What is Blockchain? What can(not) it solve? Industry by industry Impact of Blockchain
If the barrier to entry is the big issue for cryptocurrencies then education (or lack thereof) is the big issue for Blockchain Technology.
Today we join those that are working toward demystifying the Blockchain Technology for non-technical folks. This whole segment will continue to be updated with all the different topics listed below (and more added as we go along).
In this segment we will learn:
- What is Blockchain Technology?
- What is Proof of Work?
- What is a 51% attack?
- What is Public Blockchain?
- What is Private Blockchain?
- What is Hybrid Blockchain?
- How does blockchain promote decentralization?
- What are the benefits and shortfalls of Public and Private blockchains?
- What is Cryptocurrency?
- How are Blockchain and Cryptocurrency different?
- Why are companies interested in Blockchain but not Cryptocurrency?
- What does Blockchain solve?
- What Blockchain cannot solve?
- What is smart-contract?
- What is Initial Coin Offering?
- Industry by industry impact on Blockchain
Want us to interview your favorite CEO/Executive? Tell us who and why in comments.
In EACH of these industry-specific Blockchain segments, we will explore:
- Blockchain use cases in that particular Industry
- Hurdles to overcome for blockchain adoption in the Industry
- Companies that are already using Blockchain in the Industry
- Interview with an industry expert in the space
The next frontier in the Blockchain Evolution:
Security Token Offerings
Tokenizing: Making illiquid assets liquid
What is Blockchain Technology?
We explained in detail what Blockchain is in a previous article. For sake of continuity, let’s define what Blockchain Technology in this article, using a simple example.
In the good old days, we used to keep all records in a handwritten ledger book. It was very difficult to tamper the entries in the book without a trace. However, because this book was maintained by one or a few people – you can never be 100% sure about the integrity of the entries made.
Let’s say, every time a new entry is made in this ledger book, we made 100 copies and these 100 copies were held by 100 different people spread out geographically. When someone tries to tamper a previous entry, a copy of the updated ledger book is sent to these 100 validators and they can immediately see that there is a change in a previous entry that does not reconcile with their copy.
Because the consensus between these 100 validators cannot be obtained, the change made in the ledger book is negated.
This system ensures that once an entry is made, it is never changed. If there is a change that needs to be made to the original entry, you simply make a new entry at a later date referencing the original entry. In which case, all the 100 validators will agree with it because it did not alter previous entries in their copies.
How can you make sure that some random person is not making these changes to the original ledger book? Well, that’s where the handwriting comes into play. These 100 validators not only check for the integrity of historical data against their copies, but they also check whether the handwriting matches.
To translate the above simple example into Blockchain Technology terms:
Think of Ledger book as a database, entries made as transactions, copies as the copy of the database maintained by everyone connected to the database, handwriting as cryptography, the validators in our example as the nodes (computers connected to the network) and the process of reconciling/agreeing on changes as consensus.
Blockchain then is a decentralized database that is connected by multiple nodes, each node maintains a copy of the entire database, every time a new transaction is entered into the database by anyone connected to the database, it is checked against the copies on all the nodes connected to the network. If the database copy matches with the copy maintained by the entire network and the cryptographical signature are accurate – then the consensus is obtained with all the nodes. Once consensus is obtained – all the nodes update their copies of the database, thus a new entry is entered.
As you can see, none of the old entries can ever be tampered with, leaving blocks of information that remain immutable. These blocks are linked with each other by a cryptographic signature. You tamper one entry, and the cryptographical signature of all other blocks is altered, and when that happens the tampered entry is rejected and the whole database goes back to its original state.
Because the blocks are chained together with cryptographical signature, the term BlockChain came into being.
The technology that enables this consensus mechanism using cryptographical validation is Blockchain Technology.
A bit of jargon before we move on:
- Hash: Hash is the alphanumeric (mostly 32 characters) string that acts as the cryptographic signature
- Mining: The act of participating in the blockchain network to process and confirm the transactions, most blockchain networks need special equipment with high-end computing speeds
What is Proof of Work?
In our example, we said that all the 100 nodes (computers) that are connected to the database validate any changes made to the database by comparing their own databases and matching the cryptographical signature. This means these nodes are doing the work of validating. Whichever node confirms that the transaction is either valid or invalid after the consensus is obtained from the network, is said to have done the work.
