Over the last few years, the buzz about blockchains has gone up immensely. In 2015, banks across the globe had invested around $75 million on the technology. By the end of 2019, that figure will have jumped to $400 million – clearly underlying the fact that Satoshi Nakamoto’s (whoever he or it or they is/are) innovative distributed ledger platform is only at an early stage of growth at present – and will gain even more recognition, understanding and popularity in the near future. The mounting interest in blockchains is also reflected by the huge investments made by venture capitalists on companies in this sector. Tech biggies like Microsoft, IBM and PwC have already started to work with the technology, and in today’s discussion, we will take a look at some interesting tidbits about blockchains:
The need for blockchains
While internet services are essential in a truly ‘shared, secure economy’ – their presence is not quite a sufficient condition. By nature, web-based services are created to manage, store, transfer and monitor ‘information’ – and they are generally not engineered to create ‘value’ (i.e., internet can make business processes more efficient, but cannot change the processes per se). Blockchain, often referred to as the ‘internet of value’ (IoV, anyone?) plugs that gap effectively. Also, unlike traditional internet tools and portals, blockchains do not have any centralized servers – and do not have any fees payable for its services (since there are no intermediaries or so-called middlemen). Blockchains are required for direct, peer-to-peer exchange of value, through a robust digital channel. Implementation of this distributed ledger technology also ensures greater engagement levels (a large cross-section of people cannot afford the services of intermediaries), and also offers greater data privacy and confidentiality.
Understanding a blockchain
The name might seem rather nerdy, but blockchains actually represent a fairly simple digital technology. To put simply, a blockchain is a one-of-its kind digital ledger or recordkeeping device – that tracks and records all transactions in a network. A new ‘block’ is added to the ‘chain’, every time a new transaction takes place on a particular asset (apart from financial transactions, blockchains are also used to store activities involving cryptocurrencies, retail transactions, medical records, supply chain data, and a host of other types of transactions). Every relevant member on the network can view a transaction (say, between Person X and Person Y), although the two parties actually involved in the transaction might opt to keep their identities hidden (or use pseudonyms). In other words, a blockchain system is just like a public ledger, where the transaction records are distributed to all interested parties. The information chain (with time-stamped blocks) is made secure with public-key cryptography – and no single user can modify or delete or tamper any ‘block’ of information on his/her own.
Note: The initial block in a transaction chain on a blockchain is called the ‘genesis block’ (numbered 0 or 1). The individual blocks are connected to each other with the help of code snippets called ‘hashes’.
Who invented blockchains, anyway?
Ah, that’s something no one quite knows for sure till now. All that is known is that the first white paper, introducing blockchains, was published on 31 October 2008 – and the first ‘genesis block’ was mined back in January 2009. At first, it was widely believed that a man called Satoshi Nakamoto had invented the technology (he was also credited as the inventor of the bitcoin cryptocurrency). However, the ‘actual Satoshi’ categorically stated in 2014 that he had got ‘nothing to do’ with bitcoins or blockchains. Since then, the names of Michael Clear (cryptography graduate from Trinity College, Dublin) and Craig Steven Wright (Aussie coder and entrepreneur) have surfaced as the real names of Satoshi Nakamoto. There is also a suspicion that the three men who filed the ‘encryption patent application’ (Charles Bry, Vladimir Oksman and Neal King) might well have collectively worked under the pseudonym of Nakamoto. The three have, however, denied this. The brains behind blockchains are still unidentified, and it makes for delightful tech gossip!
The operation of blockchains
We have already explained the nature and main purposes of a blockchain. Let us now get an idea of how a distributed ledger actually works. The process starts with a transaction request from Entity 1 to Entity 2. A ‘block’ is created to represent that transaction on the network, and that ‘block’ gets automatically distributed to all the authorized, interested nodes. All these other network members have to approve the transaction (i.e., assure the validity of the transaction). Once that is done, the ‘block’ gets added to the ‘chain’, and the transaction now takes place between the two parties. The transaction details get shared on the ledger of all the members of the system (as indelible records). That, in turn, makes the entire system transparent and makes sure that everyone is aware of all the relevant transactions. All forms of digital currency transactions can be recorded on a blockchain – and the system also ensures that a bitcoin is used only once.
Note: In the financial services sector, blockchains have already proved to be instrumental for removing the (often significant) time-gap between transaction and settlement. Disintermediation is the biggest reason for this.
Can blockchains be hacked?
Anything that uses digital resources can, in theory, be hacked. However, hacking a blockchain is, for all practical purposes, almost impossible – and the technology, hence, makes transactions and big data more secure than ever before. Since blockchain is a ‘distributed technology’ and is completely decentralized, there are no centrally located servers that can be targeted by hackers. The information stored in the system is shared across all the nodes of the architecture, and is present in the computers of all involved data miners. In order to be able to successfully hack a Blockchain ledger, all the records in a chain of transaction have to be separately tweaked (every block is connected to a previous block, creating a chain-like structure). Experts opine that the cost of hacking a blockchain (in terms of invested time and resources) is generally higher than the potential benefits from doing it. Blockchains might not be hack-proof, but it’s the closest thing to being so.
