It’s all over the news. You can’t look at a technical or financial news site without hearing about cryptocurrencies or its underlying technology, blockchain, which, if you believe the hype, is the new disruptive technology that is going to overturn industries as we know it and replace the underlying structure of banking, tracking, and commerce. However, as with any new technology, sometimes it’s hard to separate the hype from reality. Now, I’m not going to comment on whether or not the hype is justified, but blockchain technology has proven to have useful applications, an interesting history, and is rapidly gaining adoption.
Blockchain technology was created by an anonymous internet user (or group of users) identified by the pseudonym Satoshi Nakamoto, and the design was released to the public in November 2008. The technology was designed to fix fundamental problems in the “digital cash” systems popularized by the Cypherpunk movement that started in the late 1980s. Early systems suffered from the problems of counterfeiting, unrestricted issuance, and difficulty of transfer. Bitcoin, a cryptocurrency, was the first public demonstration of Blockchain technology and solved the previous digital cash problems by creating a decentralized peer-to-peer network that maintained a public ledger. This public ledger is secured by consensus of the nodes on the network and uses a concept called “proof of work”. Proof of work uses mathematics to ensure that the ledger is secured from modification and is fault-tolerant against bad actors who might want to alter the ledger.
It turns out that the technology of a fault-tolerant, secure, public ledger is something that many businesses need, but which has traditionally been treated with inefficient and manual processes. Using a distributed ledger, businesses can exchange value quickly in a way that ensures the value being exchanged is authentic, secure, and accurate.
The use cases for this value exchange by itself may not be immediately obvious, and that’s because blockchain is often incorrectly labeled as a “disruptive technology”. Blockchain should more accurately be described as a “foundational technology” on which disruptive technologies may be built on top. This is much like another foundational technology, the World Wide Web, which has transformed our society by bypassing and highlighting inefficiencies in traditional operational models before its creation.
Currently, blockchain technology is being adopted or tested in many industries:
- Banks are using it to clear transactions, and could potentially replace financial messaging systems (e.g., SWIFT)
- Nation states (e.g., Sweden) are running trials to see if it can replace antiquated land registry systems
- Commodity and food companies are testing it to track safety and origin directly from the producer and throughout the supply chain
- Brokerage companies are testing the ability to transfer assets using smart contracts and blockchain technology to possibly replace the need and expense of clearing firms
- Insurance companies are excited about the possibilities of parametric insurance and microinsurance that previously were hard to make a profit on, but are now possible with removal of previous inefficiencies
- IoT manufacturers are testing micropayments and distributed messaging using blockchain networks
- Small businesses are using it to accept payment directly from consumers without the need of an intermediary banking institution, making transactions quicker and lowering their cost
I hope this article has shed some light on blockchain technology, which has evolved from an interesting history to being rapidly-adopted across a variety of industries. The hype may or may not be justified, but the reality is this foundational technology is changing the way we do business.