Digital currencies like Bitcoin are only for crypto-anarchists, currency speculators and dark web drug dealers, right? So why should you care about the technology that powers these crytonocurrenices? What relevance does blockchain, or distributed ledger systems, have on other, more traditional, industries?
Despite starting at the fringes of the internet, blockchain-based systems have the potential to completely upend the way businesses, governments and organisations have operated for centuries. You don’t need to start mining for bitcoins anytime soon, but it’s worth understanding what’s beneath all the hype.
Setting aside the actual technology for a moment, the principle behind blockchain is a set of open, distributed ledgers that can record transactions between two parties efficiently in a verifiable andpermanent way.
Or, in simpler language, a blockchain is a record book that everyone can see, but no one can alter. Because all transactions are visible and immutable, value can be safely verified and transferred between parties without the need for any bank or central authority.
Despite their differences, most societies across the globe can agree on one universal thing: money. Money specifically as a universal indication of value, and this value can be transferred between people, organisations, governments and so on.
In order to achieve this universality, money must be trusted by all parties involved. When you and I conduct a transaction, I trust that you will pay me for the good or service I give you. I trust that I will be able to exchange this payment for something else further down the line - that it will maintain it’s value if I hold on to (or save) it.
This trust is verified through, traditionally, an external authority - be that a king, a government or a central bank. And this trust has always been at risk of being manipulated.
Bitcoin has its origins in the earliest days of the Internet, starting in the early-90s in the imaginations of a group of geeks collectively known as 'Cyberpunks'. These Cyberpunks advocated an extreme form of libertarianism where all commerce existed outside of state control. Using cryptography as a building block, these 'crypto-anarchists' decided a decentralised, anonymised currency was needed to fulfil their vision.
This vision was fulfilled in 2008, when Satoshi Nakamoto (the pseudonym for an as-of-yet unidentified individual or group of individuals) published a white paper called 'Bitcoin: A Peer-to-Peer Electronic Cash System'. In this paper, the author(s) argued they had solved the chief problem then facing the use of ‘digital cash’, which is known as double spending.
When purchasing goods online a transaction typically had to be verified through a central party (a bank or credit card company) to ensure the money was spent once and only once. The technology proposed by Nakamoto was a huge innovation because it allowed two parties to confidently exchange value without relying on a trusted middleman to verify the transaction.
Bitcoin is the first killer app that uses blockchain technology and therefore has gotten the most airtime. But let's step away from the world of currencies and think about the implications of being able to remove the middlemen from all kinds of transactions we need to deal with on an almost daily basis.
Currently, the processing of any official agreement realise on the verification of a 3rd party. When buying a house, you trust the deed you receive because it has been verified by a external (and expensive) lawyer. Buying stocks, renewing your passport, obtaining a visa and bonds are just a few other examples. Transactions involving these kinds of assets rely on central authorities to process, record and clear the transactions. The involvement of these intermediaries typically adds friction to the process in the form of added time or cost.
Using blockchain based systems, the middlemen sitting at different choke points in the transaction chain can start to be eliminated. By removing the friction of various agents conducting their piece of the transaction, whole new business processes are enabled with the promise of being simpler, faster and cheaper.
Let’s return to the buying a house example. Using smart contracts all transaction history about a given property can be stored in a blockchain database. Purchase transactions can be conducted by following all the required steps in the contract. Since all prior property records are stored in the database, the need for lawyers to conduct title searches is eliminated. Suddenly the cost of buying a property reduces by the thousands.
Blockchain systems are in their early days and there will be a lot of challenges ahead of widespread adoption. The technology should be considered foundational much like TCP/HTTP are foundations of Internet communications. But given the massive potential for lowering costs and complexity in all kinds of applications, blockchain has to be taken seriously as a potential game changer that will affect the way all of us conduct commerce in the future.
Don’t quite understand the technology yet? Don’t worry - before you get your head around that, the 3 most important things to know are:
Want to know more about how blockchain technology works and how it might affect your industry? Watch the on-demand webinar,' Why you should care about blockchain' now.
