Blockchain. Google the word, and you’ll find a plethora of analogies attempting to explain the concept. And no wonder. While the definition appears fairly straightforward—it’s a digital, openly accessible ledger that can be concurrently added to, forming a permanent chain of data “blocks”—understanding how people use blockchain is anything but simple.
However, utilizing blockchain may be vital in a world where the technology has already spread from its first application—verifying the electronic currency Bitcoin—to being used to create smart contracts, prevent voter fraud, and track healthcare (to name just a few).
At its core, blockchain technology provides increased efficiency and trust because it eliminates the need for a central authority by creating a space where an entire community is aware of and involved in the action taking place. Blogger Martin Jee shared a blockchain analogy that may be helpful:
You know how in a playground football [American soccer] game each player knows what the score is at any one time, and you can’t change the score without convincing everyone playing that there’s a very good reason for doing so? Well, in a very similar way, each node [computer] in a blockchain-based peer-to-peer network has an identical copy of the network’s ledger of events, and that ledger is immutable.
So both playground football and blockchain achieve a situation where you have multiple participants who have an agreed-upon historical record of events, and that record cannot be tampered with. ...
In a playground football game, there is no referee (that would be a centralised authority) and yet the game is played successfully because it’s a group of kids playing a game where everyone knows the rules, and they play by those rules because otherwise they’re not “playing football.” When a kid fouls in some way, a decision is quickly made amongst the kids as to whether to act upon the foul or [whether to] simply let the game continue by passive consent (consensus is constantly achieved). The “ledger part” is the current score that all the kids are keeping in their heads, and every kid doesn’t actually need to see each goal being scored as long as they all agree what the current score is.
The ledger is immutable because a single kid cannot change the score without convincing a majority that his view of events is the right one.
And it’s in that way that all those games of footie in the playground were actually examples of a peer-to-peer network achieving immutable, synchronized, and decentralized consensus via a distributed ledger!1
Who knew a neighborhood soccer game could be so educational?
A Whole Different Ball Game
The need for a technology that could be trusted in the world of finance has never been more evident than in the last decade. On 9 October 2007, the US stock market reached an all-time high, with the Dow Jones Industrial Average exceeding 14,000 for the first time in history. Yet only two months later—in December 2007—the Great Recession began, shattering world financial markets and banking and real estate industries.
Over the next eighteen months, the Dow fell to 6,547 points, losing more than half its value, while millions of people lost their jobs, homes, and life savings.
Throughout history, obstacles and challenges have resulted in progress. Minted coins, paper money, and even entire banking systems have been created to protect those involved in the exchange of assets. Along the way, technological innovations such as telephones, credit cards, and mobile apps have improved the convenience, efficiency, and speed of those transactions.
The Great Recession would prove to be an opportunity for change. With this devastating financial downswing as a backdrop, wary Americans were open to alternative methods of handling financial transactions.
The Kick-Off
Enter Satoshi Nakamoto, a pseudonym for the author—or authors—of a nine-page white paper designed to transform the world of finance.
Published on 31 October 2008 and titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” the document described a revolutionary technology that created the world’s first genuine peer-to-peer, decentralized monetary system. The internet-based money, or cryptocurrency, could be sent directly from one party to another without going through a financial institution and with all transaction information secure, time-stamped, and viewable to everyone.
This novel concept—replacing the role of banks as the trusted intermediary with a community of participants who work together to verify transactions and provide system integrity—was revolutionary and captured the attention of many who had been devastated by the Great Recession.
The technology that made this new idea possible was blockchain. Initially written separately in Nakamoto’s original paper, the two words—block and chain—succinctly described the technology and, by 2016, were ultimately combined through popular usage.
One of the clearer explanations of how blockchain works states it this way: “Blockchain owes its name to the way it stores transaction data—in blocks that are linked together to form a chain. As the number of transactions grows, so does the blockchain. Blocks record and confirm the time and sequence of transactions, which are then logged into the blockchain, within a discrete network governed by rules agreed on by the network participants.”2 Using timestamps and unique identifiers, the blocks cannot be deleted, rearranged, or modified in any way, and every player can see each move in the game.
