bitcoin unaffected by inflation and the unregulated nature makes it an ideal defensive asset in times of political volatility or financial uncertainty.
However, the most important feature of bitcoins is that they are based on the blockchain.
Traditional banking systems and centralised ledgers
Let’s start with how traditional systems work. If you would like to make a payment to another party, your transaction must be authorised by an established intermediary. This role is usually played by a commercial bank, like ANZ or the Commonwealth Bank. If you are tech savvy enough, you can also settle through digital wallets like PayPal or Alipay. At the end of the day, all of these are trusted institutions that charge you a fixed fee or a percentage cut.
You cannot bypass these powerful institutions because they are centralised databases holding all your information.
This is where the blockchain makes all the difference. Through removing the need for intermediation, it provides consumers with economic and political empowerment.
Putting the Block in Blockchain
In layman terms, the blockchain is simply a database broadly distributing data across multiple storage units, technically termed; distributed ledger technology. Being open source and peer-to-peer ensures operations are completely monitored and maintained by its participants, without a powerful overseer. And uses state-of-the-art cryptography to safeguard its data from unauthorised access.
Think of the board game Monopoly.
There is no umpire who enforces the rules or authorises player transactions. Instead, each transaction is authenticated through the consensus of all players. In turn, these players record a history of the transactions through their own memory. In a similar fashion to monopoly, each interaction between parties on the blockchain is legitimised through the common consensus of all other participants. This is basically how applications on the blockchain work. Through algorithms, double and triple checking each transaction instead of having to trust nannas faded memory on who owns Victoria Square.
when you buy or sell a bitcoin, an invitation is sent across the entire bitcoin database for another bitcoin user, a miner, to authenticate the transaction.
So-called “miners” race to pick up this opportunity so they can be paid a small fraction of the bitcoins transferred. Every 10 minutes, bundles of authentications would be time-stamped and announced on the public ledger. The public ledger records all the bitcoin transactions around the world. This forms a ‘block’ and the repetition of these ‘blocks’ creates the ‘blockchain’. In the words of the CEO of Bloq Inc, Jeff Garzik, because of the self-creating, self-validating, and self-valuing nature of the bitcoin; it is described as “an organism”.
An organism that has changed the way we think about currency, trade and the Internet.
Cost Savings, Public and Private Distributed Ledgers
A distributed ledger system also brings enormous cost savings for both consumers and institutions. In an end-game scenario, if powerful intermediaries (banks) were rendered completely redundant, transaction costs (financial or otherwise) would become a thing of the past.
If institutions incorporate blockchain technology, cost savings and improved security would trickle down to consumers.
As you can imagine, maintaining colossal amounts of data in traditional centralised ledgers is a grand task in itself and requires billion dollar commitments from institutions. In contrast, a distributed ledger system shifts an equal share of this responsibility to each and every one of its participants.
In the banking sector alone experts predict that up to 20 billion can be saved worldwide by 2020 by utilising a distributed ledger system.
In fact, more than 50 global banks are already heavily investing into blockchain technology. Including 70 of the world’s biggest financial institutions, including the Commonwealth Bank of Australia, J.P. Morgan, State Street and Credit Suisse have also formed the R3 consortium to jointly support this research.
Distributed ledgers can also operate in a closed setting. Think along the lines of the Intranet, a closed network, and the Internet, open to the public. Sharing a permissioned common ledger across institutions, as opposed to each maintaining its own individual ledger.This would also allow transactions to be settled within minutes, as opposed to the current 3-5 days.
Internet of Information becomes Internet of Value
Now if you apply this same logic to any other interaction that is currently authenticated by an institution, you would see that the blockchain has the potentials of disrupting every single industry.
Aside from money, the peer-to-peer platform can be programmed to act as a medium for anything of value.
We are already seeing it being piloted across various sectors. Unsurprisingly, the legal marijuana and cannabis industry was one of the first to utilise this technology. Businesses who are traditionally barred from accessing institutional banking systems could trade over a blockchain platform. On the other hand, micro-loan platform Credit Dream is also using blockchain technology to connect entrepreneurs in developing countries to investors from all over the world.
Even government institutions are embracing this technology. As of August this year, the Delaware government began using a distributed ledger for the recordkeeping of stocks. Likewise, online retailer giant Overstock is also issuing and trading its stock on a blockchain platform. Overstock CEO, Patrick Byrne passionately points out how the Internet has changed publishing and how the blockchain would transform almost 160 industries; payments, social media, information storage, healthcare and medical science, or even foreign aid.
It will absolutely change everything.
This means that the blockchain marks a new age of reckoning for computer science; often referred to as Web 3.0. The Internet remains as an Internet of Information for users of the World Wide Web to use as a medium for obtaining or communicating information. On the other hand, the blockchain and its applications promise a world where value can be directly created and move through an online medium.
Distributed ledger technology also provides the groundwork for smart contracts. Smart contracts are autonomous in nature; often referred to as the blockchain ultimate application.
They assess, communicate and enforce contractual obligations without the need for human input.
Currently, if a dispute arises between the parties of a contract, it is usually settled through a legal forum, commonly the courts or a tribunal. This process entails extensive legal fees and exposes parties to imbalances of resources and power. A smart contract on the other hand is programmed to adjudicate the matter autonomously and enforce the decision upon the participating parties. Allowing parties to bypass existing institutions and interact with each other on a level playing field.
Security and Immutability
The distributed and “chained” nature of the blockchain also makes it remarkably different from all existing technology in that it is immune to hacking or other forms of unauthorised access.
As the data is distributed across millions of nodes across the blockchain, a hacker would have to attack all of these simultaneously.
In addition, the security of the blockchain also increases exponentially with the number of nodes. As every block of data exists only through reference to the block preceding it, a hacker would also have to vary the entire history of the blockchain to change the data. No single point of failure can lead to the encrypted chain being tampered with or become compromised. These features make it the ultimate solution for data security by lowering compliance and infrastructure costs for institutions and consumers.
The Bottom Line
The bitcoin is a demo application, which illustrates only some of the most basic capabilities of distributed ledger technology. In the long run, the blockchain would completely transform all aspects of society and affect people from all walks of life. It would permit consumers to bypass powerful institutions who have historically controlled every industry and create secure environments where rules apply universally and equally to all participants.