“The blockchain revolution has a greater potential than anything we’ve seen in history. It’s bigger than the Internet revolution, how it’s going to restructure society.”—Patrick Byrne, CEO and founder, Overstock.com

Whenever a transformative technology emerges with the potential for large-scale industry disruption, you can expect a generous amount of buzz and hype. Blockchain is one such technology, and it holds the potential to transform not just every commercial industry—but the traditional foundations of government, academic, and non-profit sectors of our global economy, as well.

If this potential for global transformation isn’t enough, blockchain also boasts an origin story that could serve as the plot for a gripping mystery novel. Blockchain emerged from the shadows during the financial turmoil of 2008, in the form of a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System, which described how a chain of digitized data blocks could be strung together to create a new digital currency. The white paper was authored by an anonymous source who remains unidentified, under the pseudonym Satoshi Nakamoto.

As Bitcoin emerged from these mysterious beginnings and began to gain some acceptance as a legitimate digital currency, a growing number of individuals realized that the underlying technology platform on which Bitcoin was builtthe blockchaincould be used in a large variety of applications that went well beyond cryptocurrency.

In a little more than a decade, blockchain has moved beyond its obscure beginnings and drawn the attention of mainstream media, entrepreneurs, and Fortune 500 companies, as well as governments and academia. According to the Digital Enterprise Report by Okta, 61% of digital companies worldwide with at least $1 billion in revenue are investing in blockchain. And McKinsey reported that venture-capital funding for blockchain startups reached $1 billion in 2017. While still an emerging technology, this level of interest and financial investment shows that blockchain is poised to cause large-scale industry transformation in the coming years.


What Is Blockchain?

Blockchain is commonly described as an encrypted and distributed ledger. It’s basically a record of transactions that is owned by everyone in a network, rather than by one centralized entity, and protected by cryptographic security.

While that may not sound particularly revolutionary, these simple changes in record-keeping unlock three greatest strengths that have led to blockchain’s booming popularity: decentralization, automation, and trust.

How Does Blockchain Work?

In a blockchain, each record in the ledger is stored in a block that contains:

1) Transaction data (who sent what amount of money to whom)

2) A timestamp documenting when the record was made

3) A unique cryptographic signature, called a hash, that links it to the previous block

In this way, all blockchain transactions are stored in a series of blocks that are chained together by the cryptographic signatures. Once a block is added, it is said to be immutable and its contents cannot be altered. This immutable chain is another of blockchain’s strengths, as it ensures that the entire history of a transaction can be reviewed and validated through an automated process.

Naturally, data stored on a blockchain sometimes needs updating. And when such additions are requested, the changes are validated automatically against every copy of the ledger on the network.

If, for example, someone with 10 Bitcoins attempts to purchase something that costs 15 Bitcoins, the consensus of the network is to deny the transaction because the individual can’t afford the purchase. This attempted transaction would be rejected, rather than added to the chain.

When transactions and changes are approved and validated by the network, the transaction data is recorded, timestamped, and linked to the previous block in the chain, and cryptographically sealed to ensure security.

Another blockchain security measure is the use of cryptography to create two unique keys, which are large alphanumeric strings that enable users to interact with the blockchain in a secure way:

  • A public key contains a large numerical value that is used to encrypt data.
  • A private key is mathematically linked to a corresponding public key.
  • A transaction that is encrypted with a specific public key can only be decrypted by its corresponding private key—and vice-versa.
  • The encrypted transaction is sent to the public address of the intended recipient, who then uses his or her own private key to decrypt the transaction.
  • In addition to security, the use of private and public keys also enables users to protect their anonymity.

Because trust is the foundation of our personal and professional dealings, the variety of ways in which blockchain can transform our lives seems nearly infinite. There are several industries in which blockchain is having an early impact, which we’ll discuss in this guide.

how-does-blockchain-work

What Are Some Examples of Blockchain in Finance?

Here are some examples of how blockchain may transform the finance industry to help demonstrate why the impact of this technology is so profound:

Payments: Blockchain’s decentralized ledger technology, coupled with digital currencies such as bitcoin, could enable faster payments at lower fees than traditional banks.

Securities: Conventional stocks, bonds, and mutual funds could be digitized to trade on blockchain platforms for faster, more efficient, and secure trading.

Credit and lending: Blockchain technology could be used to automate credit decisions and enable borrowers to qualify for financing faster, at lower fees.

Raising capital: Many organizations looking to raise funds are experimenting with Initial Coin Offerings and Security Token Offerings as more secure, lower-cost ways to raise capital. See below for a discussion of these and other leading blockchain trends.

