You may have heard the term ‘blockchain’ and dismissed it as a buzzword or maybe thought it was a technical jargon that may need one too many engineering degrees to use authentically in a dinner conversation.
It is perhaps currently the most popular and widely implemented example of the Byzantine Fault Tolerance – and those of us who had to endure long hours of game theory analogies only wish we had known this sooner.
The ‘Byzantine Fault Tolerance’ sounds super fancy and complicated but is actually just a way of getting a group of individuals (who don’t naturally trust each other) to reach an agreement on events (and their order) that occur within the group in a way that is resilient to any attempts of undermining that agreement.
So far so good?
Like the Generals in Byzantine, a blockchain can be thought of as a situation where multiple participants reach an agreement which is known to everyone, and no single player can tamper the recorded agreement.
I believe blockchain is a technological advancement that will have wide-reaching implications that will transform every industry it touches. Contrary to what some of us want to believe – a blockchain is not a viral dance move that will fade away if we pray hard and long enough. Instead, a blockchain is a distributed and transparent, append only, ledger. It is a mechanism for creating consensus between scattered parties that do not need to know or trust each other.
Some people have called blockchain the “internet of value” which I think is a good metaphor.
We are all comfortable sharing information online. But when it comes to transferring something of value, e,g. money – we are usually forced to fall back on old fashioned, centralised financial establishments like banks. A blockchain allows you to send something with valuable or sensitive information anywhere in the world using a private, cryptographically created key, without the involvement of a centralised body.
A blockchain is decentralised and distributed – meaning that the storage device for the database are not all connected to a common processor, or controlled by a central authority. It maintains a growing list of ordered blocks. Each block has a timestamp and links to a previous block by the same secure private key.
Blockchains are secure databases by design. The concept was introduced as part of bitcoin in 2008, and the blockchain serves as the public ledger for all bitcoin transactions. But it is crucial to understand that ‘Blockchain is not Bitcoin and Bitcoin is not Blockchain’. Bitcoin is one implementation of Blockchain plus a few extra rules and incentives thrown in to make it a cryptocurrency. By using a blockchain system, bitcoin was the first digital currency to solve the double spending problem.
This means that the major functions carried out by banks — verifying identities to prevent fraud and then record legitimate transactions — can be carried out by a blockchain more quickly and accurately.
The security is built into a blockchain system through the distributed time-stamping server and peer-to-peer network, and the result is a database that is managed autonomously in a decentralised way. This makes blockchains excellent for recording events, transactions, identity, and provenance.
Blockchain offers the potential of mass trade and transaction processing without any intermediaries. It does this by filling three important roles –
- Record transactions
- Establish identity
- Create contracts
This has huge implications because the financial services market is the largest sector by market capitalisation, and replacing even a fraction of this with a blockchain system would result in a huge disruption of the financial services industry, but also a massive increase in efficiencies.
But it is the third role, creating contracts, that extends its usefulness beyond the financial services sector. Apart from a unit of value (like a bitcoin), blockchain can be used to store any kind of digital information, including computer code.
That snippet of code could be programmed to execute whenever certain parties enter their keys, or when external conditions are met. These are known as “smart contracts,” and the possibilities for their use are practically endless, and I predict that more and more industries will find ways to put it to good use in the very near future.