- Again, Slow and Simple: What is Blockchain???
- Why is Blockchain Needed?
- So How can Blockchain Technology Change our life?
- Banks are Scared of Blockchain!
- Blockchain is not only Bitcoin, it’s much more than That
- The Blockchain Revolution – Time will Tell
Blockchain has been around since the evolution of Bitcoin, with many have been somewhat skeptical of Bitcoin creator Satoshi Nakamoto’s new virtual currency in the wake of the last global financial crisis. In the early days, the focus remained largely on the cryptocurrency itself and not the technology behind it. After all, exponential gains in a new asset class tend to overshadow what’s the driving force behind it.
Things have changed and, while Bitcoin prices may continue to break into unchartered territory, the technology behind Bitcoin and other cryptocurrencies that have since been launched is all the rave.
This technology is called blockchain.
The blockchain is a peer-to-peer distributed ledger of time-stamped transactions. For the purposes of cryptocurrencies, the entire ethos was to decentralize away from central banks through Bitcoin and other cryptocurrencies. Therefore, it’s a movement against the centralization and the control of fiat money. While with fiat money, central banks are in control of the ledger, with cryptocurrencies and blockchain technology, the user maintains their own copy of the ledger and all copies of the ledger are synchronized through what is known as a consensus algorithm.
There is so much hype over the blockchain technology now that both private and public sector organizations have opened their eyes and seen the light. What blockchain technology can offer is not only never seen before, but will become life-changing for today’s generation and be deemed as one of the greatest inventions of modern times.
For the private sector, companies have been exploring the endless possibilities of blockchain for a number of years now, but it’s perhaps been over the last 12 months that the noise has begun to crescendo. It’s all over the news wires and the recent interest from government agencies has certainly added to the hype.
As always, new technologies bring out the statisticians and charts have been doing their rounds, which represent the hype cycle of emerging technologies. One particularly detailed graphic has been produced by Gartner, a leading data and research provider in the Information and Technology space.
The Gartner Hype Cycle illustrates the different phases that an emerging technology passes through before it becomes a part of everyday life.
According to Gartner, blockchain technology has already passed the peak of the hype cycle and has entered a period of disillusionment, which brings about a realism to blockchain technology. The general view is that passing the period of inflated expectation has been an important step in blockchain’s advancement through the hype cycle.
Governments and captains of the industry have now embarked on projects to fully assess blockchain’s capabilities and how it can be incorporated into day to day processes. Some sectors have moved faster than others. The incorporation of blockchain technology into day to day practices within large multinationals has already stated, with the finance sector is the quickest out of the blocks, getting into the hype and down to business.
Again, Slow and Simple: What is Blockchain???
Blockchain was originally created to be a decentralized ledger of Bitcoin transactions that take place within the Bitcoin network.
A decentralized or distributed database/ledger essentially means that the storage devices, where the ledgers are located, are not linked to a common processor. The blockchain contains the ever-growing list of transactions by way of blocks. Each block is time-stamped and then linked to the previous block to become a part of the blockchain.
Users are only able to edit the sections of the blockchain that belong to them. In order to edit, the user is required to have private keys, which is equivalent to a password. The great feature of blockchain technology is the fact that every copy is synchronized even though the blockchain is not linked to a common processor or accessed through devices linked to the processor. An example of storage devices linked to a common processor could be office computers logged onto the company network. A master data file is edited and saved. No synchronization is required as there is only one master file stored centrally. With blockchain, it would be as though all the computers were off-line but were able to access and edit a master file that was always in sync, without there being a need for the master file saved on the company’s central server.
Any edits to the synchronized file are time stamped with the date and time of the change. Any entry or editing of the file cannot then be changed and the record will be there indefinitely.
There are three key components of Blockchain technology:
Peer-to-peer networking: Computers are linked through a peer-to-peer network. In blockchain technology, the lack of a centralized server removes the control element that a company or a government agency has with a centralized server. Each machine within the network will have all of the data updated and shared. Synchronised.
Consensus Protocols: Within the peer-to-peer network, all of the computers need to reach an agreement on the addition of new blocks to the blockchain. This is done by using consensus protocols or rules. The rules are written into the software that is run by the computers within the peer-to-peer network. The software makes sure that the computers in the network are synchronized and are in agreement at all times.