Traditional banks are centralized entities that keep records of all financial transactions made by their members. In this traditional system, there is only one ledger containing transaction records, and only one bank has access to it. In return for performing these transaction services, banks get paid in various ways.

What makes blockchain unique is that, unlike a traditional bank, its ledger isn’t owned by any single entity. Instead, all members of a blockchain community have a copy of the ledger so that every transaction is checked against every copy of the ledger to ensure accuracy. Blockchain transactions don’t require a third party to monitor or approve transactions, which allows them to be done automatically and anonymously via consensus from the community.

The elimination of a third party can reduce costs, and eliminate the potential for a centralized entity to engage in any fraudulent activity. Anyone attempting to tamper with the blockchain would have to change every copy of the ledger owned by every person in the blockchain community—a nearly impossible task, especially as blockchains increase in size. This decentralization makes blockchain systems far less susceptible to outside attacks.

“Absolute power corrupts absolutely,” according to Lord John Acton. But in a blockchain, no one has absolute power. Instead, transactions are automated by the technology, and so the community can trust that its network is free from corruption.

What’s the Difference Between Blockchain and Cryptocurrencies?

Blockchain Cryptocurrencies
As noted, the blockchain is a chain of records (blocks) that contain transaction information joined by cryptographic codes that is designed to be highly secure and efficient. The result is a permanent transaction record that’s easy to audit and verify, but very difficult for bad actors to modify. Cryptocurrencies are digital currencies that use cryptography—the use of coded messages to ensure security and privacy. Cryptocurrencies are not controlled by any central government or bank, but instead rely on blockchain technology for secure transfers and transactions.
A good way to think of the difference between blockchain and cryptocurrencies is to imagine blockchain as an operating system, and cryptocurrencies as one of the apps that run on the blockchain operating system. The growing number of applications being built on blockchain is expanding the technology’s potential to transform processes and transactions across all industries .

Introduction to Blockchain and Cryptocurrency

Watch this helpful overview of cryptocurrencies and blockchain from Nathana Sharma, Principal Faculty at Singularity University for Blockchain, Policy, Law & Ethics.

What Are Smart Contracts and Decentralized Apps? 

Two of the most important developments in blockchain infrastructure are smart contracts and the evolution of decentralized applications (DApps).

What are smart contracts on blockchain?

Traditional legal contracts define the rules of an agreement, how the agreement should be executed, and the steps to be taken if the agreement is broken. Smart contracts embed contract terms into code that automatically enforce contract rules by controlling the transfer of currency or assets under specific conditions. For example, a smart contract that’s connected to an airline’s reservation system might enable travelers who buy flight insurance to be paid automatically if their flights are canceled.

What are DApps on blockchain?

Blockchain DApps are distributed, open-source software applications that run on a peer-to-peer (P2P) network and are supported by a blockchain distributed ledger, according to TechTarget.

In the same way Bitcoin and blockchain changed the way we think about digital currencies, DApps may change the way we think about software.

Together, smart contracts and Dapps continue to expand the capabilities of blockchain technology. The result is that blockchain can provide the foundation for a broader platform that is used to host a huge selection of of apps, rather than limiting its uses to Bitcoin and other cryptocurrencies.

The most common system used to create DApps is Ethereum, which is a global, open-source platform that supports cryptocurrencies and many other types of software applications, including smart contracts. Ethereum enables developers from around the world to build, deploy, and distribute DApps quickly and securely.

A major advantage of Ethereum’s platform is that it enables a single blockchain to host any number of apps, rather than having to create a new blockchain for every new application. Since DApps are decentralized, they can scale very quickly through availability to everyone on the Ethereum platform.

How Are Governments Using Blockchain?

At the core of most modern governments there exists a mountain of paperwork and record-keeping. This situation is tied to how money is being collected and distributed—via taxes and government program fees. With blockchain’s roots in the cryptocurrency, it presents a prime opportunity for streamlining the collection and transaction processes.

Blockchain also offers citizens financial stability against their government’s careless or corrupt actions. In Venezuela, for instance, the inflation and corruption has become so bad that some citizens have turned to using the money as a material for creating bags they sell to other countries. A blockchain-based currency might enable Venezuelans to continue transacting their day-to-day affairs with a more reliable currency that can’t be easily devalued by government actions.

Perhaps most importantly, having a financial alternative to a government-run currency also might offer a possibility to escape the monopolies of authoritarian governments. For those living under an authoritarian government, there is a high potential for misuse of funds.

