A blockchain is a time-stamped series of an immutable record of data. And a distributed cluster of computers not owned by any single entity, manages this record. And, difficult-to-crack cryptographic algorithms connect these blocks to form an unbreakable chain.
You probably have heard already that the blockchain technology is the next generation of the Internet. And several experts think that this game-changing technology will transform a wide range of industries in the future. And the consulting firm, Gartner expects the business value-add of blockchain to exceed $3.1 trillion by 2030.
What is a blockchain?
It is an electronic ledger that holds a collection of individual transactions. These collections of transactions make up the ‘blocks’. And the blockchain is a distributed ledger. This means that the blocks are stored in a large number of nodes or computers that are geographically apart. And each computer or node holds the entire copy of this ledger. But these nodes are not owned by any single entity. So, it is impossible to alter any transaction without the consensus of the entire network. Also, these blocks connect to each other through cryptographic algorithms that are unbreakable. Another important feature of blockchains is that they have no central authority. And hence, it does not have a central point of failure.
Now, if you are wondering, “what’s the business value of all this?”, here’s the fundamental value proposition of blockchains.
The value of blockchains arises from the fact that it helps participants who may not even know each other to safely and directly do business without any intermediaries. For instance, you don’t need any ‘trusted’ intermediaries like a lawyer, bank, broker; or any central authority such as a government, central bank or even a court!
The birth of world’s first blockchain
The financial crisis of 2008 brought about interestingly two opposite outcomes. The first one was the US government’s reaction of bailing out large financial institutions with stimulus packages. Most governments do this by printing more money thereby driving up inflation. The second outcome was the birth of the Bitcoin. Frustrated with the central point of failure of financial institutions, Satoshi Nakamoto, whose identity is still a mystery, created a new technology called blockchain. And this new technology removed the need for a trusted intermediary or a central authority. And thus, he created Bitcoin, the world’s first digital currency!
But before we go ahead, we need to back up a little bit and understand the problems that plague the Internet today.
Issues with today’s Internet
The need for this game-changing technology grew out of the problems the current form of the Internet has. As you know already, the web has grown in leaps and bounds in the past two decades.
But, how did we get here? Here’s a brief history lesson.
- Web 1.0
The year 2000 marked the first phase of the web with about 300 million people online. Email was the killer application. But we had to pay a fortune for servers and put up with poor functionality. And, not-so-great user experience. - Web 2.0
By 2010, the web became more interactive and about 4 billion people were online. User experience improved dramatically. Also, costs went down rapidly. And technology advancements such as cloud computing as well as availability of venture capital resulted in a deluge of Internet startups. This period also marked the rise of large enterprises such as Amazon, Google, Uber etc. But with tremendous growth, came a bunch of issues: serious cyber-attacks, privacy violations, identity thefts, online frauds and fake news. Essentially, Web 2.0 lacked a trust layer, a value layer and an identity layer. - Web 3.0
Blockchain marks the advent of this phase of the Internet. Blockchain technology ushers in an Internet of trust, value and identity. Blockchain provides the trust layer that enables individuals to conduct transactions without the need for an intermediary. It also provides a transparent, shared view of all transactions. As a value layer, it enables the exchange of currencies, digital and tokenized assets at minimal transaction costs. Also, it enables a unique, verifiable identity management and increases accountability for events and transactions.
How does a blockchain work?
As mentioned earlier, we can create a block by bunching together a set of transactions. Then using the hashing function, we can convert the entire information held inside a block- all the transaction details along with the time-stamps- into a unique string of characters by the process of hashing. We write this hash, which contains the entire information contained in the block, on to the next block. And we hash the second block again. We can repeat this process till all the blocks get connected or chained together. It is impossible to insert any new information or alter any piece of data within the blocks once we add them to the blockchain. Thus, the blockchain is immutable and resistant to any frauds.
What are the major properties of blockchains?
The wide applicability of blockchain technology in various spheres stems from its inherent properties. Let’s examine each of them in some detail.
- Immutability
No one can alter any transaction inside the blockchain without consensus, because the transactions have time-stamps and cryptographic signatures. - Decentralization
No single entity controls all the computers in the network, and the information stored in them or dictates the rules. Nodes on the distributed network maintain the information and also the rules for how the network operates. - Encryption
Blockchain employs cryptography to record block-level data securely and semi-anonymously. Participants can control their identities. - Distribution
The participants of the blockchain are in different geographic locations. Each participant or the node maintains the entire copy of the ledger that gets updated as and when transactions occur. - Tokenization
We can represent any financial or physical asset digitally in the form of tokens on the blockchain.
Broad applications of blockchains
Blockchains have applications in a variety of industries as well as governance and societal processes. The biggest use cases are in the removal of major inefficiencies in the global supply chain, preventing frauds, especially with respect to counterfeit goods and avoiding theft of valuable cargo such as precious metals and luxury products. Also, blockchains are used to identify the provenance of agricultural and other perishable products as well as prevent spoilage and contamination of food products and medical supplies.
The global financial services industry is an early adopter of this technology. A slew of decentralized finance (DeFi) protocols has emerged for lending, borrowing and payments and fund transfers without the need for a trusted intermediary. As a result, these DeFi protocols have significantly lower transaction costs. Also, there is no central point of failure.
In addition, blockchains can help create tokens that are digital versions of physical assets such as real estate, art and music and protect the rightful creators and owners of these assets.
Since blockchains can provide a single, indisputable version of truth, governance processes such as elections and land reform management can leverage this technology.
What’s next for blockchains?
Irrespective of their stance on cryptocurrencies, most governments and central banks are very keen on using blockchain technologies in financial services as well as other areas, including e-governance. And blockchain technology is evolving quickly, particularly in combination with other emerging technologies such as Internet of Things (IoT) and AI.
Also, companies view blockchains as the operating system for implementing digital transformation of their businesses. Enterprise blockchains are evolving fast, given their applications in supply chain management. You can expect blockchains to become ubiquitous very soon and bring about dramatic changes in governance, industry and society.
