10 Min Read
Have you heard of cryptocurrencies? The digital-only currencies that are challenging the dollar, pound, yen and all other fiat currencies, to be the future of money. Well, if not, you should start taking note.
The cryptocurrency market is now valued at over $600 billion. That got your attention, didn't it?
You've likely heard of Bitcoin by now, the most popular cryptocurrency that's seen an astronomic rise in its value over the last 12 months, from around £580 to almost £10,000 per Bitcoin at the time of writing (boy do we envy those early investors...).
You might have heard of Ethereum – an open software platform based on blockchain technology that enables developers to build and deploy decentralised applications (see example below - LockChain), or Litecoin - a peer-to-peer cryptocurrency and open source software project (often considered to be 'silver' to Bitcoin's 'gold')?
Perhaps you were even aware of the recent SegWit2X controversy? Maybe, maybe not.
Regardless, the simple fact is no matter what you are or are not aware of at the time of publishing, cryptocurrencies are here, they're frightening and exciting people in equal measure and they're being touted as the future of money in an increasingly digital world.
But this article isn't for discussing cryptocurrencies - although you better believe we'll take a look at that in 'The Money One' - no, in this article we're looking at the tech behind Bitcoin, Litecoin, Ethereum and the rest of their crypto pals – the blockchain.
Now we should say that you don't and probably won't ever need to know exactly how the blockchain actually works. Most people don't know exactly how the internet works but billions of people use it all the same.
However, much like the internet, understanding what the blockchain is capable of, and how best to use it to our advantage is absolutely essential. So what follows is very much a top-level guide to the blockchain, one that is designed to help you see the potential in this technology, its advantages, its current issues and understand how it can be applied to improve our lives.
So let's get to it.
What is the blockchain?
Invented by an anonymous person, or group of people, known by the pseudonym Satoshi Nakamoto (I know what you're thinking – we're one sentence in and this already sounds extremely cool), the blockchain is the foundation upon which applications, such a cryptocurrencies (like Bitcoin) and platforms can be built.
It is a continuously growing list of records, called blocks, which are linked and secured using cryptography (the art of writing or solving codes used for secure communications – go watch The Da Vinci Code).
It has been developed to store data or digital ledgers for transactions, deals and contracts – basically, any information that needs to be registered separately, kept securely, and, if necessary, to be checked.
For example, it's possible to retain data of approved loans/mortgages, property rights, criminal offences, and medical records along with much, much more.
The difference between the blockchain and the current way of doing the above is that on the blockchain, the data is decentralised, incorruptible and transparent. Human error, both unintentional and intentional, is completely eliminated. Basically, everyone can see the data if they wish, but no-one can tamper with it.
Don Tapscott, Author of 'BLOCKCHAIN REVOLUTION: How the Technology Behind Bitcoin is Changing Money, Business, and the World' describes the Blockchain as,
“an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
So, if you're thinking of the blockchain right now as a “new kind of internet” or an autonomous, self-regulating digital filing system, then you're thinking about it in the right sort of way. Again, don't worry about trying to understand the technical details – just think about the way it can be applied.
A simple blockchain example - LockChain
While it's cryptocurrencies built on blockchain technology that are grabbing most of the headlines at the moment, that's far from the only use case for the tech.
A company called LockChain have created a decentralised application for booking hotels and apartments online. In their own words, LockChain is a;
“Blockchain-powered marketplace & technology, where Hoteliers and property owners can rent their property globally, collect money and manage bookings without paying any commissions to middlemen.
Due to the advanced capabilities of blockchain technology, Hoteliers and short-term rental owners can sell their rooms on our integrated marketplace for 20% lower prices without affecting their profits.”
Some of the middlemen you may have heard of in this space are Hotels.com, Hotwire, and Airbnb. It's a 500 billion dollar industry and it could be about to be disrupted in a massive way.
What are some of the advantages of blockchain technology?
The blockchain is, by design, decentralised.
By storing data across its network, the blockchain eliminates the risks that come with storing data centrally, ie; there is no central point of failure within the system. Centralised data is more controllable, and both information and data manipulation are common. By decentralising it, the blockchain solves those problems.
It's incorruptible and transparent
Blockchains constantly update themselves, going through a kind of self-auditing process every ten minutes, reconciling every transaction that happens. Because all of the data is embedded within the network in a transparent way, it is made available to the public to view at any time.
In addition, altering any data on a blockchain would require overriding the entire network it operates on, using an immense amount of computing power to do so. While that is, in theory, a possibility, it's highly unlikely to ever happen and it's considered a lot more secure than the current methods of storing and protecting data.
