‘Blockchain’ is a buzzword. In time, it will fizzle out just like others have.
If that is what you think, I bet you are wrong.
It is seven years since Satoshi Nakamoto published the Bitcoin whitepaper. Investors have so far put a little over $1 billion into blockchain related startups. And the graph is upward looking. About $200 million of that investment has flowed in during the first half of 2016.
What’s more, every sector you focus on, there is a startup working on a blockchain solution. That ranges from finance, health, asset management, agriculture to public administration.
What exactly is special about blockchain?
Blockchain renders trust unnecessary in human interactions.
That is a new reality. It is because of trust that merchants have always shipped from one corner of the globe to the other. It is because of trust that we’ve achieved law and order in our societies. And indeed it is because of trust that civilizations have flourished.
For the most part, however, we’ve exercised that trust through intermediaries. Thus, financial institutions have been the intermediaries between lenders and creditors. Insurance companies are the intermediaries amongst those seeking to pull risks together.
And the government is the intermediary amongst the citizenry of a country.
In turn, the selling of trust has been a very lucrative enterprise. A glimpse at the books of account of financial institutions, for example, will attest to this fact.
But the intermediaries have also often betrayed this trust they hold on behalf of others. For example, the collapse of the banking industry in 2008 was a result of bad investment decisions that bank executives made.
And that led to close to 9.3 million families losing their homes and investments. Unfortunately, in the past, societies haven’t had options to replace the centralized management of the trust.
But that is changing now.
The blockchain is heralding an age when, for example, a small trader in Africa can borrow credit directly from a fellow entrepreneur in the US. And you can purchase a property from a stranger without notaries and lawyers. And all that is possible with little scam risk.
What is the impact of that?
The cost of doing business will go down significantly. That is because the cut that the middle person has been taking isn’t on the budget.
What is the blockchain?
Blockchain is the technology beneath bitcoin. That is the first ever successful decentralized digital currency. But the easiest way to make sense of it is to think of it as a ledger. A continuous record of transactions.
Just like what the commercial banks keep.
Every time you withdraw from your account, the bank makes a debit entry on a ledger. Every time you deposit, the bank makes a credit entry on the ledger. It does the same every time you use your card or take a loan.
And part of this ledger is what you receive as a bank statement. The blockchain is the same in many aspects.
Just like with the bank’s ledger, when you send bitcoins, an entry is made on the blockchain against your public address (a string of alphanumeric). When you receive bitcoins, an entry is also rendered on the blockchain. Thus the blockchain is a ledger that shows who owns what at what time.
But there are major differences between the bank’s ledger and the blockchain.
First, the bank’s ledger is centralized. It is only the bank that creates, maintains and stores it. On the other hand, the blockchain is decentralized. No one entity owns it. It is a property of a network of nodes.
Every node in the network keeps a copy of this ledger. What’s more, all the copies are synchronized in real time.
Secondly, it is accessible for anyone to read and write on the blockchain (especially the public blockchain). But far from what you might think, this doesn’t affect the credibility of the records.
And how does that work?
That is possible because for you to write on the blockchain, you must follow rules entrenched in its core software. You must also do energy intensive work with your computer, which makes it costly to write bad data. Lastly, the entire network must approve your entries.
Bitcoin is on a public blockchain. Another public blockchain that has grabbed the attention of many is Ethereum.
Satoshi Nakamoto designed the bitcoin blockchain with currency in mind as the primary application. On its part, Ethereum aims to support a broad range of applications.
In May 2016, a Decentralized Anonymous Organization (DAO) on the Ethereum blockchain raised close to $160 million from investors. The DAO is a company with no offices, CEO nor a board of directors. A code guides all its processes, and all shareholders get to vote on every decision.
The other type of blockchains that showed up in the recent past is private blockchains. As the name suggests, you can only read or write on the private blockchain with permission from the owner. It is the opposite of the public blockchain.
The third type is the consortium blockchain. This is where different players come together and build a blockchain to which each of them becomes an equal node. One of the consortium blockchains is R3Cev, which is a project by over 40 major financial institutions.
Some of the commercial banks behind R3Cev include JP Morgan, Barclays Bank, and Goldman Sachs.
Another blockchain consortium is the Hyperledger. This is a project that Linux Foundation is leading with the support of close to 50 financial institutions and major technology companies. Some of the names supporting that project include IBM, Intel, and Hitachi.
Why should North Dakota care?
Already several states are embracing the blockchain technology. For instance, on 6th July 2016, North Carolina Governor Pat McCrory signed House Bill 289 into law. The new law gives clarity to bitcoin and blockchain businesses.
On 2nd May 2016 Delaware Governor, Jack Markell unveiled a plan to embrace the blockchain. By providing an enabling regulatory and legal environment, the state seeks to attract blockchain companies.
It is the right time to get involved. The world is waking up to the realization that the blockchain should fuel our social, economic and political relationships.