Created In 2008, the Blockchain concept was introduced as a new way of establishing trust between trusts-less transacting parties. It has been the base protocol for the crypto-currency Bitcoin. Today however, Blockchain can have applications that venture far beyond its’ original intent.
It is an approach (and yes, innovation) that could change the speed and fundamental fabric of how transactions in its’ ‘broadest’ sense (financial, data, assets, information) are being achieved.
Blockchain is different from anything else in use on the market today it works via a public and fully distributed network of nodes and users to move any ‘digitalized’ asset from peer to peer. As such, anyone can access the ledger and see the transactions which are validated without any direct intermediate party or facilitator.
Nodes participating in a Blockchain distributed ledger system validate the accuracy of a ledger through a ‘consensus’ method, very similar to how any other group reaches a consensus via a majority decision. To safeguard a consistent view of the ledger (to all), there are a number of different consensus algorithms that are existing: Proof of Work, Proof of Stake, Proof of Activity, Proof of Burn, Proof of Capacity, Practical Byzantine Fault Tolerance, etc.
So, everybody’s collective transactions are stored in a ledger, distributed in a peer-to-peer network. The end-to-end transparency of the blockchain is ensured as transactions are recorded in blocks which are cryptographically secured and ‘chained’ together (old to new), thus providing an unbreakable record of data.
In its’ essence, Blockchain is a distributed database technology that allows for potentially complex trust relationships between database users.
Distinction is often made between permissionless and permissioned blockchains. Permissionless blockchains allow anyone to participate and are most commonly used in cryptocurrencies. They assume no trust between participants Permissioned blockchains restrict access in terms of who can perform various actions on the blockchain. They assume some levels of trust, and are potentially more useful for many business applications than permissionless blockchains.
Blockchain doesn’t require intermediate party or facilitator to authenticate or to settle and confirm transactions. It is by design global and distributed and can by default record any structured information, not only financial transactions.
Today, Blockchain is mostly permissionless of which Bitcoin is the most well-known. The Blockchain itself, the underpinning technology, however, is the biggest innovation. The concept of a distributed database where trust (and truth) is ensured via software and mass peer-to-peer collaboration is what is forcing to rethink existing business models and processes.
The implications are vast as the Blockchain indeed eliminates the need for a ‘central authority’ or organization to validate trust and the final transfer of value (or information). Just imagine the number of ‘central authorities’ you are involved with on almost a daily basis: you have to pay the rent via the bank, you have to enter an insurance claim for that small accident you had, you want to buy some online music for download on your phone, your passport has expired, it’s time to book a weekend away from work, you are looking to purchase a house, your new employer requests a copy of your diploma, etc.
We can all think of hundreds of these ranging from money, registers, registrations, notary, identities, tickets, medical files, etc. to all physical equipment connected to the internet.
Internet of Things
Everybody talks about Internet of Things were all kinds are connected and objects are becoming more and more autonomous. Also in this area Blockchain has an added benefit. In this domain, we need to speak more about smart contracts, smart things and proof of ownership. The main idea is that most rules and agreements can be programmed on a Blockchain (think your fridge detects that it’s broken, cuts the power to the non-essential devices in your house based to avoid overall failure via an agreed sequence and priority, triggers the maintenance crew and authorizes the payment if the Blockchain knows if agreements have been kept or not). If you are interested in this, in one of my next articles I will deep dive in ‘Decentralized Autonomous Corporations’.
Blockchain will evolve over time. There are many other examples of value / information transfers that are critical in the current economic fabric. Decentralizing information and transactions whilst ensuring transparency and trust has significant merit. Bind this with tokenized (physical) assets, it is obvious that we will see a significant growth applications based on Blockchain.
Additionally, Blockchain is Digital by design. Documents, assets (even tokenized physical assets) and information are expressed in code and added to a decentralized ledger allowing proof of ownership and transfer on the Blockchain.
Blockchain has the intrinsic potential to become the most disruptive technology and approach in the next decades as it evolves further. It’s however not a solution for everything. At this stage, the use of Blockchain needs to be carefully validated on a case-by-case basis whilst considering the total cost of a distributed ledger compared to one single ledger and the more immediate benefits of such classic models.
This article was originally published on my LinkedIn page and modified for public reading.