Demystifying Blockchain
Technological innovations such as robotics,
artificial intelligence, cloud technology and
the mobile economy have established
themselves very quickly over the last few
years through developments like social
media and digital identities, and have now
become a key element of the commercial
and social economy (e.g. sharing economy,
crowdfunding).
It is therefore important
for companies to understand the impact
of these technological advances on their
business models so that they can adapt
themselves to new circumstances. The
ability to change is now a necessary if not
vital skill that companies must possess
if they are to defend or expand existing
competitive advantages and market
shares. These adjustments result in a
transformation strategy that makes the
difference between success and failure.
In
recent years the world has demonstrated
on numerous occasions how former
market leaders such as Kodak1or Nokia have continuously lost market share due
to a lack of transformation strategies and
ultimately exited the market. To prevent
this, companies must examine these
innovative technologies on an ongoing
basis and evaluate whether and what
change they could bring about
. Driven by
Blockchain technology, there is a level of
hype similar to that seen prior to the first
commercial use of the Internet.
The World Economic Forum defines
Blockchain technology as follows:
Blockchain or distributed ledger technology
(DLT) is a technological protocol that
enables data to be exchanged directly
between different contracting parties
within a network without the need for
intermediaries.
The network participants
interact with encrypted identities
(anonymously); each transaction is then
added to an immutable transaction chain
and distributed to all network nodes.
As a result, Blockchain is expected to
offer enormous potential for bringing
about radical change in a wide range of
industries, business models and operating
processes such as payment settlement,
accounting or the use of customer and
loyalty cards.
In view
of the technical complexity and the lack of
acceptance of these far-reaching changes
in the private, public and commercial
sectors, this new technology will in all
probability only catch on gradually and
depending on how it develops over the
coming months and years. It is therefore
less a question of whether Blockchain will
establish itself and more a question of
when and in what areas.
Trust is an integral part of any dealings
between two or more contracting parties.
This trust is generally created by involving
organisations or specific groups of people
as intermediaries. Ongoing globalisation
and the growing complexity and volume
of global transactions are making this
approach increasingly difficult, as it is
becoming ever more time-consuming,
costly and thus inefficient. Furthermore,
the events of the last financial crisis showed
that this intermediary-based system is
highly vulnerable. This led to a huge loss
of confidence in the prevailing system
and a shift towards the development of
alternatives, which in turn gave rise to
Bitcoin
.
Experts have now recognized the potential
not only of bitcoin but in particular
that of the Blockchain technology that
underpins it. Organisations and companies
are conducting extensive research and
development into Blockchain. This new
technology represents a promising
alternative to the current organisational
and technical infrastructure, one that
is needed to rebuild the trust between
organisations, companies and private
individuals. A significant portion of
Blockchain’s potential lies in the simple,
technology-driven way in which the
required trust and security platform and
structures can be developed in order to
facilitate efficient business activity. For
many organisations, this trust element is
a strong argument in favour of exploring
Blockchain.
Another key factor in Blockchain’s future
success will be the technological progress
made with regard to scalability.
The current high energy requirement and
verification (mining) of new transactions
due to proof of work usage means
Blockchain is reaching its limits in terms of
scalability. Blockchain technology requires
each new transaction to be matched
with the global register of existing parts
of the Blockchain by means of a “hash”.
New transactions first have to be verified
by the “miners”, resulting in a time delay
of around ten minutes. Research teams
are already working on reducing the
transaction time and memory size. The
technological challenges could also be
overcome in future through higher server
and broadband capacities.
The digital currency bitcoin is probably the
best known application of Blockchain and
is even better known than the Blockchain
technology on which it is based. Bitcoin
highlighted the potential of DLT and
identified other practical applications of the
technology. The way in which Blockchain
technology works is explained below using
bitcoin as an example.
The cryptocurrency, a digital payment
method based on cryptographic principles,
is generated via a large number of
Internet-linked computers with the aid of
a mathematical formula and recorded in
a database that is managed decentrally
by all participants. The currency can be
transferred directly by means of a special
peer-to-peer application, in other words
without an intermediary. Encryption
technologies ensure anonymity and
ownership structures in the Blockchain
To understand the difference between public and private blockchains,
consider the difference between the Internet, which is public and
available to everyone, and intranets, which are created by specific
entities and only available to certain individuals with permission.
Public blockchains are decentralized and accessible to anyone,
regardless of their affiliation. Transactions are publicly verified and
remain in the public domain. To ensure the integrity of the system
and to validate transactions, financial-incentive and consensus
mechanisms are built into the system. Crowdsourcing is an advantage
of public blockchains, which are outside the control of any private
or governmental entity. Because a public blockchain is available to
anyone, improvements are made by consensus of the participants.
Open access encourages greater participation and makes it more
likely for public blockchain networks to be employed in a wider variety
of applications. Importantly, public blockchains offer the potential
for reducing transaction fees. In the Bitcoin network, for example,
the average processing fee for a Bitcoin transaction is .04 cents,
compared to more than .35 cents for a typical credit card transaction.
Private blockchains are set up and maintained by a private entity.
Security protocols control and limit access to authorized parties.
Transactions are verified within the private blockchain and can
potentially be altered within that private network, which enables
operators to correct errors. This feature is not permitted in public
blockchains, in part because it can create security risks. There are
two types of private blockchains: consortiums, which include preselected
participants from a variety of organizations; and fully private
blockchains, which are limited to participants from one organization.
Private blockchains can authenticate transactions more quickly—
generally within seconds—because they operate on networks that are
more centralized and are made of up fewer computers. In contrast, it
can take as long as two hours to authenticate a Bitcoin transaction,
which happens on a globally distributed, public blockchain involving
thousands of unaffiliated computers.
How is Blockchain evolving and what does it mean to me?
Blockchain remains at an experimental phase inside many large firms today. Also, the first level of disruption seems more likely for the Financial industry, in the payments space. Here traditional transactions such as money transfers, credit and debit card payments, remittances, foreign currency and online payments, require an intermediary such as a clearing house or a financial institution. In these cases, a transaction would occur directly between the buyer and the seller, without any intermediary and the validation of the transaction would happen in a decentralized way or ‘distributed ledger’.
However, Blockchain has the capability to become the ‘internet of money’ parallel to the world of IoT, directionally. Also, we are seeing interest in Blockchain beyond the world of Financial Services. So, even though Blockchain is starting with some narrow objectives, signs definitely suggest wider usage and broader adoption.
For a large scale adoption to be successful, technology would have to scale well, as more companies participating would mean more nodes where the blocks would have to travel to. Also, since addition of each node drives exponential data growth in every node, bigger chains would drive Blockchains to grow more than 200 peta bytes/year. This could completely overwhelm the bandwidth of any node’s connection. However, today we have companies like Amazon, Facebook and Netflix, which run distributed databases at massive scale. Similar technologies are powering Blockchains, and hence, their ability to scale is almost certain.
Another key point would be building of consortiums and communities to standardize on Blockchain protocol and platforms. Today, it seems fairly fragmented, but we believe once some networks reach critical mass they will drive convergence amongst participating networks.
So, today you may not be able buy a Sandwich with Blockchain like you can with your Visa card. However, the world is getting ready to setup a massive Blockchain network behind the scenes that might drive a uniform digital currency, enabling us to pay without middlemen like Visa!
For people looking for more information regarding Blockchain or want to learn blockchain I suggest this book
http://www.amazon.in/Blockchain-Revolution-Technology-Changing-Business/dp/1101980133
In the coming post will talk about the pros and cons of Blockchain technology
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