The people who come to power in such governments often do so through disenfranchisement of the voting system. With blockchain-based voting, votes can be cast more easily and securely, because a citizen’s vote can be cryptographically sealed to avoid tampering. In this way, citizens might gain greater representation and guide their governments toward more honest practices.

How Can Blockchain Help the World’s “Unbanked?”

Because cryptocurrencies were the original driving force of blockchain technology, it’s not surprising that nearly all types of financial services organizations are experimenting with ways to integrate blockchain to avoid being disrupted.

But considering that 1.7 billion adults in the world currently do not have a bank account, we can expect to see blockchain companies focusing on developing regions to provide access to financial services and a chance for real wealth accumulation. Without the need for centralized offices and transaction fees, blockchain-based companies may be able to provide financial services at a much lower cost than traditional banks. Many financial professIonals are optimistic that blockchain technology can help improve socioeconomic conditions around the world.

How Is Blockchain Impacting Healthcare?

The healthcare systems of the world, including those in the US, are facing massive challenges in providing affordable care to all. Shifting regulatory policies and aging technology infrastructures make keeping track of personal health records complicated and expensive. But blockchain holds the potential for individuals to reclaim ownership of their medical records with improved accessibility and security, and potentially lower costs.

In addition to faster treatments and service delivery to individuals who are dealing with health issues, blockchain technology could also greatly reduce paperwork and false claims, which could lower costs and improve care for every healthcare system around the globe.

How Is Blockchain Impacting Manufacturing and Logistics?

One of the most exciting use cases for blockchain implementation is in supply chain management. For example, we’re already seeing industry giants such as Walmart and IBM partner on blockchain projects to track their produce from farm to store shelves, to ensure food safety and quality. This partnership will enable all product-related data to be stored on the blockchain, from origin to retail outlet. These blockchain partnerships are models for organizations to collaborate and share data in a secure way.

Blockchain’s immutable ledger also enables any food defect or problem in the supply chain to instantly be tracked back to its source. Techcrunch reported on Walmart’s success, saying that its traditional process typically took approximately seven days to trace food sources. With blockchain, those seven days have been reduced to 2.2 seconds.

Watch this video of a blockchain panel from SU Global Summit as experts explain how blockchain-based solutions can be a force for good and discuss how to ensure blockchain technologies follow ethical principles.

What Are Other Examples of How Blockchain Is Positively Impacting the World?

There are many ways that blockchain is poised to improve aspects of our daily lives and the world around us. For example, blockchain is helping to improve transparency in the insurance industry, monitor carbon offset trading, complete real estate deals, to verify the authenticity of diamonds and rid the market of conflict diamonds, protect endangered species and reduce poaching, and the list continues.

What Are Some Challenges Facing Blockchain Technology?

While some media outlets portray blockchain as a massive opportunity with unlimited upside, it’s still an emerging technology with major challenges to overcome. As with most transformative technologies, a key hurdle will be legislative, with regulators struggling to keep up with the far-ranging implications of blockchain. There several blockchain challenges to note.

Speed of computation at scale

Each device on a blockchain network is called a “node.” Because every blockchain node must have a copy of the distributed ledger to validate transactions through consensus, it takes much longer to process a transaction than with a centralized system. Bitcoin, for example, can process roughly seven transactions per second, whereas Visa can handle up to as many as 50,000 transactions per second.

Energy demand

Blockchains typically use what is called “proof of work” to add a block to a blockchain. This process requires one of the nodes on the network to solve a complex mathematical puzzle or computation. Whoever solves the puzzle first is able to add the block to the chain, and as a reward for validating the block, the person who solved the computation receives a token such as a Bitcoin.

As you can imagine, when each Bitcoin was worth nearly $20,000, many bitcoin “miners” lured by the prospect of great wealth began vying to solve these puzzles. But these computations require high-end graphical processing units, and the larger the blockchain, the more difficult the proof-of-work computations. The use of blockchain to process bitcoin transactions consumes a great deal of energy—enough to power the nation of Switzerland, or 5,854,904 U.S. households according to digiconomist.net.

Initial coin offerings (ICOs) and scams

Unfortunately, as with the wild-west beginnings of Bitcoin, scammers often used the promise of blockchain in attempts to cheat investors. Some would simply put together a white paper and website with exaggerated claims on how their new blockchain innovation would create vast wealth for early investors. The problem was so widespread that more than 80% of 2017 ICOs were scams, according Cointelegraph.

Rigidity in smart contracts

There is something to be said for appreciating human nuance and real-world circumstances in business transactions. In some cases, it would be difficult to design the conditions of a smart contract that anticipates any possible transaction problems and unintended consequences. Although smart contracts are often touted as eliminating the need for third-party involvement, it is unlikely that smart contract disputes will be resolved solely by software solutions in the future.

