Blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a Blockchain is inherently resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks.
Blockchain was invented by Satoshi Nakamoto in 2008 for use in the cryptocurrency, bitcoin, as its public transaction ledger. The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need for a trusted authority or central server. The bitcoin design has been the inspiration for other applications.
Bitcoin Network Data
Popularity of Blockchain:
Bitcoin is the wildly hyped cryptocurrency, a method of transacting payments over an open network using digital bits and encryption. It was the first-ever decentralized one when it was created in 2009. Other forms of cryptocurrency or virtual money, such as Ether (based on the Ethereum blockchain application platform), have also sprung up and have opened new venues for cross-border monetary exchanges.
The term bitcoin was first… well, coined in 2008 when Satoshi Nakamoto (likely a pseudonym for one or more developers) wrote a paper about a “peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.”
Working of a Blockchain:
As a peer-to-peer network, combined with a distributed time-stamping server, blockchain databases can be managed autonomously to exchange information between disparate parties. There’s no need for an administrator. In effect, the blockchain users are the administrator.
Additionally, blockchain networks can be used for “smart contracts,” or scripts that automatically execute when certain conditions are met. For example, users of Ethereum’s Ether exchange must meet pre-determined conditions that prove someone owns the cryptocurrency and have the authority to send the money they claim to own. In addition, multiple blockchain users can create contracts that require more than one set of inputs to trigger a transaction.
Example: Real Estate Transactions require sign-offs between buyers, sellers, and financial institutions.
Simplified Bitcoin Block Chain
Contribution of Blockchain and Cryptocurrencies in Transforming the Digital Economy:
As platforms are increasingly becoming the fastest growing organizational form – connecting ideas, talent, and capital on a global scale – a new technology promises to accelerate the digital transformation started by the internet. Whereas the internet brought the ability to cheaply transfer information, before the diffusion of cryptocurrencies, the transfer of value still required traditional, trusted intermediaries to secure market transactions. While still in its infancy, the suite of technologies associated with blockchain and crypto-tokens has the potential to fundamentally change how organizations and individuals source and allocate resources in the economy.
Blockchain technology is associated with a reduction in two key costs: the cost of verification, and the cost of networking. The first allows for the costless verification of any transaction attribute that has been previously stored on a distributed ledger at almost zero cost. As a result, market efficiency is improved, like credentials, reputation systems, provenance, and other attributes of individuals, goods, and services that can be more cheaply tracked with higher integrity throughout the economy. The second enables entire platforms to be bootstrapped without the need for a central actor through the use of a token of value aimed at rewarding early investments in the new ecosystem and at funding its operations (as in Bitcoin). This architectural change in how digital marketplaces operate has implications for competition and incumbents’ ability to retain control over existing ecosystems and resources.
At the same time, for the applications built on top of cryptocurrencies such as Bitcoin or Ethereum to replicate some of the more complex forms of governance actually needed to run a digital platform, smart contracts will have to evolve from small-scale experiments into a reliable technology. Researchers at the intersection of computer science, economics and law will also have to further understand the security, economic and legal challenges posed by decentralized platforms and smart contracts.
Uses of Blockchain:
Blockchain technology can be integrated into multiple areas. The primary use of blockchains today is as a distributed ledger for cryptocurrencies, most notably bitcoin. While a few central banks, in countries such as India, China, United States, Sweden, Singapore, South Africa, and the United Kingdom are studying issuance of a Central Bank Issued Cryptocurrency (CICC).
Main Uses are as follows:
- General potentials
- Land Registration
- Smart Contracts
- Decentralized Networks
- Banks
- Government and National Currencies
- Blockchain technology can be used to create a permanent, public, transparent ledger system for compiling data on sales, storing rights data by authenticating copyright registration, and tracking digital use and payments to content creators, such as wireless users or musicians.
Safety in Blockchain:
While no system is “unhackable,” blockchain’s simple topology is the most secure today, according to Alex Tapscott, the CEO, and founder of Northwest Passage Ventures, a venture capital firm that invests in blockchain technology companies.
“In order to move anything of value over any kind of blockchain, the network [of nodes] must first agree that that transaction is valid, which means no single entity can go in and say one way or the other whether or not a transaction happened,” Tapscott said. “To hack it, you wouldn’t just have to hack one system like in a bank…, you’d have to hack every single computer on that network, which is fighting against you doing that.”
What a Blockchain does: A blockchain allows us to securely share and/or process data between multiple parties over a network on non-trusted peers. Data can be anything, but most interesting uses concern information that currently requires a trusted third-party to exchange. Examples include money (requires a bank), a proof or property (requires a lawyer), a loan certificate, etc. In essence, the blockchain removes the need for a trusted third party.
