The internet has created a global marketplace over the past forty years. A consequence has been a high level of fraud resulting in an increasing trust gap. Intermediaries help to add a level of verification but there still remains a leap of faith that the intermediary is trustworthy and competent. With the number of smart devices predicted to outnumber humans seven fold by 2020, new technology is required to fill the growing trust gap. Up step blockchain, tipped to radically change record keeping for shares and derivatives, property, governmental agencies and filing accounts. The resultant ledger is an immutable record trusted by all counter parties that speeds up and reduces the cost of transactions. Blockchains could replace all intermediaries and what’s more, every company in the world could be at risk of competitors that embrace and incorporate this game changing technology. Below we look at how blockchain works, its strengths and weaknesses and what future applications could be.
Blockchain technologies will initially target industries where poor service is delivered at a high cost.
One thing for sure there is far more to blockchain than Bitcoin.
What is blockchain?
Imagine blockchain as a jig-saw puzzle, where each piece is a unique shape based upon the ordering and configuration of hundreds of smaller shapes. If one smaller shape is removed or altered, then it is impossible to configure the unique shape of the jig-saw piece. Each unique shape fits the previous piece and creates the overall puzzle.
The jig-saw puzzle is stored across a network for added security. Significantly, the puzzle cannot be changed, it can only be added to. The network uses the existing puzzle to confirm the veracity of the smaller shapes that make up the latest unique jig-saw piece. If no anomalies are found, the latest piece is added to the puzzle.
By verifying the jig-saw piece, the network is verifying all the smaller shapes and the way they are combined.
If you replace the smaller shapes with data and the jig-saw piece with digital code then you have a blockchain. Once the code is verified by the network, this becomes a block of digital data that is a permanent record and cannot be changed.
The digital code for one block, includes a small part of the code for the previous block of data and this creates the chain. If any data is removed or altered, that block will no longer fit in the chain.
The data is dispersed across the network for added security and the combination of this plus the cryptographic algorithms used to generate the digital codes, results in a previously unachievable level of cybersecurity.
A private blockchain may be used by a company as a ledger to record transactions or as a permanent record that all regulations and procedures were followed. This typically will be a closed community network with a number of selected members verifying each block.
For public blockchains, anyone can become a member of the network. The success of the blockchain is dependent on creating a large network member base. As the public network is decentralised, the problem arises of how the members can be trusted with access to the data, think Wikipedia. An ingenious verification process protects all the data through cryptographic codes and creates a mathematical question, a hash, from the digital code of the block. The first member to find the solution is rewarded. The other members then verify the solution is correct. As the members all receive the same mathematical question and have the same solution, this confirms they have the same data, in the same order within the block. The data in the block is verified by the network without the members being able to change or remove data.
Bitcoin was the very first blockchain and is an open public distributed ledger. A member solving the mathematical question is rewarded by 25 Bitcoin, worth approximately $150,000 in mid-2018. Such reward has ensured the network has grown; the larger the network, the more secure the blockchain.
In the digital world, data that once created can never be changed is essential in developing trust.
Early adopters and innovators of blockchain have already created a lot of value and wealth in a short time, now they want to change the world.
You can see a blockchain working live at: https://www.blockchain.com/explorer
Independent –blockchain often operate over hundreds or thousands of computers. With over 50% approval required, the wider the membership, the more secure the blockchain.
Error free – a large network of computers creates immense processing power. The blockchain processes and checks all digital records before they are added to a block. The combined data is given a unique digital signature based upon the data in this latest block and the code from the previous verified block.
Highly secure – a combination of cryptography, mathematical algorithms, together with the open nature and transparency of the ledger means it is virtually impossible to hack
Permanent records – reduces fraud as the ledger cannot be altered or tampered with only added to chronologically. Once verified, a block is a permanent record and the ledger is immutable.
Transaction Speed – scaling blockchain systems is the number one obstacle to mass adoption as the ledger requires all members to process every transaction. Bitcoin can process a maximum of seven transactions per second, Ethereum is two times faster. However this is a long way from VISA that processes up to twenty four thousand transactions per second.
Trust – the association of block chain with crypto currencies has led to scepticism particularly amongst older generations. Like all new technologies there is an element of not trusting what you do not understand and the lack of tangibility of digital assets leads to distrust.
Game changing technology
Past history has demonstrated that once a highly disruptive technology has been created, then an open platform will allow the technology to develop rapidly. New distributed ledger technology (DLT) systems will be launched that operate more efficiently than current blockchains. If all the bright minds working in this space can introduce new technology so blockchain works at half the transaction speed of Visa, there really will be no limits to where it will be used. Below we look at a few examples of possible global applications of blockchain:
Retail – blockchain could do to online retailers what Amazon did to bricks and mortar stores.
Healthcare –blockchain could store medical records with the high security demanded by patients whilst providing access for doctors leading to faster and more accurate diagnosis. The data could also be used for research enabling drug development, as well as predictive health management and cures.
Pharmaceuticals – blockchain could free the market of fake and patent infringing drugs through supply chain management.
Government – verified elections; issuing licences, birth & death certificates, visas, passports: benefit & disability payments. Blockchain could reduce bureaucracy, increase both time and cost efficiency, increase transparency and reduce mistakes.
Financial Markets – blockchain could transform financial exchanges and ultimately replace them as the DLT provides real time transaction, settlement, permanent record and all required regulatory requirements such as KYC and AML proof of ID.
Insurance – the trust currently provided by Lloyds of London is replaced by blockchain managing trust and verifying all the data involved in insurance contracts. Once again, blockchain can increase efficiency whilst eliminating errors and fraud.
Cybersecurity – centralised servers are vulnerable to error, data loss and hacking. A decentralised network can encrypt and store data in code across multiple locations. The blockchain will recompile the data when needed.
Property – blockchain could be used to verify ownership, ensure veracity of documents, conduct all KYC and AML requirements and transfer property deeds. Again blockchain would replace middle-men increasing efficiency and eliminating human error whilst reducing cost.
There is very good reason why the VC industry is backing early stage blockchain technology developers as well as companies that are using the technology in niche applications to bring efficient, transparent and cost effective solutions. The more a blockchain is used, the better it becomes. The early protagonists of this technology have already made major returns and are set to continue to be the biggest gainers.
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.