A node that validates the transaction gets a small-fees from the network, as a proof of work performed.
There are other forms of consensus mechanisms, such as, proof of stake, which gives rights based on the ownership of the network instead of a number of nodes.
What is a 51% attack?
In our example, we had 100 validators. Every time a transaction takes place, to wait for all 100 validators to confirm the transaction takes too long. In the real world, there could be thousands of nodes. For instance, the Bitcoin core has over 10,000 nodes running at the time of this writing. To avoid delays, a democratic approach is embedded in the consensus methodology.
That means, if 51% of the nodes confirm a transaction, that transaction is committed to the network and the databases of the other 49% will be updated with the changes committed to the network.
This is where things get interesting.
There are many blockchain technology solutions available. Some of them are public blockchains and others are private blockchains, there are others that are in between. We will look at how they differ in a bit, but for now, a public blockchain is accessible by anyone with the right equipment and internet.
Let’s say, on a particular public blockchain technology of your choosing there are a total of 10 nodes. Someone with a malicious intent connects 15 of their own new nodes to this public blockchain. What this means is that this individual or group can manipulate the entire blockchain since they control more than 51% of the nodes.
This is one of the reasons why companies are choosing private blockchain where every node is handpicked.
There is an argument that private blockchains do not fully realize the true potential of what Blockchain technology can offer.
What is a Public Blockchain?
A Public Blockchain is a blockchain network that anyone with a computer and internet can access. For instance, you can go to Bitcoin.com or Ethereum.com and join their network, and if you have the right type of equipment, you can even start contributing the hash power to the network.
For instance, you can go to Ethereum.com or Bitcoin.com and start participating in the blockchain network and get paid out fractions in their native currency.
But Public Blockchain’s utility doesn’t end in earning fractions, it spans a much broader landscape.
Many Decentralized Applications (DApps) are built on these open Public Blockchain networks. When they launch their DApps on these public blockchains, they automatically inherit the massive security of the Blockchain that they are operating on.
This means an individual or a small entity can leverage the massive network strength without shelling their pockets out.
One day, we may find a broader use case for Public blockchains in healthcare, Government operations, money transfer, loyalty programs, etc.
What is a Private Blockchain?
Most companies realize the potential of Blockchain technology, they just don’t like the idea of putting their information out there.
This translated into creating blockchains that access restrictive. This means companies can utilize all the great features of Blockchain while keeping their information safe.
They can also specify who gets participate in their network since most of the participation is based on ‘invite only’.
Private Blockchains, although great, they really do not realize the true potential of blockchain because they lack the strength and transparency of a bigger blockchain. Alex Mashinsky in our interview mentioned that “those that are working on Private Blockchains are wasting their time.”
In the technology world parlance, Public Blockchain is like the Internet, anyone with the right device and connection can join in. Private Blockchain is akin to the intranet, only those that are connected to the server can join in.
What is a Hybrid Blockchain?
A Hybrid Blockchain is where some parts are accessible by everyone and some parts are restricted for the public. For example, the public may have access to ‘view’ but not edit. Only a few authorized individuals may have ‘edit/write’ access.
This is a good model for bringing Government related services on to blockchain where you want everyone to be able to ‘view’ Government activities without having access to edit the information.
For instance, identity management could be a good government service that can benefit from Hybrid Blockchain model, everyone with your specific address (or Bar code) can verify your identity but they will not be able to change it.
How does blockchain promote decentralization?
It is important to note that only Public Blockchain protocols are decentralized. Private blockchains are not decentralized.
Public Blockchain achieves decentralization by being accessible to anyone with the required equipment. People with requisite technical skills can see the information committed to most applications launched on these public blockchains.
The idea of accessing the strength of a massive network to launch your own Applications without having to pay the toll for doing so creates an environment where people want to build things that help the public at large. If in return – creators of these applications are rewarded, well, that is commendable.
The feature of immutability instill trust in people that transact on the public blockchain, this trust leads to skipping the intermediaries (like banks or agencies) that used to play the ‘trust’ role earlier. Because Blockchain is accessible globally, theoretically, it opens doors to transact with anyone from anywhere.
Trust, circumventing intermediaries, being accessible globally and lack of barriers to entry all help Blockchain promote decentralized commerce.
What are the benefits and shortfalls of Public and Private blockchains?