Process integrity and high-quality data
All actions on any given blockchain will be completed exactly as they've been programmed to do. This removes human error from the equation and the need for a trusted third party, saving a lot of time and money.
Also, as all the data that passes through a blockchain is stored, you can be sure that any data you look at is complete and accurate.
Lower transaction costs and faster transactions
Third-party intermediaries (middlemen) and overhead costs for exchanging money or assets are relatively high, even with the creation of companies like Transferwise, who seek to lower the costs of international money transfers. Blockchains take third parties out of the equation resulting in lower costs.
In addition, sending money between banks and between countries can take days to complete, especially if undertaken outside working hours. Blockchain transactions occur in minutes and can be processed 24/7.
Think about a world where country borders don't make any difference when it comes to the transfer of money. That's what we're rapidly heading towards.
To give you more of an idea of the potential of blockchain applications we've come up with a couple of hypothetical situations (which may very well be being worked on right now).
1. Imagine a decentralised voting application for government elections, with no fear of outside interference – long thought to be a major issue. Voting would become incorruptible almost overnight.
2. Imagine the two billion people in the world without a bank account - unable able to securely store, send and receive currency from anyone – having access to a decentralised platform where they can do all of the above without enduring the costs, travel and paperwork currently needed to be able to open a bank account.
By banking the unbanked, more people also get access to things like insurance, mortgages, lines of credit, pensions and other professional services. Just think of how much you're able to do because you have a bank account and you'll understand how much of a big deal this could be.
Once you start to think of all the ways the blockchain could improve people's lives, and the way we do things on a daily basis, you'll start to understand its immense potential. Never before in history has the opportunity to take control from centralised powers and share it with everyone been a realistic possibility.
What are some of the current disadvantages of blockchain technology?
It is important to note that as a brand new technology, there are definitely some issues with the blockchain – especially when it comes to cryptocurrencies. We've highlighted a few below.
While strong encryption exists, there is no central point of failure, and the blockchains themselves aren't subject to human error or fraudulent behaviour, there are still some security concerns to be addressed before the masses will entrust their personal and financial data to the blockchain.
Essentially, the security of your transactions over any blockchain (especially in regard to moving and storing digital currencies) will depend very much on the level of security the individual users adopt.
Moving from a heavily regulated and centralised world to one that is decentralised will not be easy and it will be resisted (we're already seeing the heavy resistance of cryptocurrencies in China, for example). For the blockchain to be fully accepted, it requires the buy-in of billions of users and operators, as well as governments – and that will take time.
As alluded to above, blockchains will come up against heavy resistance when it comes to regulation – especially blockchains that are creating cryptocurrencies like Bitcoin. The challenge to fiat currency is not one that national governments will be OK with overnight, especially due to its decentralised and somewhat anonymous nature. Lack of regulation and acceptance will likely stunt mass adoption in the short term.
How will the Blockchain disrupt business?
Lou Kerner, self-confessed crypto-evangelist, says, “Decentralisation is the lens through which I now look at everything. It’s the most important thing I’ve learned about over the last three months.
It seems to make sense that, all else being equal, the industries most at risk for disruption from decentralisation are where the middlemen charge the highest tolls.”
It would be worth thinking about those industries with a high percentage of middlemen (Banking/finance, real estate, travel and advertising to name just a few). These industries are likely to be disrupted in the biggest way as decentralised applications take away the need for 3rd part intermediaries in many situations.
How businesses in these industries react to this potential change will be interesting to watch. Perhaps we'll see the largest businesses change their model completely, or maybe they'll develop blockchains of their own.
No-one wants to end up as the 'Blockbuster' of the blockchain revolution.
What is a smart contract? Who is Vitalik Buterin, and why should I care about a hard fork?
We're not going to tell you. Well, just not yet.
This is where our little foray into the world of the blockchain ends. We've only scratched the surface when it comes to this technology, but if we've whet your appetite and you'd like to find out more, there are some amazing resources out there for you to discover, and we sincerely hope you go look for them (we've put a few of our favourites below).
We'll leave you with one final thought, for what it's worth:
The blockchain is absolutely going to disrupt the world. It might take 12 months, it might take five years, but it's going to happen.
In some markets that disruption will be total and absolute. In others, less so. Be aware of it now, keep abreast of its changes and evolutions, and don't be a victim of ignorance.
Was this article helpful? What did we miss about the blockchain? What do you think are the possibilities of the blockchain?
We do love a good discussion, so please share your thoughts in the comments section below.
*Image credit - avocoidentity.com