It’s not very often that a truly world-changing invention comes around, something with the potential to transform entire industries. The personal computer, the internet, smartphones; each of these was initially met with resistance – some even suggested that these breakthroughs had no future, but we all know how those stories played out. Enter blockchain technology.
It is a truly revolutionary idea, and potentially one of the modern world’s greatest inventions, but it is still shrouded with mystery.
When most people think of blockchain, they think of cryptocurrencies, like bitcoin or ether, but the technology is far more than just digital money. It is the tech that makes cryptocurrencies possible, yes, but it is also the tech that has the potential to transform every major industry on the planet, it even has the power to create an entirely new internet.
What is blockchain technology and where did it come from?
The story of blockchain and bitcoin are one in the same.
It begins with a social and political movement centered on cryptography and privacy. This group of individuals, called cypherpunks, predicted an internet wherein data and personal information was unprotected and potentially used in malicious or undesirable ways by corporations or government entities.
From this, the notorious Satoshi Nakamoto was born.
Nakamoto was responsible for the original bitcoin whitepaper: Bitcoin: A Peer-to-Peer Electronic Cash System. In this paper, he/she/they outlines a plan for a brand new digital currency built on a digital distributed ledger, now called blockchain.
Nakamoto’s blockchain was built using three core technologies: cryptography, peer-to-peer networks, and a software protocol to bring everything together.
Blockchains are created as a chronological order of transactions, cryptographically secured from one block to the next, and distributed amongst a number of computers within the network called nodes. These nodes are responsible for maintaining the blockchain, processing transactions, and discovering new blocks. Currently, most blockchains do this through one of two different protocols: Proof of Work (PoW), Proof of Stake (PoS).
Proof of Work relies on miners who ‘work’ to discover a new block and verify transactions. In this, miners essentially trade computational power with the prospect of a reward as an incentive to maintain the blockchain and achieve consensus, the core principal which ensures both the integrity and immutability of the blockchain. Over time, mining becomes increasingly difficult, requiring more and more power to discover new blocks.
Satoshi Nakamoto notes: “Proof-of-work has the nice property that it can be relayed through untrusted middlemen. We don’t have to worry about a chain of custody of communication. It doesn’t matter who tells you a longest chain, the proof-of-work speaks for itself.”
The PoW process has been criticized by many due to its incredible electricity usage, leading to new concepts to keep the blockchain growing.
Proof of Stake is a more recent development wherein the creator of a new block is determined by a users’ ‘stake’ in the blockchain, or how many coins they possess. This was in direct response to the foreseen challenges in the PoW concept. In the PoS protocol, transactions are still verified by individuals by processing complex equations, however they are incentivized through transactions fees, as there is no reward for the creation of a new block. Each individual receives transactions to verify based on the amount of coin they hold.
The PoS concept also addresses another issue. In the PoW process, a lot of electricity is used, and in turn, miners must exchange their cryptocurrency to fiat in order to pay the bills. In the PoS concept, it is in a participant’s best interest to keep the cryptocurrency within the ecosystem.
The many different types of blockchains
Just as there are many different types of cryptocurrencies, all servicing different purposes, there are also many different types of blockchains, all of which operate in different ways.
There are two basic categories in which different blockchains fall, public blockchains and private or federated blockchains.
Public blockchains are owned by everyone, decentralized, trust free, open, and anonymous.
The first and most popular public blockchain, bitcoin, was launched in 2008. Bitcoin is primarily a means to exchange coins. Bitcoin operates on a peer-to-peer network using a Proof of Work protocol. Miners compete for the prize, a set amount of bitcoin, awarded when a new block is discovered. In addition to the reward, miners are also incentivized through transaction fees paid by users of the network.
While Bitcoin was the first blockchain, it is not without its own innovations. Currently, developers are working on off-chain solutions which will allow the network to scale, deal with more transactions, and even build smart contracts.
The Lightning Network (LN) is one such development. The LN is a protocol which operates on a second-layer of a crypto-blockchain. It is essentially a peer-to-peer micropayment system which operates in a similar chronological format to the original blockchain. To participate, a user will commit a set amount of on-chain cryptocurrency in order to spend it within the LN. The user will then open a payment channel between whomever they would like to pay. Finally, when they have exhausted their balance or if they are finished transacting, the channel can be closed, and the bitcoin from the user’s wallet would be transferred.
Another upcoming addition to the Bitcoin blockchain is the RootStock (RSK) platform. RSK is a peer-to-peer smart contract sidechain that is connected to the Bitcoin. Sidechains are basically separate blockchains which remains connected to the parent through a two-way peg. Bitcoin miners are incentivized to maintain the sidechain through a process called ‘merged mining’ which includes an additional reward for new blocks discovered. The RSK platform is highly compatible with Ethereum, and can create similar smart contracts, and even alternative cryptocurrencies in the same fashion.