Public Blockchains are readily accessible, easy to launch your DApps on. They are also relatively resilient to 51% attack since it takes a lot more computing power to break down some of the big networks. Public Blockchains truly reflect the spirit of Blockchain.
When you participate in a more popular Public Blockchain, you are competing for processing power, this means, you may have long wait times. Many businesses cannot afford this kind of wait time. You have to pay a premium to cut the line, this can easily eat into the company’s revenue.
Lack of privacy is another drawback of Public Blockchains.
Private Blockchains are restrictive and are not for broad use. Since the resources are managed privately – there is not a long wait time to process the transactions like we have in Public Blockchain. Safety of information can be ensured since you grant access to only trusted parties.
Private Blockchains may help companies but they do not instill the ‘trust’ factor which is the cornerstone of Blockchain revolution. Collusion is a possibility in Private Blockchain.
What is Cryptocurrency?
Most people know Bitcoin as the king of cryptocurrencies, but what they may not realize is that Bitcoin also represents the Blockchain.
In its own right, Bitcoin is the first publicly accessed Blockchain with its own fuel/currency to run the network, the Bitcoin cryptocurrency.
What then is a cryptocurrency?
As we learned before, for Blockchain to work, we need computing power. Computing power comes at a cost. Each Public Blockchain has its own fuel to reward the computing power contributed. This reward that represents a fraction of the value contributed to the Blockchain platform. That reward itself is the Cryptocurrency. This process of providing computing power (hash) to solve a cryptographic puzzle of sorts is called mining.
In true sense, cryptocurrency is a real earned money! Although it is earned by the computers instead of by physical human labor.
Cryptocurrency is then a byproduct of Blockchain. Blockchain can survive without cryptocurrency but all forms of cryptocurrencies need some Blockchain basis to it.
What makes Bitcoin a store of value is the limit on its total supply. In the end, only 21 million Bitcoins can ever exist. Of these, almost 4 million are lost due to access, hardware issues, ignorance or any number of other reasons.
Not all Cryptocurrencies are mined, though.
Some blockchains pre-mine, that is, issue their platform currency and sell them for fiat currency for operational needs. When someone wants to use the services on their platform – they are then required to pay for such services in the pre-mined currency. This type of currency is known as utility tokens.
Utility tokens because their value is dependent on their usability on the platform. If the platform does not succeed – their value may become zero.
SEC has been warning companies that sell the pre-mined utility tokens that such utility tokens will be regarded as ‘securities’ and not complying with securities laws while issuing utility tokens will have consequences.
How are Blockchain and Cryptocurrency different?
Cryptocurrency is a byproduct that acts as the fuel to encourage people to provide their processing power.
Blockchain technology can run without cryptocurrency, however, Public Blockchains usually rely on the reward (cryptocurrency) to allure people to commit their computing powers to the network.
Why are companies interested in Blockchain but not Cryptocurrency?
As discussed earlier, cryptocurrency is a fuel that encourages people to commit their computing power to run the network.
However, since most enterprises do not want to share their information – they favor Private Blockchains. Private Blockchains do not need Cryptocurrency.
Because of the negative press around Cryptocurrencies and securities boards, action against companies that issued cryptocurrencies (in the name of utility tokens) – companies of repute are trying to steer clear of the tag ‘cryptocurrency’ with their brands.
What does Blockchain solve?
Blockchain revolution started on the basis of many promises, however, its core promise comes from the technology’s ability to instill trust through immutability.
As we learned earlier, you cannot tamper with the entries once committed to the Blockchain, you always leave a trail that is there for anyone to see. This instills a new level of confidence in the data that was not available in the traditional databases.
This deceivingly simple ability of immutability can one day help solve the issues of counterfeit, helps conduct intermediary less commerce, cover-ups, etc.
What Blockchain cannot solve?
Blockchain cannot stop bad players from taking advantage of people. Since anyone can access the network, not everyone that is accessing the network comes there with good intentions. There have been many ideas that were ‘proposed’ to be built on blockchain only to empty people of their hard-earned money.
Even with Blockchain, you need to know who is behind a particular project or initiative. If they are trustworthy people then they will build things that utilize the immutability and trust factor of Blockchain.
“Customer beware” applies to blockchain space as well.
The blockchain is NOT foolproof, literally. Human errors do cause mayhem in Blockchain. Blockchain cannot save itself from 51% attack (people have to) that we talked about earlier.
