Most people have heard about bitcoin at this point. But what is Blockchain? Blockchain is the underlying technology for bitcoin. Now, before you glaze over and think that this will be an overly technical blog post, I assure you that it is important that you read further. Blockchain may very well be the “next big thing” in business innovation.
In the late nineties people got excited about the internet but weren’t quite sure what it was going to be. In fact, there were many skeptics that didn’t think it would be much of anything. Check out these headlines from the late nineties:
“Computer ‘WEB’ to Change Billions of Lives (Yeah, Right)” Paul Krugman of the New York Times
“The Internet, Bah!” Clifford Stoll of Newsweek
“From the Ether: Predicting the Internet’s Catastrophic Collapse and Ghost Sites Galore in 1996” Bob Metcalf of InfoWorld
We all know how that turned out.
Think of Blockchain as technology that allows virtually foolproof record keeping. Our economy requires trust to operate. Trust is required to give our currency its value, trust is required to believe products will do what they say they will do, and trust is required to buy online and have confidence you will receive the paid for product. Today we have lots of controls to encourage trust: the Federal Reserve is a central authority and institution of trust for all using the dollar in the U.S., consumer protection agencies protect consumers in the event of false advertising, and the ability to claw back a credit card transaction if a retailer does not deliver a purchased product. Blockchain can become the new trust model for world economies. See the following quick video on: Understanding the Blockchain in Two Minutes.
Blockchain has 4 qualities that make it a compelling solution with significant applications across industries:
- it is a distributed ledger
- it is public
- its entries are time-stamped
- it is persistent or lasts forever
Let’s talk about these 4 qualities in the context of a payments system for the sake of narrowing the conversation. Today the Federal Reserve in the U.S. issues currency, in fact in 2016 the Federal Reserve will print 7.6b notes for a total value of $213b. This is cash injected into the economy through banks. Banks are where the average consumers get access to this cash (typically through their employer’s payroll). We must trust that banks are not vulnerable to cyber attacks, theft, and that their accounting procedures are appropriate. And what if they are not? In 2011 Citibank was “hacked” and over 200,000 customer’s data was leaked. Citibank is what we would call a centralized ledger. Their database houses all of their customer’s information and transaction histories. If a hacker breaks in, well, they will steal all they can before the breach is identified and they are stopped. Blockchain on the other hand has no single point of failure. Blockchain is as strong as all of the computers (nodes) that are using the network. As you can see in the picture above each single point or node is connected to many other nodes. If one node is attacked then the other connected nodes will simply continue on as if nothing happened. The risk of foul play decreases as more “good” nodes participate in the network. The only real risk is when a “hacker” or group of “hackers” control over 50% of the computing power of the nodes on the network. This is a little bit of an apples to oranges comparison but I will address this in the next paragraph.
The Blockchain’s distributed ledger is public. Wait, so all of my personal information, account numbers, and transaction histories will be public? No, and yes, blockchain uses a public and private key system to access the network to protect your personal identity, the equivalent of an account remains protected, and yes, your transaction history is public, while your identity associated with this transaction history is private. Let’s say the Federal Reserve issued a digital currency on a Blockchain network instead of pushing the physical currency out through banks. A person accessing this cash to redeem it for goods and services would have a private key to access your currency and your public key (a string of numbers) would be displayed along with the corresponding transaction history for all users on the network to see. Therefor, your identity is private, the equivalent of your account is private, but everyone can see what you, or your public key, has done on the network. This protects all users against double spending, and speaks to the earlier point of a sound network, unless over 50% of the processing power of the nodes on the network is controlled by “bad” people; because the only way for the public ledger to be corrupted is for over 50% of the computing power on the network to start re-writing the transaction history. This is improbable because the group controlling this much computing power would have to re-write the history in the plain sight of all the other users.
Continuing with our example of the Federal Reserve issuing digital currency on a Blockchain network, at the time when currency is issued into the system there is a time-stamp showing the entry. Additionally each time that a user (identified as their public key) transacts on the network there is a time-stamp of their activity. The first transaction from a user is always the honored transaction. Comparing this to how banks function today, a bank is the authority over the central transaction history or ledger. Their technology, or in some cases their employee, identifies attempts at double spends or double charges and reconciles what is correct or incorrect. Most of the time they get it right, but some of the time they get it wrong. The Blockchain acts consistently and unequivocally.
Finally, the Blockchain is persistent, or in other words, it lasts forever. Well, barring a worldwide EMP (Electromagnetic Pulse) knocking out all electricity and digital records, it lasts forever. The point here being that we are no longer bound by physical instruments of value and record keeping. Physical cash degrades, is damaged, is lost, digital currency does not. More importantly the distributed ledger builds on itself and maintains an accurate record of ownership and use into perpetuity.
We have discussed how Blockchain may change our conventional payments system, but what other applications may Blockchain have:
- instant stock trade settlements (no longer a need to use traditional bank settlement systems that can take days, sometimes weeks)
- privacy preferences (linking only what you want to have shared to your public key)
- humanitarian aid (no longer has to pass through currency exchange)
- voting (we will no longer need to have a re-count in Florida)
- digital media protection (original works become an entry in the blockchain and all other use after that requires a use agreement)
- property titles (no more title insurance, no more duplicate title requests)
These are just a few of the myriad applications. It would be great to hear some of your thoughts around potential applications.
So, is the Blockchain as big as the Internet? Just like the internet in the 1990s, Blockchain has its fair share of skeptics, but in my humble opinion it has every possibility of being equally transformative. Blockchain can change almost every industry and the underpinnings of business itself.