Ethereum is another public blockchain. Created in 2013 by Vitalik Buterin, Ethereum opens up a new realm of possibilities in the blockchain world and is arguably responsible for accelerating blockchain adoption throughout many of the world’s major industries.
Ethereum, like Bitcoin, currently operates under a PoW protocol to create new ether, the platform’s currency, but recent news suggests a switch to PoS may be on the horizon.
Ethereum’s key potential is highlighted in its capacity to build smart contracts on top of the blockchain. Smart contracts gave developers the opportunity to create entirely new cryptocurrencies, decentralized applications, and even decentralized autonomous organizations, a feature that no other blockchain offered at the time.
Private and federated blockchains are privately owned, centralized, require permission to alter, and accessible only by trusted, predetermined parties. These platforms are created especially for enterprise and industry use.
Two key developments within this space are R3’s Corda and the Ripple Consensus Network.
R3, a distributed database company and growing consortium of firms interested in the research and development of distributed ledger technology, built Corda, a platform fine-tuned to operate within the financial world. Because of its complexity, it is not limited to finance – it has also caught the eyes of the energy industry, healthcare, and even governments. Corda has no underlying cryptocurrency and no miners involved in maintaining the network. Instead, nodes are assigned and controlled by predetermined individuals or companies in order to process transactions.
Another platform that falls within the ‘blockchain-inspired’ space is Ripple Labs’ Consensus Network. Ripple is unique in that it does have an underlying cryptocurrency (XRP) used in the processing of transactions, though it is not minable. Instead, a set amount, 100,000,000, XRP was created. In its protocol, which is primarily used by banking institutions for fast, fee-free transference of fiat currency, a tiny amount of XRP is burned or destroyed.
What industries are using blockchain technology?
Blockchain technology is completely transforming the way businesses are run and how transactions are made. From finance to charity, no stone is being left unturned.
The financial sector is easily the most susceptible to disruption through blockchain technology, and major institutions from around the world are beginning to jump on board. The benefits of a distributed digital ledger are clear. Faster transactions, greater transparency, and higher security cut costs within the industry and save time for consumers. Using blockchain technology, it is estimated that the banking industry could save upwards of $20 billion in middleman costs alone.
In addition to finance, the $1 trillion pharmaceutical industry is also on the chopping block. Not only could the industry save millions in the industry’s supply chain management, it could also prevent losses and ensure the quality of a specific product, ultimately saving lives. Global shipping giant DHL is at the forefront of this movement, with Scott Allison, President, Life Sciences & Healthcare, DHL Customer Solutions & Innovation, noting: “We have established one of the world’s most substantial blockchain-based track-and-trace serialization systems, spanning 6 geographies and populated with +7 billion unique pharmaceutical serial numbers.”
Though blockchain technology is reshaping capitalism, it is not limited to enterprise. Humanitarian efforts are also being transformed. The United Nations has been a significant advocate of the technology, creating several initiatives including a program to provide refugees who have lost everything with identity and the formation of a blockchain coalition to fight climate change.
What are blockchain’s drawbacks?
Despite its disruptive properties, blockchain technology does have a few challenges to overcome before taking over the world. ‘
Blockchain technology uses a lot of electricity, and as more and more industries flock to the tech, its carbon footprint will only grow. This is one of the driving factors in moving away from the previously mentioned Proof of Work concept, with many suggesting that a shift to Proof of Stake could be a possible solution to this dilemma.
In addition to the tech’s increasing energy usage, the lack of a clear regulatory framework also threatens to rain on the blockchain party. The decentralized nature of blockchain technology and the fact that there are no defined, industry-wide security standards make it difficult to convince the world’s leading industries to adopt this technology, which is why many are choosing the path of private, ‘blockchain-inspired’ platforms. Vitalik Buterin notes: “The main advantage of blockchain technology is supposed to be that it’s more secure, but new technologies are generally hard for people to trust, and this paradox can’t really be avoided.”
The future of blockchain technology
While blockchain technology is actively turning just about every industry on its head, one of the more exciting applications of the technology is the prospect of a new, decentralized internet.
There were a number of factors that led to the internet as we now know it. From better connections to enhanced communication channels, these developments ushered in a new era of content curation and social communication, in addition to modern web services such as online banking or streaming video that we know and love. The problem, however, was this transformation created a lapse in data collection oversight, allowing corporations to grow and prosper from the use of personal information.
This is the very same series of events the cypherpunks of the pre-bitcoin internet predicted. Julian Assange explains in the book, Cypherpunks: Freedom and the Future of the Internet: “The internet, our greatest tool of emancipation, has been transformed into the most dangerous facilitator of totalitarianism we have ever seen. The internet is a threat to human civilization.”
But the solution may be just around the corner.
Many suggest that blockchain technology will be the foundation of an entirely new internet, one in which users are in control of their own data. From file storage to social media, the re-decentralization of the internet has already begun.
The blockchain revolution is catching fire, and though it still faces numerous challenges, it shows no signs of slowing.