The bitcoin revolution
The blockchain technology was introduced as a platform for recording transactions of the Bitcoin digital cryptocurrency (released in 2009). Bitcoin transactions are either anonymous or (more popularly) pseudonymous, and transfers are made/received at pre-specified ‘Bitcoin addresses’ (there are no mutual trusts required for the transacting parties). Due to its nature, it is extremely difficult to trace the movement of bitcoins (unlike, say, credit card payments or wire transfers). The distributed ledger is periodically edited by the network, after checking the available balances at different ‘Bitcoin addresses’. New, unconfirmed bitcoin transactions are checked at intervals of ten minutes by ‘bitcoin miners’, who allocate the necessary computing and processing power in exchange of a certain amount of the cryptocurrency. In 2016, this ‘reward’ was slashed to 12.5 bitcoins for every completed block (it started with 50 bitcoins/block; the amount is decreased after every 4 years). With a market capitalization figure of ~$67.5 billion, bitcoin is by far the most popular cryptocurrency in circulation at present. Ethereum (market cap ~$30 billion) occupies the second spot.
Note: The price of one bitcoin is more than $4000 (subject to occasional dips, like the one this July). In comparison, the rate of a unit of Ethereum varies in the $310 – $330 range.
The concept of smart contracts
In a blockchain’s rule-oriented transactions ecosystem, ‘smart contracts’ take up the role of middlemen, and ensure that everything is optimally automated. Advanced coding goes into the creation of these contracts, along with preset deal workflows, sensor services, distributed apps and custom APIs. The ‘smart contracts’ get triggered whenever certain conditions are fulfilled (for example, blood sugar levels in a medical report, or wattage in an electric meter going above a predetermined level) – and the requisite actions are initiated. From intellectual property management, banking and financial transactions, and 3D printing, to manufacturing and delivery logistics – everything can be efficiently managed by the blockchain ‘smart contracts’. In the distributed ledger, all business rules are pre-programmed by these contracts, and all members of the network are notified of the same.
Note: Solidity is a Turing-complete programming language created by Ethereum. It is used for the purpose of coding smart contracts.
The role of Keys
For recording bitcoin transactions on a shared ledger, users need to have their unique ‘private key codes’, which serve as their passwords to the blockchain system. Every private key is associated with a specific ‘bitcoin address’ (the key, hence, serves as user-credentials) – and smart contracts can be coded only after a network-member has entered his/her key. The ‘private key’ of users is stored in their respective ‘wallets’. Outside of bitcoin transactions, keys can be ‘private’ or ‘public’, on blockchain systems. In broad terms, a public key can be explained as the tool from which ‘public addresses’ on blockchains are generated (via cryptographic hashing).
Impact of blockchains on employment
Blockchains are being created and implemented by…well, anyone involved in digital transactions (including IoT), for the verification of the ‘transaction blocks’. Since this verification process becomes automated in the system, the technology can potentially replace a large percentage of the mid-level accountants – who perform the same verifications manually – across the world. What’s more, the digital representation of contracts (i.e., the ‘smart contracts’), can do away with the need for drawing up the same contracts repeatedly, and hence, the need for many lawyers. However, these perceived employment losses would be more than offset by the increased opportunities offered by the new technology – with a strong, well-trained workforce required to manage blockchains and use them in an optimized manner. In a nutshell, digital distributed ledgers would increase the demand for ‘qualified workforce’, while reducing the need for repetitive manual work. Firms are chasing greater efficiency with blockchains – and the technology is being adopted in a wide range of industries.
Note: To know more about the main application areas of blockchains (apart from financial services), click here.
10. The downside of blockchains
Ross William Ulbricht, the founder of the world’s first cryptocurrency-based illegal ‘darknet market’ called ‘Silk Road’ (for buying/selling drugs), was sent to life imprisonment in 2015. However, the success (albeit, for a limited period) of Silk Road (v.3.0 was pulled down earlier this year) showcased a way in which the blockchain technology can be misused. As previously mentioned, the system allows for anonymous transactions (owner data can remain hidden) – and only the transaction details are entered into the shared ledger. As a result, malpractices and illegal trading with bitcoins can be initiated by shady third-party users. As the blockchain market matures over the next few years, this issue is expected to be resolved. It is a powerful technology, and developers have to ensure that it is not being used for underhand practices.
Blockchain is still a fair way off from becoming mainstream, with the market expected to mature in 2025 (it is currently in an ‘early adoption’ stage). The growth in the interim is all set to be remarkable, with both leading tech giants as well as a host of startups (Slock.it, Enigma, SETL) becoming actively involved in developing/leveraging the technology. To sum up, the open-source blockchain distributed ledger replaces centralized gateways/servers and delivers cutting-edge recordkeeping services for all types of digital transactions. Easily one of the growing technologies to watch out for!
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