How Blockchain is going to change the world!
- March 11, 2021
- Posted by: Shalini R
- Categories: Economics, Information Technology, Innovation
How is Blockchain Used?
As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. But it turns out that blockchain is actually a reliable way of storing data about other types of transactions, as well.
Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For example, IBM has created its Food Trust blockchain to trace the journey that food products take to get locations.
Why do this? The food industry has seen countless outbreaks of e Coli, salmonella, listeria, as well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to find the source of these outbreaks or the cause of sickness from what people are eating.
Using blockchain gives brands the ability to track a food product’s route from its origin, through each stop it makes, and finally its delivery. If a food is found to be contaminated then it can be traced all the way back through each stop to its origin. Not only that, but these companies can also now see everything else it may have come in contact with, allowing the identification of the problem to occur far sooner, potentially saving lives. This is one example of blockchains in practice, but there are many other forms of blockchain implementation.
Banking and Finance
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, five days a week. That means if you try to deposit a check on Friday at 6 p.m., you will likely have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 minutes,2 basically the time it takes to add a block to the blockchain, regardless of holidays or the time of day or week. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to three days (or longer, if trading internationally), meaning that the money and shares are frozen for that period of time.
Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks. European bank Santander and its research partners put the potential savings at $15 billion to $20 billion a year.3 Capgemini, a French consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications.
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is controlled by the Federal Reserve. Under this central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. In 2008, some of the banks that ran out of money were bailed out partially using taxpayer money. These are the worries out of which Bitcoin was first conceived and developed.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally.
Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound for those who have no state identification. Some countries may be war-torn or have governments that lack any real infrastructure to provide identification. Citizens of such countries may not have access to savings or brokerage accounts and therefore, no way to safely store wealth.
Health care providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy.
Records of Property
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a government employee at the local recording office, where it is manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming—it is also riddled with human error, where each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanently recorded.
In war-torn countries or areas that have little to no government or financial infrastructure, and certainly no “Recorder’s Office,” it can be nearly impossible to prove ownership of a property. If a group of people living in such an area is able to leverage blockchain, transparent and clear timelines of property ownership could be established.
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.
Say, for example, a potential tenant would like to lease an apartment using a smart contract. The landlord agrees to give the tenant the door code to the apartment as soon as the tenant pays the security deposit. Both the tenant and the landlord would send their respective portions of the deal to the smart contract, which would hold onto and automatically exchange the door code for the security deposit on the date the lease begins. If the landlord doesn’t supply the door code by the lease date, the smart contract refunds the security deposit. This would eliminate the fees and processes typically associated with the use of a notary, third-party mediator, or attorneys.
As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of their products, along with such common labels as “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the path and safety of food throughout the farm-to-user journey.
As mentioned, blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the November 2018 midterm elections in West Virginia. Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounts or any real concern that fraud might threaten the election.
Advantages and Disadvantages of Blockchain
For all of its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, blockchain technology may very well see applications beyond those outlined above. But there are also some disadvantages.
1. Improved accuracy by removing human involvement in verification
2. Cost reductions by eliminating third-party verification
3. Decentralization makes it harder to tamper with
4. Transactions are secure, private, and efficient
5. Transparent technology
6. Provides a banking alternative and way to secure personal information for citizens of countries with unstable or underdeveloped governments.
1. Significant technology cost associated with mining bitcoin
2. Low transactions per second
3. History of use in illicit activities
Here are the selling points of blockchain for businesses on the market today in more detail.
Advantages of Blockchain
Accuracy of the Chain
Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. In order for that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers—a near impossibility for a large and growing network the size of Bitcoin’s.
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification and, with it, their associated costs. Business owners incur a small fee whenever they accept payments using credit cards, for example, because banks and payment processing companies have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction fees.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. Transactions can be completed in as little as ten minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.
That is, when a user makes public transactions, their unique code called a public key, is recorded on the blockchain, rather than their personal information. If a person has made a Bitcoin purchase on an exchange that requires identification then the person’s identity is still linked to their blockchain address, but a transaction, even when tied to a person’s name, does not reveal any personal information.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hashcode changes—however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.
Most blockchains are entirely open-source software. This means that anyone and everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. This also means that there is no real authority on who controls Bitcoin’s code or how it is edited. Because of this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree that the new version of the code with the upgrade is sound and worthwhile then Bitcoin can be updated.
Banking the Unbanked
Perhaps the most profound facet of blockchain and Bitcoin is the ability for anyone, regardless of ethnicity, gender, or cultural background, to use it. According to the world bank there are nearly 2 billion adults that do not have bank accounts or any means of storing their money or wealth.5 Nearly all of these individuals live in developing countries where the economy is in its infancy and entirely dependent on cash.
These people often earn little money that is paid in physical cash. They then need to store this physical cash in hidden locations in their homes or places of living leaving them subject to robbery or unnecessary violence. Keys to a bitcoin wallet can be stored on a piece of paper, a cheap cell phone, or even memorized if necessary. For most people, it is likely that these options are more easily hidden than a small pile of cash under a mattress.
Blockchains of the future are also looking for solutions to not only be a unit of account for wealth storage, but also to store medical records, property rights, and a variety of other legal contracts.
Disadvantages of Blockchain
While there are significant upsides to the blockchain, there are also significant challenges to its adoption. The roadblocks to the application of blockchain technology today are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours (read: money) of custom software design and back-end programming required to integrate blockchain to current business networks. Here are some of the challenges standing in the way of widespread blockchain adoption.
Although blockchain can save users money on transaction fees, the technology is far from free. The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the bitcoin network is close to what Denmark consumes annually. Assuming electricity costs of $0.03~$0.05 per kilowatt-hour, mining costs exclusive of hardware expenses are about $5,000~$7,000 per coin.10
Despite the costs of mining bitcoin, users continue to drive up their electricity bills in order to validate transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivized to validate transactions.
Some solutions to these issues are beginning to arise. For example, bitcoin mining farms have been set up to use solar power, excess natural gas from fracking sites, or power from wind farms.
Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second (TPS). Although other cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 24,000 TPS.
Solutions to this issue have been in development for years. There are currently blockchains that are boasting over 30,000 transactions per second.
While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably the Silk Road, an online “dark web” drug marketplace operating from February 2011 until October 2013 when it was shut down by the FBI.6
The website allowed users to browse the website without being tracked using the Tor browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current U.S. regulations require financial service providers to obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations. This system can be seen as both a pro and a con. It gives anyone access to financial accounts but also allows criminals to more easily transact. Many have argued that the good uses of crypto, like banking the unbanked world, outweigh the bad uses of cryptocurrency, especially when most illegal activity is still accomplished through untraceable cash.
Many in the crypto space have expressed concerns about government regulation over cryptocurrencies. While it is getting increasingly difficult and near impossible to end something like Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks.
Over time this concern has grown smaller as large companies like PayPal begin to allow the ownership and use of cryptocurrencies on its platform.
What’s Next for Blockchain?
First proposed as a research project in 1991,7 blockchain is comfortably settling into its late twenties. Like most millennials its age, blockchain has seen its fair share of public scrutiny over the last two decades, with businesses around the world speculating about what the technology is capable of and where it’s headed in the years to come.
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself at age twenty-seven, in no small part because of bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap with fewer middlemen.
As we prepare to head into the third decade of blockchain, it’s no longer a question of “if” legacy companies will catch on to the technology—it’s a question of “when.”