“For example, if you bought a computer today, the company you purchase it from will have a record of your purchase in their internal systems,” explains John Gardner, a BYU Marriott associate professor of operations and global supply chain management who is researching blockchain. “The company will give you a receipt of the transaction generated from their system, but they are the ones who maintain that record.
“If you purchase that computer using blockchain technology, the blockchain will house that record of your purchase, and participants in the blockchain will share that record jointly,” he continues. “If the company tried to change the record, all participants in the blockchain could view the discrepancy, and the system would not make the company’s request valid unless the majority of participants agreed to it. Also, if you later sold the computer to someone else, the blockchain could be used to track the history of who has owned it, connecting it from owner to owner in a traceable record.”
No Referees Needed
Blockchain technology offers solutions to some of the most significant challenges in the world of traditional financial transactions:
Cost. Traditional business transactions can be expensive. Intermediaries often charge fees for their services, whether it’s a credit card company adding a surcharge to run a card or a mortgage broker charging fees to close a loan. Blockchain eliminates the need for any middleman involvement and the accompanying cost.
Timeliness. It’s not unusual for some financial transactions to take days to finalize. Banks may need to verify funds, and title companies need to confirm ownership. Each step of a transaction can take time. Using blockchain technology, transactions of any kind—financial or otherwise—are processed much more quickly, sometimes in mere minutes.
Immutability. No participant in a blockchain transaction can alter any of the information after it’s been recorded to the ledger. If a mistake on a transaction has been made, a new transaction must be created to correct the error. Both transactions must be validated by—and will be visible to—everyone involved.
Ownership. Participants can clearly track where an asset came from and how ownership has changed over time.
Transparency. A single, shared ledger becomes the decisive resource to see and verify all the information regarding any transaction.
Accessibility. Half of the people in the world don’t have access to a bank account or other methods of facilitating transactions. However, the number of people in the world who have computers and mobile devices is increasing dramatically, and blockchain puts the power of transaction into the hands of people around the world.
Ultimately, trust—a key element that people seek in any transaction—is inherent in blockchain. Because each block builds upon the one before it and is visible to every participant, then fraud, cyberattacks, and corruption become immediately apparent. As a result, the community of participants polices itself, much like the group of neighborhood soccer players keeps score, calls out fouls, and assesses penalties.
Running with It
“What the internet did for communications, I think blockchain will do for trusted transactions,” IBM president and CEO Ginni Rometty explained in a June2017 interview.3 Much of the initial growth and excitement behind the internet stemmed from the fact that this new technology provided an amazing way to connect across the globe.
The same might be said about blockchain and the possibilities it opens for smoother transactions across every industry. “Blockchain has many potential applications for sharing transaction information immediately between parties,” observes Gardner. “Parties can set up smart contracts that automatically transact when specified conditions are met. These features have the potential for reducing how long it takes for customers (individuals or organizations) to make and receive purchases. It could also enable multiple parties to share desired levels of information across entire supply chains. For example, blockchain could be used to provide needed traceability on the sources of food or drugs.” And that’s just the beginning.
At the root of this newly tapped potential lies the ability of blockchain to facilitate the process of recording transactions and tracking a wide variety of assets, from the tangible (such as houses, cars, cash, or land) to the intangible (such as patents or copyrights). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk, cuttings costs, and providing trust for every player in the game.
In addition, there is not just one type of blockchain, Gardner says: “There are several types of blockchain that can be adapted to many different uses. Bitcoin operates on a blockchain that relies on the exchange of cryptocurrencies by users with pseudonymity, using encrypted identities on a public network. Whereas businesses may use blockchain in a private, permissioned network with known identities.”
For example, Daimler, the company that makes Mercedes-Benz cars, borrowed $114million using blockchain technology. A traditional loan would have required drawing up contracts, communicating with investors, and extensive administration.
