Blockchain – what is it and why do we need to start thinking about it?
Dr Ross Thompson, Programme Team Leader for Leadership and Management at Arden University discusses why we all need to begin thinking about blockchain, by exploring the principles of the technology, what the concept is all about and how the practical applications of it might impact and disrupt business, employment and society.
Introduction to blockchain
These impacts on blockchain to businesses over the next decade are likely to be considerable with many commentators calling blockchain the internet revolution 2.0. Consultancy organisation, Gartner, predict the value of blockchain contracts and commercial activity will top $3t by 2030. Another survey by Deloitte (2018) found that 75% of large corporates were either investing in blockchain or actively considering doing so.
Origins of blockchain
Blockchain can be traced back to the aftermath of the financial crisis of 2008-09. In that period, a revolutionary white paper was published under the name, Satoshi Nakamoto (nobody knows if this individual actually exists). It was this paper that gave birth to the phenomenon that is blockchain and also the rise of cryptocurrencies such as Bitcoin.
Blockchain is another word for a distributed ledger system. Ledgers are simply “filing cabinets” that hold records of transactions. Traditionally ledgers are held centrally: from think bank records, government databases, insurance companies records, to healthcare records. These centralised records have a number of drawbacks:
- Risk of data being hacked, and data subjects suffering loses as a result
- As data is stored in one place, a total loss such as a fire could result in the eradication of thousands, even millions of records
- A transparency risk where data subjects might not be able to see all of their private information held on the central ledger
- A risk of the “data manager” or data gatekeeper corrupting, moving or manipulating data
Blockchain purports to reduce if not eliminate these problems and risks. It achieves this by spreading the risks via a distributed network of computers. Information, and contracts are now decentralised and retained on numerous computers (nodes) rather than just one central machine. These computers and their operators fulfil two functions. They store all the information simultaneously and verify the legitimacy of the transactions via a process known as consensus algorithms. Transactions are confirmed by blockchain miners. Blockchains can therefore overcome many of the disadvantages of centralised ledgers because:
- Data is very hard to hack, a bad actor would have to penetrate several, perhaps thousands of computers rather than just one
- As data is distributed, a fire or similar in one location will not wipe all the records as they are simultaneously held on all the computers in the network
- It is democratic, there is no one owner of the data like an insurance broker or bank – all users of the blockchain can view records
How does the blockchain work?
In a blockchain, transactions are encrypted in a special code of the same length called a hash, it does not matter what the size of the transaction is, and the code will always be of fixed length. When further, related transactions are conducted they are linked to each other using a hash pointer, these groups of transactions are known as blocks. Its cleverness does not stop there – as new transactions are made all other transactions in the block are altered and updated. Hacking is virtually impossible as a bad actor would have to hack into and alter all transactions in a block. This is made even more difficult as transactions are not held centrally, but on a number of distributed computers (nodes). Each node has to approve a new transaction, this is known as the consensus principle, the transaction cannot be confirmed unless all nodes approve it (mining). As well as deterring hackers, this practice therefore helps promote accuracy and security, it also helps prevent the double spend problem.
What are the key benefits?
- Blockchain helps prevent hacking
- It is transparent and hard to manipulate
- Saves costs and time by eliminating the need for an intermediary
- It is immutable – all records are permanent and traceable
Early blockchain development centred upon cryptocurrencies such as Bitcoin which challenge the need for conventional banking systems. They eliminate the need for an intermediary for financial transfers and allowing transactions to take place peer to peer without conventional fiat currency. Further down the line, blockchain technology, which can be public or private, could threaten other financial intermediaries such as PayPal and Western Union Transfer.
Healthcare records, insurance contracts, government systems (especially voting systems), estate agency, stock trading, supply chains and record keeping systems are all currently being transformed by blockchain.
Blockchain is here to stay, from its slightly mysterious roots and the initial growth of cryptocurrencies, it now stands ready to transform business processes in a variety of contexts. While its disruption has and will cause job losses and displacements, it is also launching a raft of new opportunities for businesses, entrepreneurs and jobseekers. Additionally, consumers are set to increasingly access goods services enabled by the blockchain.