How Blockchain works: From a technical point of view, the blockchain is an innovation relying on three concepts: peer-to-peer networks, public-key cryptography, and distributed consensus based on the resolution of a random mathematical challenge. None of these concepts are new. It’s their combination that allows a breakthrough in computing. If you don’t understand it all, don’t worry: very few people know enough to be able to develop a blockchain on their own (which is a problem). But not understanding the blockchain doesn’t prevent you from using it, just like you can build web apps without knowing about TCP slow start and Certificate Authorities.
What Blockchain compares to: See the blockchain as a database replicated as many times as there are nodes and (loosely) synchronized, or as a supercomputer formed by the combination of the CPUs/GPUs of all its nodes. You can use this supercomputer to store and process data, just like you would with a remote API. Except you don’t need to own the backend, and you can be sure the data is safe and processed properly by the network.
Industries use Blockchain:
Shipping, Fintech, Healthcare, Energy. Blockchains are being put to a wide variety of uses in several industries.
Example- Blockchain in FinTech:
Accenture recently released a report claiming blockchain technology could reduce infrastructure costs for eight of the world’s 10 largest investment banks by an average of 30%, “translating to $8 billion to $12 billion in annual cost savings for those banks.”
In the case of cross-border payments, the processing is often complex and includes multiple layers of communication among payment participants to verify transactions – an operation known as payment and settlement.
Payments, clearance and settlement in the financial services industry – including stock markets – is rife with inefficiencies because each organization in the process maintains its own data and must communicate with the others through electronic messaging about where it is in the process. As a result, settlements typically take two days. Those delays in settlements force banks to set aside money that could otherwise be invested. Because it can instantly share data with each organization involved in a blockchain database or ledger, the technology reduces or eliminates the need for reconciliation, confirmation, and trade break analysis. That helps yield a more efficient and effective clearance and settlement process, according to Accenture.
J.P. Morgan has created what is arguably one of the largest blockchain payments networks to date: the Interbank Information Network (IIN). The financial services company announced that the Royal Bank of Canada and Australia and New Zealand Banking Group Ltd. have joined INN, “representing significant cross-border payment volumes.”
J.P. Morgan created the blockchain network to significantly reduce the number of participants needed to respond to compliance and other data-related inquiries that can delay payments.
Practical Implications:
Facts stored in the blockchain can’t be lost. They are there forever, replicated as many times as there are nodes. Even more, the blockchain doesn’t simply store a final state, it stores the history of all passed states so that everyone can check the correctness of the final state by replaying the facts from the beginning. Facts in the blockchain can be trusted, as they are verified by a technically enforceable consensus. Even if the network contains black sheep, you can trust its judgment as a whole.
Storing data in the blockchain isn’t fast, as it requires a distributed consensus.
Many successful businesses on the Internet today are intermediaries. Think about Google for a minute: Google managed to become the intermediary between you and the entire Internet. Think about Amazon: they became the intermediary between sellers and buyers for any type of good. That’s why a technology that allows us to remove intermediaries can potentially disrupt the entire Internet.
Will it benefit to end-users, who won’t need third parties to exchange goods and services anymore? It’s far from certain. The Internet had the same promise of heavy disintermediation. Yet Google built the first market capitalization worldwide as an intermediary. That’s why it’s crucial to invest in the blockchain quickly because the winners and losers of the next decade are being born right now.
How big are blockchains today? Let’s see some numbers.
Bitcoin:
- Block time: 10 minutes
- Number of bitcoins earned for each mined block: 25
- Number of blocks mined: over 400,000
- Number of transactions per block: over 1,200
- Number of nodes in the network: ~7000
- Bitcoin value: $420
- Most of the computing power is said to be concentrated in China
Ethereum:
- Block time: 10 seconds
- Number of Ether earned for each mined block: 5
- Number of blocks mined: more than 1,400,000
- Number of transactions per day: over 30,000
- Number of nodes in the network: over 6,000
- Ether value: around $10, but it varies a lot.
- Most of the computing power is said to be concentrated by a miner pool called “Dwarfpool”
In addition to providing a good template for blockchain’s adoption, TCP/IP has most likely smoothed the way for it. TCP/IP has become ubiquitous, and blockchain applications are being built on top of the digital data, communication, and computation infrastructure, which lowers the cost of experimentation and will allow new use cases to emerge rapidly.
With our framework, executives can figure out where to start building their organizational capabilities for blockchain today. They need to ensure that their staffs learn about blockchain, to develop company-specific applications across the quadrants we’ve identified, and to invest in blockchain infrastructure.
But given the time horizons, barriers to adoption, and sheer complexity involved in getting to TCP/IP levels of acceptance, executives should think carefully about the risks involved in experimenting with blockchain. Clearly, starting small is a good way to develop the know-how to think bigger. But the level of investment should depend on the context of the company and the industry. Financial services companies are already well down the road to blockchain adoption. Manufacturing is not.
No matter what the context, there’s a strong possibility that Blockchain will affect your business.