Instead, Daimler executed the loan between the two companies using smart contracts that relied on a private blockchain to automate the loan’s order book, create agreements, and check on payments. With this blockchain-based loan, all involved parties have instant access to an identical, distributed record.
A Business Hot Shot
A private blockchain is created around four main concepts: a shared ledger, permissions, consensus, and smart contracts.
The idea of a shared ledger is the same for both public and private blockchains.
Transactions are recorded only once, eliminating the duplication of effort that has long been part of doing business. The record of the transaction is shared among everyone in the network through replication. Finally, the ledger is permissioned so participants can see only those transactions they’re authorized to view.
While a private blockchain can be permissionless, just like a public blockchain, it also offers organizations the option of creating permissions in order to restrict network input and access to transaction details for certain participants. This type of control allows companies to comply with data protection regulations such as those required by the Health Insurance Portability and Accountability Act (HIPAA).
In a business network where the participants are known and trusted, transactions can be verified and committed to the ledger through a variety of different consensus methods—including proof of stake, meaning validators must hold a certain percentage of the network’s total value; multi-signature, meaning a majority of validators must agree that a transaction is valid; and practical Byzantine Fault Tolerance, which is an algorithm designed to settle disputes among network participants when one participant generates different output from the others in the same network.
Lastly, in private blockchain networks, organizations can create a smart contract, or an agreement or set of rules, that will govern transactions. Contracts are stored on the blockchain and executed automatically when the criteria are met. Smart contracts can have numerous clauses that provide security superior to traditional contract law while decreasing the delays and costs that often accompany traditional contracts.
Just the First Half
The true potential of blockchain has yet to be determined. Although Gardner is quick to point out that he is not an expert on blockchain, as a global supply chain professor he is especially interested in how blockchain might be used in his field.
“Blockchain is certainly a dynamic, expanding technology with applications that change every day,” he points out. “We are in the early stages of its development.”
The 2018 annual report from the Global Blockchain Business Council notes that “blockchain technology could be the most transformative technology since the internet.” The report continues,
The World Wide Web revolutionized commerce, communication, and media, but so many assets of value—currency, passports, votes, and land titles—have yet to be digitized. The delay in progress has been tied, in large part, to the lack of security offered by legacy platforms. Blockchain technology provides an elegant solution to that—and many other flaws in existing systems.
... [Blockchain technology] provides a secure, efficient solution whenever individuals or organizations need to store or transfer assets or information. As it is adopted across sectors and geographies, blockchain technology will reshape many of the systems powering contemporary life.4
Blockchain may indeed profoundly change how the world works—and how we work in the world. The next time you buy a house, you may not have to sign a huge stack of papers that need to be sent to several different stakeholders. In five years, your primary care physician may be able to track—and share—medications and treatments with other key healthcare providers. And someday, you may even use bitcoins to purchase groceries.
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Witten by Christopher K. Bigelow
Illustrations by Michael Waraksa
About the Author
Christopher K. Bigelow works as a freelance writer, editor, publisher, and university instructor. He got his master’s in creative writing at Brigham Young University. A father of five and grandfather of one, he lives with his family in Provo, Utah.
Notes
- Martin Jee, “The Best Blockchain Analogy Ever!” Martin Jee’s blog, 11October 2017, accessed 6July 2018, martinjeeblog.com/2017/10/10/the-best-blockchain-analogy-ever.
- Manav Gupta, Blockchain for Dummies, IBM Limited Edition (Hoboken, NJ: John Wiley & Sons, 2017), 13.
- Ginni Rometty, interview by Jim Cramer, Mad Money with Jim Cramer, CNBC, 21June 2017, https://www.cnbc.com/2017/06/21/cnbc-transcript-ibm-chairman-president-ceo-ginni-rometty-on-cnbcs-mad-money-w-jim-cramer.html.
- Global Blockchain Business Council, “‘Global Challenges: Blockchain Solutions’: The GBBC 2018 Annual Report,” January2018, daks2k3a4ib2z.cloudfront.net/596d1089592fec0e94682231/5a6750dc419e5f000158fb00_FINAL_GBBC_REPORT_2018.pdf.
