The next generation of the internet is upon us. With rapid developments such as e-commerce and other online activities ever growing, the internet of information is becoming an extremely empowering tool. Alongside this, the increasingly popular digital currencies known as cryptocurrencies, which rely heavily on consumer adoption for their value are on the rise. However, the underlying technology of these digital currencies such as Bitcoin is known as Blockchain.
What Is Blockchain?
When individuals use the internet to transfer files or data amongst one another, the original version is never sent across, but instead, a copy. This is meaningless for data transfers such as emails, pdf’s or photos. However, for certain assets that hold specific value for the holder, this is a problem. Consider financial assets such as stocks and bonds, as well as other generic assets such as IP, art, deeds, tradeable permits etc – the list goes on. If copies of these assets were to be made, this is a serious problem. Instead, these assets should directly be transferred from one agent to another.
As a consequence, this requires the intervention of intermediaries. These are the middlemen in society, these include banks, governments, credit card companies and so on – they establish trust in our economy. Commonly, the intermediaries provide the role of authentication, identification, clearing, settling and record keeping. However, due to the internet’s over saturation, cracks are appearing in this long-established framework.
The Framework Behind Blockchain
This entwined network is gathering vast amounts of information on the way individuals operate and how we live our lives, ultimately undermining our privacy. Such detailed information is, of course, extremely valuable, especially to those who can put it to the right use. Consider it an asset class synonymous to big data. Thus, imagine a world without the need of intermediaries but instead simultaneous transactions whereby all kinds of assets can be transferred across a single public domain ledger.
This idyllic scenario was foreseen by Satoshi Nakamoto, a Japanese computer scientist whom created a form of digital cash that used an underlying cryptocurrency called Bitcoin. Ultimately, as hypothesised, this allowed individuals to establish trust and transact with one another without the need of a third party. This is seen to be the spark to the flame that is reigniting the internet – the so called new era of the internet.
This new form of asset, Bitcoin, which is simply a form of cryptocurrency, runs on an underlying technology known as blockchain. The realm of digital assets is simply distributed across a global ledger, rather than stored in a centralised medium. This ledger uses advanced cryptography which is simply the art of programming using codes. Nevertheless, when transactions are fulfilled, this data is posted worldwide across this global ledger whereby “miners” then go to work on how best to solve these specific combinations.
These combinations are created from the last 10 minutes of transactions whereby a ‘block’ is created (assortment of transactional data). These miners compete every 10 minutes to validate and solve these blocks, those successful are then rewarded in Bitcoin. However, importantly each block is then connected to the previous block to create a chain of blocks which is then time-stamped, synonymous to a digital waxed seal.
A crucial aspect of the blockchain system is that if a hacker wished to hack a specific block, since they contain valuable information, the hacker would have to hack all previous blocks contained in the sequence. Moreover, this idea is supported by a TED Talks discussion wherein it was mentioned that this would have to be done not just on one computer but across millions of computers simultaneously using the highest levels of encryption – somewhat an insurmountable task. Blockchain cannot be hacked. And that is blockchain in a nutshell. Other digital currencies using this blockchain technology exist, with Ethereum being another prominent currency. In actual fact, as of July 2017 there are over 900 digital currencies in existence.
Now to understanding the impact these digital currencies can potentially have on not only the financial services industry but the whole world. Currently, when an individual pays for an item using their credit card, a signal is sent across a number of companies that register this change is value. Across the pipeline, each institution may take a cut up until the final settlement occurs. With blockchain, there would be no settlement as the change in value (payment) is the same activity as a change is the ledger (an account of all transactions). Since this transaction has been settled directly, this eradicates the need for financial intermediaries, which is slowly causing upheaval within the industry. Will the servicemen in the industry be able to embrace the technology or will they simply be replaced – only time will tell.
Other alternative applications to this technology exist outside the financial services industry context. Take the music industry for example: it is a well-known fact that musicians tend to be left with scraps by the end of the whole industry supply chain. The leeches include agents, record labels, promoters, retailers and so on. Think about if musicians would simply release their music on to a blockchain eco-system whereby any listeners would automatically reimburse the artist through this idea of simultaneous transactions. This rule applies for any creator of art – the promotion of fair compensation. Another important case exists with remittances. Blue collar workers are forced by institutions such as Western Union to forsake a certain cut of their highly earned wage bill, simply to send money to friends and family.
However, for these workers, this is a huge proportion of their wage bill. Don Tapscott states the level of remittances each year to be $60bn dollars. Think about the savings if these transactions were undertaken on this blockchain ecosystem. Taking all of the above into consideration leaves one clear conclusion – the blockchain revolution is has arrived. Eliminating the use of intermediaries and channelling our uncertainties towards a single level playing field will sequentially eradicate the distrust element – trustless transactions.
Aligning together using a single database, the blockchain ecosystem will radicalise the future ahead, both in terms of transparency and value creation. In the words of Bettina Warburg,
“we can create a decentralised database that has the same efficiency of a monopoly without actually creating that central authority.”
Lastly, the blockchain technology is in its early development stage and there is still a great deal to learn as how best to channel its usefulness.