If you’ve been on any social media, turned on the news or done pretty much anything but live under a rock for the past three months, you’ve probably heard of Bitcoin. You’ve probably heard of how “revolutionary” it is, how it is going to completely change how we pay for goods and services, and eventually, how it will be responsible for phasing out traditional forms of currency which are standard today. You’ve probably seen economists completely miffed or startled by its success, with many offering a variety of predictions on the future of monetary exchanges itself, with Nobel Prize-winning economist Joseph Stiglitz even declared that Bitcoin and cryptocurrencies should be banned altogether.
If you have absolutely no idea what’s going on, don’t worry – you’re not alone. Bitcoin and the technology behind it, blockchain, are very difficult to understand because we’ve never seen anything like it before. Don’t worry, here is a breakdown of what many believe to be the future technology of monetary transactions and data exchange.
The blockchain is simply a system of secure, public records. It is a software that currently powers monetary transactions with Bitcoin and has the potential to publicly record anything from medical records to voting. The blockchain is leading the next wave of technological innovation, here’s what you should know about it.
What makes blockchain revolutionary and the concept itself stunning is the transparency it puts forward. It’s response to a desire for more security is unexpected, removing visible barriers protecting this information, installing invisible security as to not undermine the safety of the data by any means. The blockchain is easily understood when visualized: each record is called a “block”. Blocks are stacked on top of each other to form a chain that is continuously growing.
Each block contains their respective data as well as a timestamp, their cryptographic hash, and finally, the cryptographic hash of the previous block in the chain. A cryptographic hash is a unique code which identifies the block it belongs to and the content in that block. When the content of a block is altered, the hash is changed, alerting others of the adjustments made. As you probably have already guessed, this is an effective way of enhancing quality control, monitoring efficiency and most importantly, detecting and forestalling any possible fraud activities on the system.
It is the cryptographic hash of the previous block that links the blocks, making the chain. For example, block A in Bitcoin’s chain contains the monetary amount being transferred, the name of the sender of the funds, the name of the recipient, a timestamp made at the time of the transaction, it’s own cryptographic hash and the hash of the block prior to it. Block B in Bitcoin’s chain has its own data, own hash and the hash of the previous block – if the hash listed on block B does not match the hash on block A, this means that block A has been modified since its original composition. It is this algorithm that allows for sensitive information, such as monetary transactions, to be uploaded with confidence.
What makes blockchain a disruptor to the system is how it stores its data – this is where things get a little complex. Databases have been configured in three different ways. In the most common design, called a centralized network, computers (technically called nodes) communicate their information with one central server (also called a node). This central server then sends that information to a recipient in another network.
Centralized networks have a single database located at one site. Your average household operates using a centralized network, while large corporations such as Facebook and Google utilize the second database design, called a distributed network. Distributed systems allow for the network to have more than one server. These servers are located at multiple sites and communicate with each other, allowing millions of nodes accessing their data without compromising the speed at which this information is circulated.
The third system design, which is used by blockchain, is called a decentralized network. This design is absent of a central server or servers. There’s no “mothership” which nodes report to, no central administrator which holds all the data. Most importantly, no single entity or individual “owns” the chain. Blockchain instead disperses its data across a network of computers. All computers in this design are created equally and they communicate with each other by passing messages. Decentralized networks allow the scale-up of an organization to be easier and cost less. The main advantage of this design is the security it provides. If one node is compromised by a third party intending to do harm to the entire network, they will be unsuccessful as the data is spread out among numerous computers. Taking one of these nodes offline would just be a drop in a very large ocean of nodes and it will in no way impact the security features of the system.
The blockchain is best defined as a permanent, reliable registry of information. This registry is called a distributed ledger (also known as a shared ledger), which can be viewed by anyone, anywhere, as long as they have internet connectivity. This is made possible thanks to blockchain’s use of a decentralized system. Without it, the direct peer-to-peer interactions wouldn’t be possible. One might ask, how do we know the information on this ledger is legitimate?
In a world where cyber warfare is becoming an increasing threat, how can we guarantee that these records are true and that they have not been fabricated? As all of these transactions are publicly recorded, it relies on the general population to verify the accuracy of any new blocks added to the chain. Any adjustments made to the records can be viewed, and therefore accredited by any and all users on the platform.
The idea of a string of blocks secured using cryptography was first conceptualized back in 1991. Stuart Haber and W. Scott Stornetta created Merkle Trees and first used this technology to efficiently shared documents in a small network. Eleven years later, David Mazières and Dennis Shasha created a shared network design which did not rely on the honesty of a central authority but instead on all participants in the system.
