New technologies with all kinds of interesting names are popping up every day, but few of them are as hyped as the word “blockchain.” This technology has the capability to reinvent the Internet and technology as we know it. From startups disrupting trillion dollar industries, to massive crowd funding campaigns raising over 100 million dollars in a few hours, to solving social inequality - blockchain is on fire!
To understand why it’s becoming such an important part of the world, let’s first take a step back and see exactly what it is, and how it came to be. Blockchain technology was first conceptualized in 2008 by a mysterious, not yet identified person (or group) named Satoshi Nakamoto.
The first technical implementation took place in 2009, when Satoshi introduced a new e-currency he called Bitcoin. In his first post on the P2P Foundation forum, he introduced it as the first “decentralized e-cash system” with no central server or trusted parties. It was also the first digital currency that solved an old problem called “double spending,” where the same digital token could be spent several times, which in turn caused inflation and fraudulent currencies.
Now, it’s very important to point out the fact that Bitcoin, and other currencies like Ether and Litecoin, are based on blockchain technology. The currency and the technology are not the same thing. A cryptocurrency is a digital currency that utilizes encryption techniques to regulate both the creation of new funds, and to verify transactions.
In the “real” world, someone could give you something, and you would own it. In the online world, you could just copy the information, and you would both own it. That doesn’t work well with currencies, and that’s the “double spending” problem Bitcoin and other digital currencies solve with something called “mining,” a complex process that verifies and adds transactions to a public ledger. Now, what does that mean?
Think of it as a decentralized and distributed digital “ledger,” just like a ledger you would use for accounting to record your transactions, but much more complex. It is a database that is shared, replicated and synchronized among the members of a network. A blockchain is a so called digital consensus system. Participants in the network govern and agree by consensus on the updates to the records in the ledger. No central, third-party mediator, such as a financial institution or clearinghouse, is involved.
In a traditional world, your money, stocks, and even identity are kept in digital ledgers. When you transfer money or ownership of the money or stocks, no physical actions take place in most cases. The bank doesn’t send cash, the stockbroker doesn’t issue new paper certificates, the transaction simply gets recorded in a digital ledger.
Traditionally, we needed a central authority, like a bank or a broker, to preside over that ledger. An accountant can’t give everyone access to his books, because then people would just add a lot of zeroes to their own account balances, right? So institutions were created out of necessity, and we trust those institutions to keep the integrity of said ledger.
Along comes the blockchain and changes everything. It records digital transactions in a decentralized manner, meaning between parties on many computers, so that the record can’t be altered retroactively (it’s very close to impossible). It also means that there is no single central point of failure. Hackers can’t hack a whole network by accessing one server or one location, and a natural disaster in one geographical area won’t affect the network.
So what does this mean? It means that you can verify and audit transactions at a very low cost, with no middlemen. You can send money to anyone without restrictions, and at any time – instantly! But blockchain technology reaches far beyond the exchange of value without any third parties involved. An open, decentralized and encrypted system allows for previously excluded people to enter the global economy.
You can store a person’s persona and digital ID in the secure blockchain, which could potentially solve the problem of social inequality and wealth distribution. An example would be the 2 billion people in this world who live without a bank account. With a digital ID, they could send and receive funds with ease.
The Harvard Business Review describes blockchain as a foundational technology that has “the potential to create new foundations for our economic and social systems.” Many advocates also describe it as a disruptive technology, as it offers lower cost, more secure and often more optimized solutions to existing business models. Fintech is a great example of a sector where many startups are disrupting how money is being transfered. Other sectors include insurance, transport and logistics, health care, entertainment and gambling.
Corporate Involvement and Alliances
Big corporations also seem to believe that blockchain is part of the future. A World Economic Forum report predicted that by 2025, ten percent of global GDP will be stored on blockchains or blockchain-related technology. The Big Four accounting firms are testing blockchain technologies in different formats. Ernst and Young has provided all their Swiss employees with digital wallets, and they accept bitcoin as payment for consulting services.
The Enterprise Ethereum Alliance sports members like Microsoft, Cisco, J.P. Morgan, Ing, Intel, Mastercard and several other major corporations, and IBM has announced a major involvement in blockchain technology.
Aside from corporations, there are whole countries adapting to the new technology. Dubai is planning to be the world’s first blockchain city, Russia’s president, Vladimir Putin, has expressed an interest in the Ethereum platform, and Singapore’s government released a report saying it has carried out a test using Ethereum blockchain technology to create a national digital currency.
The First Aspect Of Blockchain – The Money Part
One big part of the current excitement around blockchain is the financial part – the crowd funding, the valuation and the market caps for a slew of the new cryptocurrencies utilizing blockchain technology.
Startups in the space have done their own ICOs (Initial Coin Offerings), a process where a company sells its digital tokens straight to potential users, instead of approaching only angel investors or venture capitalists. Basically, it’s a crowd funded effort to raise money for a company.
Famous examples are Bancor, a new standard for cryptocurrencies, which raised 153 million dollars in three hours. That’s right. Three hours. Another company, Status, a browser, messenger and app platform, is another company that raised over 100 million dollars in a very short time. We also have Tezos, a self-governing blockchain, which raised 160 million dollars in 32 hours.
To say that they are disrupting the traditional VC funding model would be an understatement. “In the first half of 2017 we've witnessed ICO funding exceed venture capital funding for blockchain startups, and it shows no sign of slowing down. The access to faster liquidity versus requiring an IPO or sale is attractive to many traditional venture investors, and excites many smaller investors who traditionally wouldn't have access to these investments,” says John Monarch, CEO of Direct Outbound, and an avid blockchain advocate and expert.
The bull-like market has also attracted a lot of traders, who have seen a 10x, 50x, and in some cases over 100x return on their investment. Stratis, a blockchain development platform, has seen an 82,000% ROI since their ICO.
The Second Aspect Of Blockchain – The World Changing Part
The core of blockchain is the decentralized and extremely secure technology. It obviates the need for a central authority, and transfers the power and control from large corporations to the many. As mentioned above, this makes transactions fast, safe and inexpensive.
People in rural areas (or anywhere), with or without bank accounts, can now send funds instantly, without using money transferring services, and with minimal fees. Third party companies may in some cases become obsolete.
If you think about the opportunities this presents, you can see why brokers, banks, payment processors and similar entities should be a bit nervous. The advocates like to call it “Internet 3.0,” the foundation for years to come.
“Decentralized and democratized currencies have the ability to give people a say in monetary policy, inflation, issuance, and generally grant more choice. Bitcoin and blockchain were created as a response to the 2008 financial crisis and the distrust in economic decision makers - people have historically had no true choice in money, but cryptocurrencies are changing that,” says John Monarch.
Charity organizations will also benefit greatly from this new technology. It offers transparency on a whole new level, easier and new ways to raise funds, and it can help reduce the amount of corruption. The decentralized nature of blockchain also offers a significant advantage to charities operating in areas where trustworthy parties are hard to come by. For more information, I recommend the discussion paper called “Giving Unchained: Philanthropy and the Blockchain” by the Charities Aid Foundation.
In conclusion, blockchain technology is new, and it’s already causing a media storm. Its advocates insist that we are entering a digital revolution and complete transformation of how we function in a digital world. If that is true remains to be seen. We are in its infancy, and many of us are excited to see where it’s going, and how the world will change with it - hopefully for the better.