Blockchains: The agreement on the shared data is known as the blockchain. The blockchain makes it easier for computers to verify the growing amount of data held within the network. New data entries refer to previous data entries to create the link in the chain.
To illustrate the process, taking Bitcoin as an example makes the most sense as most people are familiar with the concept of currencies, albeit virtual and their transactions.
Computers are connected to the internet and run Bitcoin software. The software can either be mining software or simply a Bitcoin wallet. If we take deposits and withdrawals of Bitcoin, an update of each transaction carried out by the computer and then sent to all of the other computers within the network, in this case, Bitcoin. The Bitcoin ledger is updated or synchronized on all of the computers linked to the Bitcoin network.
Two key rules within the Bitcoin consensus protocol are:
- Bitcoins cannot be sent before they have been received. This rule is embedded within the software to prevent fraud.
- One computer within the Bitcoin peer-to-peer network is selected at random to decide the order of transactions within the 10 minute period.
- The need to randomly select a computer to decide the order of transactions is because computers within the Bitcoin network are located all over the world. Internet speeds mean that a computer in Australia may receive the order of transactions differently to a computer located in the UK. The computer decides the correct order of the valid transactions.
- The randomly selected computer is rewarded with new Bitcoins for the verification and ordering of transactions.
For the blockchains outside of Bitcoin, differences will be found within the consensus protocol and of course, the information shared across the network.
Why is Blockchain Needed?
Since the invention of the World Wide Web and cell phones, there has been very little to shout from the rooftops about. Sure, we’ve got cars that can drive themselves and the hype over artificial intelligence is building, but nothing is likely to be as material as the introduction of blockchain technology, not only into the financial system but into everyday life.
For the financial system, the prospect of a decentralization away from a centralized system is a daunting one to consider.
Can the world truly exist without fiat money?
The evolution of Bitcoin and other cryptocurrencies have not only drawn significant attention but have also threatened the very foundations of the financial system as we know it today. After all, this was the intention of Satoshi when the global financial crisis hit the global economy harder than any crisis in history. With the increased level of wisdom and education, should central banks avert the crisis that many still struggle to recover from? Satoshi believed so and the Bitcoin network agrees.
Granted, Bitcoin’s market capitalization and that of the cryptoworld pales into insignificance when compared with the $83.6tn dollars of paper money in circulation and the financial system today. But Bitcoin’s market capitalization has now surpassed that of many of the largest companies in the U.S and would in fact rank within the top sixty by market cap. All of this within just 8 years.
While many see Bitcoin as a currency, the surge in Bitcoin’s value may well have as much to do with the blockchain technology than the virtual currency itself.
So, while the heated debate over whether Bitcoin is a bubble or not continues to simmer on the surface, few will argue against the benefits and the ultimate impact of blockchain technology on the financial system and everyday life.
What changes can be to the financial system by using blockchain and how will that benefit us?
In today’s world, we have little choice but to pay the fees that cover the costs of an archaic financial system, with call centers, back office teams in their masses and the reams of paperwork that continue to destroy the world’s ecosystem. Add to that, the sizeable number of crimes committed each year, which is possible because of the systems in place today. It is estimated that more than 40% of financial intermediaries suffer from financial crime each year. With shareholders continuing to demand double-digit returns and regulatory costs ballooning, it’s not surprising that the general public is left to pick up the bill.
Blockchain has been touted as the golden egg for the financial system. One can only imagine the benefits of incorporating the technology into the system. A decentralized ledger with appropriate levels of security and available across the respective peer-to-peer networks, and removing the intermediaries that add to the exorbitant costs faced by the financial system.
There’s always a downside to the arrival of a material shift in processes as a result of technology and that is the displacement of workers. But, in the interest of depositors and those that are exposed to the flaws of the financial system today, this will likely be considered an acceptable cost by the majority.
Real-time verification and recording of transactions including money, equity, bond and commodities recorded on a decentralized ledger is a groundbreaking concept. The removal of silos within the financial system and the lengthy reconciliation process will feel like Utopia compared with how the system works today.