In 2008, after many failed attempts by others, an individual (or possibly a group of people) operating under the pseudonym Satoshi Nakamoto successfully coupled Haber and Stornetta’s block idea with Mazières and Shasha’s decentralized network design to create the cryptocurrency Bitcoin, which was launched a year later. Success was slow at first, five years after it was first released the file size which held all the records of every Bitcoin transaction ever was only 20 gigabytes. By 2017, however, that file grew to 100 gigabytes.
Bitcoin was the first mover – today one bitcoin is worth over $10,000 and in recent years has been joined by over 1,500 other cryptocurrencies utilizing the potential of blockchain technology. Bitcoin, and by extension blockchain, is the response to a societal desire to make the movement of money and files more efficient. Currently, in a digital transaction between two parties, those involved must trust a third party or “middle man” to deliver the funds or file from point A to point B. Blockchain challenges this.
After the success of bitcoin, many recognized the potential in the technology that powered Bitcoin, deciding that it could be used to handle other sensitive and non-sensitive files, not just digital currencies. Ethereum, the largest developer of blockchain applications, expanded blockchain’s scope to contracts. Ethereum’s Smart-Contracts, in short, utilize the distributed ledger to store contracts, using computer algorithms to automatically enforce the terms of the contract, instead of a third-party mediator.
There are a variety of other applications using blockchain technology in the works. Tech giants such as IBM and Microsoft have also recognized the value of blockchain, offering their own versions to their large enterprise clients. This is all possible because blockchain was never patented, allowing anyone with an idea for its application to implement its use.
The beauty in blockchain is how unlimited its uses are. It calls on those interested to bring their creativity to the table, providing solutions to problems that have been plaguing society for some time. Bitcoin and digital assets like it are just the starts, almost like a test run of the technology in play, an example of what it can do to possible businesses looking for something that will put them one step ahead of the competition. Bitcoin and the noise it made was a validation that this technology is future technology. Now companies globally are taking this basis and molding it to serve innovative and practical purposes. The blockchain is transforming the future of information sharing. Today, the best innovative ideas revolutionizing their respective industries seem to focus on the removal of a middleman, closing the gap between company and customer.
Uber-connected those looking for a ride directly with drivers, eliminating the need for a taxi company. Netflix posed a challenge to movie theaters and television networks by linking their audiences directly to the content in a more cost-efficient way. Blockchain looks to follow this model, however, it differs from these companies as it is an ideology that can be applied to theoretically every sector. Bitcoin, blockchain’s first application, already challenges financial institutions replacing their services through the use of cryptography. Blockchain will also eliminate the need for notaries to verify documents – once a document is uploaded on blockchain it is not possible to modify it. That means that birth, death, marriage, land and other records will not require a third party to be verified once an already verified version has been put into a blockchain. Many predict that blockchain will be used to collect taxes in the next decade. The peer-to-peer network would allow for financial transactions to be made with no middleman, and any fees that might be incurred would be eliminated making business more efficient and accessible. Furthermore, the security of blockchain would help in reducing fraud in the sharing of money and information.
By removing institutional limitations, blockchain can also do a lot of good. Through this technology, money can be sent to struggling individuals in countries where much of the population does not have access to a financial institution. The Bill and Melinda Gates Foundation has already launched a mobile payment system using blockchain technology, providing those who do not have access to a bank account (nearly two billion) with this service. Industries of third-world countries with limited infrastructure and resources can now grow more easily and efficiently, eventually pulling their country out of economic troubles. Blockchain may not be the sole solution to global poverty, but early assessments promise that will likely alleviate many individuals and economies from hardships.
While the open exchange of records seems harmless, there is some sensitive information that should not be available to everyone. Social security numbers and electronic medical records, for example, should be shielded from the public. Some measures are being taken to utilize the efficiency of data transfers through blockchain without the transparency of a shared ledger. Guardtime’s Keyless Signature Infrastructure (KSI) for example, protects the electronic health records of all Estonians while still using blockchain technology to transfer the data.
Blockchain also wants to change the way you receive your news. Through the use of social media, news, whether verified or not, spreads faster than ever. Anything written well or delivered by a well-known writer or presenter on your favorite news outlet can interpret as truth – why would the average person argue with what they believe to be a credible source? In the spreading of information, it is difficult to know what is real and what is fake. Much like its network design, Snip, a startup using blockchain technology, hopes to decentralize the source of news from major networks, delivering the works of freelance writers not tied to a network tainted with bias or an agenda.