Blockchain space is also prone to a lot of FOMO and FUD, that is short for Fear Of Missing Out and Fear Uncertainty and Doubt. The only antidote to these vices is education and knowledge.
What is a smart-contract?
Just like Blockchain, the term smart contract is not a new one. Nick Szabo used the term smart contract in his thesis dated 1996 titled “Smart Contracts: Building Blocks for Digital Markets.”
Nick explains “New institutions, and new ways to formalize the relationships that make up these institutions, are now made possible by the digital revolution. I call these new contracts “smart” because they are far more functional than their inanimate paper-based ancestors. No use of artificial intelligence is implied. A smart contract is a set of promises, specified in the digital form, including protocols within which the parties perform on these promises.”
To break it down, a contract that can be executed by the system automatically upon fulfilling a set of agreed-upon conditions can be termed as a smart contract.
Nick’s vision to create instant, cheap and efficient smart contracts was just a theory in 1996, however, with the advent of Bitcoin Blockchain, that vision has taken shape.
Contracts executed by the systems on a Blockchain are forever immutable – which advances the trust aspect.
What is Initial Coin Offering (ICO)?
“A healthy dose of skepticism is always good. This bear market is forcing investors to demand more than just a colorful whitepaper,” said Dr. Jemma Green of Power Ledger during our interview.
Unfortunately, that wisdom was too late to arrive for many investors (including us) who invested in Initial Coin Offerings (ICOs) and lost a ton of money, including life savings. Billions of dollars were raised using ICOs.
ICO model has indeed the paved way to raise capital for great ideas to change the world but no capital.
An ICO is where a company pitches the idea to the general public. If the public believes in the idea, they can contribute whatever is the minimum contribution, usually, the minimum contribution is very low to enable small investors to be able to join in. ICOs are different from crowdfunding on many fronts but one defining difference is that most ICOs are primarily used in the Blockchain space and accept cryptocurrencies as an investment.
ICOs opened up an avenue for raising capital for people and companies that may otherwise never been able to raise the capital.
Another beauty of an ICO is – people from all over the world can contribute capital into ideas they like. There are few countries that specifically prohibit companies from accepting investments from their Citizens (for example, the United States, China, Singapore, etc.).
Although the idea of ICO has caught bad press in the recent year due to many bad players that scammed people out of their hard-earned money, the concept itself is quite an amazing one. The concept of ICOs will eventually help change the face of traditional capital markets through Security Token Offerings.
Security Tokens are similar to utility tokens issued in an ICO, however, security tokens follow the securities laws of the land instead of circumventing.
Because they are supposedly legal, big businesses can enter into them once the complete framework is made available by the respective authorities.
We use the word ‘supposedly’ since the legal framework within which Security Token Offerings can be issued is not readily available. Most companies are working within the confines of exceptions and exemptions available in the securities law but a separate Security Token guidance or framework is yet to see the light of the day.
Industry by Industry impact on Blockchain
- Blockchain and Law (upcoming)
- Blockchain and Healthcare (upcoming)
- Blockchain and Real Estate (upcoming)
- Blockchain and Insurance (upcoming)
- Blockchain and Supply Chain (upcoming)
- Blockchain and Financial Services (upcoming)
- Blockchain and Energy (upcoming)
- Blockchain and Charity (upcoming)
- Blockchain and Government services (upcoming)
- Blockchain and Gaming and Gambling
- Blockchain and Your Data Rights (upcoming)
Do you have a favorite CEO in Blockchain space who you would like us to interview? Tell us who and why in comments.
Everything in this article is an opinion, not an advice of any kind. This material has been prepared for general informational purposes only and it is not intended to be relied upon as accounting, tax, investment, legal or other professional advice. Please consult with a professional for specific advice.
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About the author
RK Reddy holds two Masters degrees, one in Accounting and another in Business Administration with over 15 years of experience in the financial services industry.
RK Reddy is an ardent fan of Blockchain and Cryptocurrencies. You can see the excitement about this new blockchain technology in every article on Cryptotapas.com. Sometimes this excitement leads to an overly optimistic view. Guilty as charged. RK Reddy says “what may seem like an ‘overly optimistic expectation’ today may become an everyday norm in 5-10 years; look at the history of cars or airplanes, Blockchain and Cryptocurrencies belong to a similar frame of reference.” Of course, that is just his opinion.