So How can Blockchain Technology Change our life?
The social impact of blockchain technology has already begun to be realized and this may just be the tip of the iceberg. Cryptocurrencies have already provided doubts over financial services through digital wallets, the rollout of ATMs and the provision of loans and payment systems. When considering the fact that there are more than 2 billion people in the world today without a bank account, such shift is certainly a life changer and can only be a positive one. Perhaps the shift for cryptocurrencies will be easier for developing countries than the process of fiat money and credit cards. In a way, it is similar to the transformation that developing countries had with cellular phones. It was easier to acquire mass amounts of cell phones than to provide a new infrastructure for landlines phones.
Decentralizing away from governments and the control over people’s lives will likely be embraced by many and the social implications can be quite significant. One only needs to consider the spate of identity thefts that have hit the news in recent years. Handing the control of identification to the people would certainly eliminate such events and allow people to reveal information with trust.
In addition to giving the underprivileged access to banking services, greater transparency could also raise the profile and effectiveness of charities working in developing countries that fall under corrupt or manipulative governments. An increased level of trust in where the money goes and who benefits would surely lead to increased contributions and support for the needy in parts of the world that are in desperate need of aid. Ironically, and not inline with the public opinion, blockchain can built a financial system that is based on trust.
Taking it one step further, blockchain technology is well placed to remove the possibility of vote rigging and all of the other negatives associated with the current process. In certain countries, we have heard of voters being intimidated or worse for polling stations that have been shut down by governments in an attempt to control the outcomes in a world where true democracy has been brought into question. Issues with the election process are certainly not confined to the developing world. Last year’s U.S presidential election is a case in point, where allegations of Russia hacking voting systems cast doubt on whether the outcome was democratic or rigged in favor of the Republicans or perhaps the Russians. Believe it or not, Blockchain can actually solve some of these problems. Of course, with a new technology, there are new obstacles and problems that will come but the cycle goes on and those new problems will be solved with more sophisticated solutions.
A decentralized ledger would provide all of the necessary data to accurately record votes on an anonymous basis, and verify the accuracy and whether there had been any manipulation of the voting process. Intimidation would be non-existent with voters being able to cast their votes in the privacy of their home.
Perhaps the greatest social impact of blockchain technology is here.
Banks are Scared of Blockchain!
Cost savings within the banking industry have been estimated to range from $16bn to $20bn per year through the adoption of blockchain technology.
It’s not just the cost savings, however. Consider a shift in fundraising approaches away from the debt capital markets and initial public offerings to Initial Coin Offerings (ICO). If we take it a step further, would there be any need for the equity markets as we know them today? Cryptocurrencies could replace traditional shares of companies, listed or unlisted and the blockchain technology would then manage and record the transfer of shares for the given company on a decentralized ledger. Maybe it will not happen tomorrow, but, it could be the reality.
Intermediaries would no longer be needed and it could see the end of the traditional brokers of today.
A migration from physical to virtual money would then just seem to be inevitable – market sentiment driving the value of cryptocurrencies as economic indicators drive paper currencies today.
What would be the purpose of central banks when the use of paper money slumps in favor of virtual money? Japan has already embraced cryptocurrencies as legal tender. As the market continues to evolve, others will follow.
If central bankers want to continue enjoying their days in the limelight, they’re going to need to catch up. One function that remains lacking is the regulatory side. Taking the control away from the governments, perhaps central banks will eventually become equivalent to oversight committees. Drawing up the regulatory framework and mapping out the progressive inclusion of blockchain technology into the financial system. Some would argue that such a function would be of far greater value.
The outlook for blockchain technology looks bright and the gains made from adopting the technology will be beyond comprehension. How the technology is embraced will ultimately be the key to how it benefits the financial markets and the world in general.
For now, the world’s largest banks and central banks have begun to invest significant capital into the use of blockchain technology. While bank CEO’s have been generally dismissive towards Bitcoin, the view is quite different when it comes to the underlying technology.
First movers are likely to be the world’s largest banks that will want to get ahead of the curve to avoid being left behind. JPMorgan Chase & Co (JPM:N) announced in October that it had launched a new payment system using blockchain technology in partnership with Royal Bank of Canada (RY:TO) and Australia and New Zealand Banking Group (ANZ:AX).
