BLOCKCHAIN: THE FUTURE OF TRANSACTION?

blockchain 1

Written by Søren Gyde Sønnichsen with great input from David Yerger from Bitgo.com

Many people heard about Bitcoin in late 2013 when the so-called Cryptocurrency suddenly surged over 700% in value within less than 2 months, making early investors overnight millionaires. The following 2 years Bitcoin shook off almost 80 % of the peak value, while people discussed whether this seemingly volatile Cryptocurrency really is the future of payments. Is it secure enough? Can we have a stable economy without any room for monetary policy? The real innovation, however, is the technology underlying Bitcoin; the Blockchain.

The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. Once a transaction is added to a block, it is virtually impossible to remove it. Thus, you have a distributed chain of records, transaction history, time stamps of events, to refer back to. Those shared records are distributed across a global network updated in real-time.

Since 2013, the blockchain technology has begun to step out of the shade of the cryptocurrencies as blockchain companies have received almost $1 bn between 2014 and February 2016. Companies and investors alike are recognizing that bitcoin is just one of a wide range of applications. Imagine a world where you can buy a house in the Seychelles within half an hour while you are sitting in a café in France. Doing so with proper digital identifiers can reduce fraud of digital transactions to almost zero. The applications extent to voting, supply chain management, distribution of sensitive medical records or even reselling of concert tickets or limited edition shoes.

 

IoV: Internet of Value?

Recently, at a blockchain event hosted by VLAB at Stanford Research Institute, John Wolpert of IBM, noted that the buzz around this technology reminded him of the early years of the Internet 20 years ago. He attended an Internet event in the same auditorium back then where there was the same sense; the Internet will have a massive impact on our society.

Great innovation of the Internet in the early days was the ability to store and share information across the world at unparalleled speed. In recent years, Internet of Things (IoT) has evolved as the “second generation” of the Internet as we are becoming more and more connected to our material belongings through the Internet. We are storing massive amounts of data on the Internet, generated not only by our smartphones, TV’s or Coffee Machines but also generated by ourselves.

blockchain 3One might perceive blockchain as an Internet of Value (IoV). It is a database protocol that is extremely well suited at storing and sharing information about valuable assets because it is decentralized and distributed. In essence, blockchain is a chronological chain of bundles of information or “blocks”. The cryptographic nature of blockchain insures that no one can counterfeit or change it.

The fact that it is decentralized and distributed means that everyone is able to not only to use it but also to manage it because everyone on the blockchain holds a copy of the database as well as a “wallet” with a private key. This makes every user able to verify every transaction and in effect verify the assets of any user’s wallet and track the transaction history of the assets. It is exactly the secure verification that makes blockchain suitable for e.g. exchange of sensitive medical data or valuable assets that are easily counterfeited today such as art.

Of course, every user will not spend time verifying transactions – this is taken care of by so-called miners, who are paid (in Bitcoins) to verify transactions. The order of verification is random and the miner, who “solves” the “verification puzzle” the quickest, is paid. The “verification puzzle” takes a large amount of computing power to solve fast but once a miner has solved it the solution is easy to verify. This means that the transaction is not instant and can take anywhere between minutes and up to half an hour but miners are incentivized to solve them fast as only the fastest get paid.

Still, this speed of transaction and (importantly) verification of authenticity is unprecedented and the decentralized nature makes it insusceptible to corruption as it would be extremely difficult for any one person to take down the entire system since everyone holds a copy of the database.

 

Buying property on the blockchain

Returning to an example of a possible application of blockchain. Consider the steps involved in buying a house: a mortgage is issued almost instantaneously by a blockchain enabled auction and the investor (which could be a bank, a private investor or a crowd of investors) enters into a smart contract with the house buyer where the bank, as an intermediary, is cut out. The smart contract is self-executable in terms of making payments and continuously monitors and verifies whether all parties involved are upholding the conditions of the contract. Ownership of the house and payment are transferred on a blockchain betweeblockchain 2n buyer and seller, using Bitcoin or some other cryptocurrency. As there is no need for any human intermediaries (such as banks or lawyers), blockchain reduces the economic deadweight loss associated with these intermediaries, increases the overall economic surplus and potentially benefits both the owner of the mortgage and the house owner.

Consider the possible impact in developing countries where a well-functioning financial system is not present. A local farmer might not be able to loan money to buy a piece of land. No international bank will be willing to lend him money because there is no way to assess the assets of the farmer or the actual value of the piece of land. If property was exchanged on a blockchain, the bank could instantly verify (from anywhere in the world) the previous traded price of the land and verify the assets of the farmer, possibly enabling an extension of a loan and ultimately supporting economic growth.

When talking about Bitcoin, it is also worth mentioning that this removes the need for a central monetary institution such as a central bank. This could have a positive impact in countries with e.g. hyperinflation because of a corrupted monetary system or a central bank with no credibility. This will however be a drawback in countries that successfully use monetary policy to support economic growth in recessions and contain economic activity in booms.

 

Impacts of the Blockchain: Today and in the future

Today, the bitcoin blockchain manages around 200,000 bitcoin transactions a day, moving US$150 million around the world without interaction with any bank or financial intermediary. As mentioned in the beginning, a lot of funds are flowing into companies ´which are developing both consumer- and business oriented blockchain enabled applications.

Critics question the security because the decentralized nature of the database means that no central entity is able to step in and prevent a breach; the blockchain maintains itself, so to speak. Security is not an issue when assets are stored on a blockchain, however, security is a massive concern when those digital assets are secured in private “wallets” as is the case with Bitcoin. If the private key to this wallet is compromised, there is no way to retrieve your digital assets. However, many companies are working on how to strengthen security practices to reduce the likelihood of wallets being hacked. An example of a company is BitGo. This is an enterprise wallet and security company. More than $1 Billion USD moves through BitGo wallets each month by global businesses. They do this without taking custody of your funds, you maintain your funds. They enforce the security measures, policy and treasury controls on your behalf when you are ready to send a transaction.

Blockchain technology is already impacting international payments. Exchange infrastructure is in over 100 countries around the world. The questions no longer remain as to if this technology will change the way we live – the question is when. The possible applications are abundant but it remains to be seen whether blockchain is all hype or it actually will change the world with the same magnitude as the Internet indisputably has done.

blockkchain 4

Sources:

CoinDesk

CB Insights

BitGo

Related Posts Plugin for WordPress, Blogger...

Leave a Reply

Your email address will not be published. Required fields are marked *