Blockchain has been around for some time now and may seem like an intimidating concept to comprehend. On the contrary, blockchain is an easy concept to comprehend and offers many opportunities to improve our lives.
Blockchain technology has been touted to cause a shift in how businesses function to other aspects of daily living. Blockchain technology was introduced in 2009 to send payments between two parties, digitally and anonymously, without a third party to verify the transaction. It was initially designed to authorize and log the transfer of cryptocurrencies, a digital coin that runs on a blockchain.
Today, blockchain is one of the biggest buzzwords. So, what exactly is blockchain? It is essentially a shared database or a distributed ledger with entries that must be confirmed and encrypted with every entry dependent on a logical relationship to the previous entries, while providing a tamper-proof solution to sensitive information.
Figure 1: Five forces of blockchain
Source: Brian Behlendorf, Hyperledger Project at Linux Foundation
To gain a better understanding we need to understand the opposite of blockchain – a centralized ledger. Whenever we use a debit/ credit card, we swipe the card at a store for a purchase and the merchant sends the bill to the bank. The bank verifies the purchase and sends the money to the merchant before making a record of this information in a ledger.
The step of recording all the transactions made by customers is key. The ledger holds the record of every transaction, all the way back to the first transaction. The ledger is maintained by the bank and can be accessed online through your bank account. The bank is in complete control of the records and consumers can’t make changes to it.
Figure 2: Blockchain application and disruption
Source: SEAN KEATHLEY, Adrenalin Agency
If a hacker gains unauthorized access to the bank’s ledger, they could change account balances and make it look like certain transactions never happened and many other things. This can be avoided if a bank adopts a distributed ledger.
Every member of the bank would have a copy of the ledger containing every single transaction. Whenever any transaction is being made, every member will be informed of the transaction. The members would then verify the transaction and add it to the ledger.
Similarly, in the blockchain, the ledger is a block which stores each transaction. In this case, if a hacker gains access to one ledger, it wouldn’t cause as much problems, because the other ledgers can easily verify the transactions.
For example, if I were to send a friend some cryptocurrency, I would essentially be informing everyone in the network of the amount of cryptocurrency I would be transferring, and they would verify and record that transaction. This ensures that every transaction is both verifiable and secure.
One of the cons however, is that this technology is computationally expensive. Everyone updating the ledger needs to have the power to verify transactions and modify the ledger. Those verifying and modifying use their own resources and are rewarded with small transaction fees every time they do so.
These individuals ensure every transaction gets verified and added to the ledger and get paid for verifying and modifying the ledger.
Blockchain technology also increases security. One must change every single block that follows to make a change to a single block. Even if all the subsequent blocks were changed, verification would fail, because the subsequent copies of the chain would show that someone had tampered with it.
One-way blockchain changes and improves our daily life, is that it is useful for a variety of financial processes. Blockchain has the potential to replace banking processes that are time-consuming, paper-heavy and expensive, while operating digitally and offering security to transactions.
The Singapore government has turned to blockchain to prevent banks from being defrauded by traders. Fraudulent companies used duplicate invoices for the same goods to defraud the banks of hundreds of millions. In order to prevent invoice fraud, the Singapore government developed a system having blockchain create a unique cryptographic hash (similar to a fingerprint) for every invoice, and the systems would be alerted if another bank registers an invoice with the same details.
One of the first movers in experimenting with the blockchain is the financial services industry. The Monetary Authority of Singapore (MAS) has successfully completed a pilot to explore the use of blockchain for interbank payments. MAS is looking at this project as the first step in leveraging blockchain to verify and reconcile trade finance invoices, verify the performance of contracts, keep an audit trail and deter money laundering.
Blockchain is a technology that can impact almost any industry as it is able to impact next-generation technologies such as Internet of Things. Today, there are many “smart” devices that have flooded the market. Those made by the larger and reputable companies have the systems and incentives to fix security problems quickly. However, the smaller internet-enabled devices, such as lightbulbs or doorbells, are typically made by unknown companies. These companies lack the funds or ability to incorporate strong security features in their products.
The 2016 cyberattack on internet routing company Dyn occurred because of hackers taking advantage of insecure “Internet of things” devices. The solution to ensuring products are well protected could be solved using blockchains that track and distribute security software updates.
Smaller companies would program their products to check in with a blockchain system for latest updates. These companies would securely upload new updates as they are being developed. By ensuring each device possesses a strong cryptographic identity, manufacturers can communicate with the right device and push out the relevant updates. This would help device makers and customers know the equipment would efficiently keep its security up to date.
It’s clear that blockchain provides many benefits and players across different industries are jumping on board. Industry players are providing platforms which are powered by blockchain technology, to improve application security and facilitate complicated processes. What remains to be seen is how effective blockchain will be and how fast different industries adopt this technology to get a cutting edge.