The three banks are not alone with IBM have been assigned by various groups to revamp internal processes using the blockchain technology. Microsoft is also there and likely to be one of the leaders in the pack. The speed which banks are moving is an indication of how scared they are of what blockchain could mean for them.
Central banks won’t be far behind…
Blockchain is not only Bitcoin, it’s much more than That
Having discussed the positive impact that blockchain technology can have on democracy, there are countless other areas in which blockchain technology can have a dramatic effect. Some examples include:
Supply Chains: The ability to track foods from farm to shelf is one that has recently made the news. IBM announced that it has begun working with the larger food suppliers, including Nestle and Walmart, to take advantage of blockchain technology. Of particular interest to food, suppliers are being able to identify the source of food contamination, as well as being able to track the producer within the food supply chain. Beyond food, the transparency of blockchain can also give consumers the true source of manufactured goods, which has become important in today’s society.
Energy sector: The trading of energy with the use of blockchain could allow the consumer to sell excess energy to their neighbors, removing the control from the utility companies. Similar to financial markets, there may even be a range of prices as supply and demand dictate price.
Governments: Governments have already begun pilot projects to incorporate blockchain technology into their daily operations. The intention being to make the efficiency gains that the technology can deliver. In the UK, the government has used blockchain technology in the disbursement of student loans and also to track the payment of benefits to the underprivileged. The government’s view is that blockchain could reduce corruption, the number of fraud cases and costs by shifting away from the current use of paper.
Elsewhere, governments are looking to use the technology for record keeping, including land property deeds. The use of the ledger could, in fact, be used to record the transfer of titles and deeds of property.
Healthcare: The removal of the paper trail in the healthcare system and making patients’ medical records are available to the patients’ without the threat of hacking or leaking. Additionally, a decentralized ledger of medical data may even be able to provide the necessary data points to support the fight against virus and disease.
Music Industry: Protection of rights and distribution of earnings within the music industry is a key consideration, as the industry looks at ways to adopt the technology. Removing the ability for piracy and allowing listeners to download music stored on the blockchain, paying for the music with cryptocurrency would be one of the paradigm shifts in the industry. It would also mean that the right people get paid… It may well be the death of distributors, but it’s unlikely that artists within the industry will lose any sleep over such a prospect. Blueprints have already been published in a decentralized blockchain ledger that is expected to solve the issues of rights and payments.
The first artist to engage cryptocurrencies in the music industry was Bjork with a release of a new album that provides buyers with 100 Audiocoins.
These are just a small number of examples. Blockchain technology is being explored across all of the major sectors and with many industries already rolling out pilot projects, the skeptics may have to eat their words.
The Blockchain Revolution – Time will Tell
Whether blockchain technology does, in fact, become a part of everyday life remains to be seen. While inflated expectations raised the possibility of an end to central banks and their responsibilities as we know it today, an end to the centralized financial system is perhaps a step too far for now.
The current system which the banking systems and the global economy function on a daily basis are still founded in our social life. Removing the oversight responsibility of central banks and handing it over to the general public is an unthinkable step, but this doesn’t mean that certain qualities of blockchain technology and the ethos of decentralization cannot be adopted.
The realms of possibilities are endless and alongside corporations and the banking system, central banks are now exploring the possibilities and how blockchain technology can be incorporated into the financial system. The fact that central banks are exploring the technology suggests that there is an open mind to embrace blockchain technology.
After all, central banks are in place to decentralize from their respective governments. So this would just be an evolution of the independence that central banks are supposed to be working on today. One possibility is to create a peer-to-peer network comprised of the greatest economic minds of today and tomorrow. This would free central banks from possible pressures from respective governments, eliminate the currency war phenomenon seen since the global financial crisis and bring an end to accusations of certain economies enjoying more favorable trade terms. And let’s not forget the “free will” printing of money that has put a Band-Aid on the debt woes of governments around the world.
Time will tell how blockchain evolves, but one thing looks to be certain today. Status quo is no longer an option and change is needed.
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