What Are Some Leading Blockchain Trends?

There are numerous trends driving adoption and implementation of blockchain technologies. We’ll discuss a few of the more prominent trends here.

Blockchain and Internet of Things

The Internet of Things (IoT) refers to the billions of smart devices connected to the internet using embedded sensors to collect, manage, and analyze data. The versatility of IoT is impressive, and so is the growing number of global IoT-connected devices, which are expected to top 75 billion by 2025.

But this massive global data exchange also presents new vulnerabilities. Imagine if hackers were to target IoT applications supporting life-saving medical devices or autonomous vehicles. Because blockchain technology leverages a secure, distributed ledger to transfer data between parties, it may help to create a safer IoT for mission-critical applications.

And since blockchain is a decentralized, distributed network, anyone attempting to hack into an IoT application would need to hack every node on the network in order to make significant changes. In one use case, the Hyundai Digital Asset Company is applying blockchain technology to address IoT challenges in storage, data authentication, and identity management.

Security token offering (STOs)

STOs were created to help rebuild some of the public trust that vanished in the midst of so many cryptocurrency scams. Here are the basic differences between ICOs and STOs:

ICOs STOs
An ICO happens when organizations create a token offering to raise capital to fund their business or a project. ICOs are mostly unregulated and their tokens are not backed by actual financial securities. ICOs are subject to fraud and pose significant risks for investors. STOs are used to raise funds in a way that’s similar to ICOS, but STOs are subject to regulation and backed by real assets, such as a company’s revenue. STOs offer a much more transparent transaction that can benefit offering organizations, investors, and government regulators.

Unlike ICOs, any mismanagement of your STO investment is subject to legal repercussions, and US-based STOs are subject to Securities and Exchange Commission (SEC) regulations that guide the fundraising process and protect the rights of investors. Because STO tokens are tied to external sources and assets, they act as ownership records of a real-world investment.

Hybrid blockchains

Blockchains are usually thought of as being either private or public, but a third option that combines the two models into a what’s called a hybrid blockchain seems to offer a viable approach. The hybrid approach appears promising because it combines blockchain’s benefits, including security, reliability, and trust, while addressing some of its limitations.

Hybrid blockchains are a customizable way to meet the needs of an organization or even several organizations working together, while avoiding some of the risks of public blockchains. For example, supply chain systems that involve multiple entities could benefit from the secure and immutable exchange of information on a hybrid blockchain.

Sharding

Two of the biggest problems in blockchain are its limited throughput and scalability. One of the most promising solutions to emerge is called sharding, a technique originally used in standard databases that divides large data sets into smaller subsets called “shards” for speed and efficiency.

By sharding a blockchain, it’s possible to spread out the computation and storage so that each node in the network isn’t required to process the entire blockchain’s transactional data. While this would allow for parallel processing and certainly improve the speed of blockchains, there are still potential security issues that have kept this approach from being integrated into most blockchains.

Blockchain and the Decentralized Future

Watch this presentation from Anne Connelly, Faculty for Blockchain at Singularity University, to learn how blockchain changes the way we structure our societies and what that means for corporations, governments, and humanity.

What’s Next for the Future of Blockchain?

Humanity’s rise to dominance in the animal kingdom is largely a result of one key thing: cooperation. With blockchain’s incredible capacity to build trust into any transaction, humanity may be on the verge of reaching a previously unknown level of cooperation and collaboration.

  • When elections are run on blockchain, citizens can have faith—and proof—that their votes are being counted correctly.
  • Internet browsers using blockchain-based tokens can help you can gain control over your online experience and ensure you’re not being manipulated by advertising or social networks that might abuse your data.
  • Blockchain-based financial applications could mean you’ll worry less about having your bank account hacked or paying exorbitant fees to a banking middleman

Blockchain has even provided the foundation for the world’s first borderless virtual nation. Bitnation was founded in 2014 and has hosted the world’s first blockchain-based marriage, birth certificates, refugee emergency IDs, and more. Bitnation’s blockchain-based government services are used by “Bitnation citizens” around the globe.

Blockchain is still evolving and more and more use cases are emerging for how it can provide more clarity, transparency, and trust into human relationships, government work, and business dealings. Imagine what humanity could accomplish if cooperation and trust start becoming intrinsically baked into nearly every transactional aspect of our global community? Whether you’re a true believer or skeptic, it’s an interesting premise, and one that highlights the potential of blockchain as a truly transformational technology.

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