Blockchain in a way is a social experiment testing the possibility of a world where nearly everything is transparent. Not just public institutions like banks or government agencies will be put in the hot seat – blockchain has the potential to change the private sector as well. After big corporations took advantage, and continue to take advantage of the average population, many desire more transparency in the management of businesses small and large. With the use of blockchain’s public records, there are no secrets. A company’s facts and figures could theoretically be verified by anyone. Additionally, blockchain could eliminate corporate waste generated by the management of supply chains – a long process which requires the movement of a lot of data and offers a lot of opportunities for errors to be made.
The blockchain is so powerful that it could potentially alter the inherent self-interest in human behavior, forcing managers to work honestly and responsibly, following through on the values they advertise. Full transparency would mean earnings, expenses, salaries, and much more would be made available for public viewing. Furthermore, the advantages can cross sectors – government agencies would be able to view the sensitive information of any corporation in the private sector. In the future, when blockchain is the norm, dishonest companies avoiding the forced exposure of blockchain could be stigmatized for not publicly showing their records through the use of the technology. What would be left would be honest, responsible corporations conducting open and fair business.
In the market for cryptocurrencies, the figures are shocking. The market for the 1,500 cryptocurrencies available grew from just under $19 billion to over $300 billion – in just 2017. Five years ago, the market capitalization for cryptocurrency was approximately just $1.6 billion. Bitcoin, the most valued cryptocurrency went from $15 billion to $167.7 billion. Cryptocurrency investment funds have been started, Grayscale’s Bitcoin Investment Trust alone has invested $1.1 billion since 2013.
It has been reported that 60% of large companies are considering at least partial use of blockchain technology. In 5 years more than half of large companies will be using blockchain-powered cloud systems as opposed to their own local data systems. Analysts at Gartner predict that blockchain’s global business value-add will reach $176 billion by 2025, and $3.1 trillion by 2030. That’s $2.9 trillion in just five years. There’s no doubt blockchain is the future of technology. In almost every industry there is a company researching the implementation of blockchain in their operations. Here are some companies that plan on being based partially or fully on the blockchain.
Blockchain developers will obviously be fully on the blockchain. The biggest developer, Ethereum is currently leading the industry into new sectors. The blockchain is also reviving tech relics like IBM who are investing millions in offering their enterprise clients cloud-based storage, one of the remaining services it still provides, with blockchain. These clients find the security of blockchain more reliable than those of prior cloud-based networks.
As mentioned earlier, blockchain makes the supply chain more efficient. Retail giant WalMart is taking advantage of blockchain for this reason, as well as to organize store records. The financial service company Visa plans on using blockchain technology to speed up payments. Even social media users are turning to the new technology to manage their own images and content. JP Morgan has created Quorum, their own blockchain developer geared specifically towards the financial services industry, in preparation for the disruptions the industry is expected to see due to the blockchain.
The future of blockchain is strong – everyone agrees that in order to be a relevant company in ten years, you need to invest in the use of blockchain now.
The potential with blockchain is enormous. It can be implemented by many sectors and in many cases has saved businesses. Companies that have recognized the importance of bitcoin have made the decision to stay on the right side of history, choosing to not be removed from the market by technology ahead of their time. Bitcoin has given them an opportunity to invest in the future of technology in what would have essentially eliminated their business had they done the opposite.
Bitcoin also has the opportunity to do a lot of good. With blockchain, aid donors can track where their donations go, ensuring that it gets into the hands of those who need it most. Because of this, more and more donors are stepping forward with the reassurance that their money is actually helping people.
Blockchain frees the individual, the company and the industry from the institutional barriers that slow their growth and performance. In the waves of technological innovation, the innovative design of blockchain takes us one giant leap forward after years of small progressive steps building on an old concept. While the digital capacity of computers has improved, their size has decreased, and the speed at which they perform tasks has increased, nothing has quite revolutionized how we distribute data or money like blockchain does. Not since the development of the internet or the personal computer has the way we complete everyday tasks and share information been transformed so dramatically.
Nobel Prize-winning economist Milton Friedman posited in 1999, when the internet was still very young, that it would become one of the greatest forces that would contribute towards the reduction in the role of government. He added that though it was still missing at the time, a reliable e-cash would soon be developed to ease the transaction processes, especially those that depended on digital money.
Is blockchain and by extension Bitcoin the reliable e-cash that Milton Friedman predicted nearly twenty years ago? Have computer scientists created a software so disruptive that entire financial institutions will crumble and governments will be forced to take on different roles and leave some roles behind? Only time will tell, but blockchain certainly has the potential to do great things. There is something so enticing in the implementation of a free-market where truly no one is in charge and many doors are opened. While many are still skeptical of the future of Bitcoin and cryptocurrencies, most people in the industry agree on one thing: blockchain is here to stay.