By Bernard Marr for Forbes
There’s a lot of hype in the air about blockchain technology at the moment. A recent World Economic Forum report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain related technology. This means it’s probably something which everyone involved in business should take notice of. However, there’s still a lack of understanding about what it is, and what it does.
This makes it difficult for the layman to assess whether it’s something worthy of their time and attention. And for a new technology to become mainstream, let alone change the world (as blockchain enthusiasts claim it will) it must find a fan base beyond the technically-minded.
One way people describe blockchain technology is the “internet of value”. I like this term but it deserves closer inspection.
We have become used to sharing information through a decentralized online platform (the internet). But when it comes to transferring value – for example money – we are usually forced to fall back on old fashioned, centralized financial establishments such as banks. Even online payment methods which have sprung into existence since the birth of the internet – Paypal being the most obvious example – generally require integration with a bank account or credit card to be useful.
Blockchain technology offers the intriguing possibility of eliminating this “middle man”. It does this by filling three important roles – recording transactions, establishing identity and establishing contracts – traditionally carried out by the financial services sector.
Worldwide, the financial services market is the largest sector of industry by market capitalization. If blockchain technology can replace just a fraction of that by enabling peer-to-peer transactions in other sectors then it clearly has the potential to create huge efficiencies.
The technology was initially pushed into the headlines several years ago thanks to the virtual currency Bitcoin. The value of one unit of the currency (which is underpinned by blockchain technology) rose from pennies to over £$1,000 between 2011 and 2013, making a handful of early adopter enthusiasts very wealthy. Of course, this generated press interest. Since then, while Bitcoin’s value may have fallen and the currency established a more stable rate of growth, the buzz around the blockchain concept has intensified.
IBM, Microsoft and many others have announced services based on blockchain technology. Unsurprisingly, at the moment these are mainly aimed at financial services clients. It may represent the threat of extreme disruption to their industry – but of course they will still attempt to capitalize on it – that’s what they do, after all!
Last month Indian tech giant Infosys announced the launch of its own blockchain based service saying that they had received interest from almost every single one of their large customers. Major banks including Bank of America, Barclays andMorgan Stanley have also publicly spoken about their involvement and taken part in trials. In fact, 25 major banks last year announced their commitment to the R3 CEV initiative, designed in investigate blockchain’s potential use in finance.
But how exactly does it work? I think this is where it’s worth returning to the phrase “internet of value”. The regular internet allows anyone to publish information to anywhere in the world. A blockchain (and there are many individual ones – both public and private, just as with websites) allows anyone to send value anywhere in the world where the blockchain file can be accessed.
Each chain is essentially just an online database, stored in a distributed, peer-to-peer fashion among its users. Cryptography ensures that users can only edit the parts of the blockchain that they “own” – by possessing the private keys necessary to write to the file. It also ensures that everyone’s copy of the distributed blockchain is kept in synch. In the most common model, distributed processing power, drawn from users of the blockchain, is used to fuel the cryptographic systems needed to do all of the leg work.
By giving private keys which you own to someone else, you effectively transfer the value of whatever is stored in that section of the blockchain. To give the easiest example – Bitcoin – keys can be used to access addresses which contain units of currency with financial value. This fills the first of three crucial roles – recording of transfers – traditionally carried out, at great expense, by the financial services industry.
It also fills the second key role – establishing trust and identity. No one can edit a blockchain without owning the corresponding keys. Cryptographic checks are carried out whenever anyone tries, and edits which are not verified across the network are not accepted. Of course, the keys – just like gold, or cash – can theoretically be stolen. However, a few bytes of computer code can usually be kept secure at relatively little expense.
Essentially this means that the work carried out by legions of staff in offices of banks, to record transactions, verify identities and prevent fraud, can now be carried out far more quickly and accurately by pure mathematics. Human fallibility is taken out of the equation.
In my opinion, though, it’s the third crucial role – the establishing (and verifying) of contracts – where blockchain offers the most exciting possibilities. And it’s also where the value of this type of technology becomes apparent outside of financial services. The ability to securely read and write to a distributed ledger, governed by mathematics and consensus rather than the whims of a centralized operator, has a whole heap of potential in just about every other industry.
The key here is that as well as something as basic as an indicator of value (as with Bitcoin), blockchains can be used to store any kind of digital information, including computer code. This code can be programmed to execute when two or more parties enter their keys – meaning that everyone agrees that a contract has been filled. It can also read from external data feeds – stock prices, weather reports, news headlines, or anything else that can be parsed by computer code – to create contracts which automatically “sign off” when stated conditions are filled. These are known as “smart contracts”.
Obviously the potential here is limitless. Applications could be developed which allow businesses to validate transfers based on delivery of service – for example a certain number of buying orders would signal to the blockchain-based smart contract that conditions had been filled for an invoice to be paid. The payment could then be made automatically through a blockchain based payment system. App ecosystems are already evolving, based around platforms such as Ethereumwhich aim to give businesses the toolsets necessary to get involved.
One theory even suggests that blockchain tech will provide the value “fuel” for the Internet of Things. Devices in the home and across industry could automatically pay for the energy they use by writing to the relevant blockchain, creating a transfer of value based on the precise usage of the device.
One project involves the creation of “smart” local power grids based on distributed blockchain technology. Of particular use in remote communities, such systems would allow the distribution, metering and billing of electricity to be administered within the community itself, rather than being reliant on external multinational power and finance institutions.
Another, ascribe, aims to use blockchain tech to solve intellectual property issues in the digital age. Blockchains can be used to create a permanent or transferable link between the owner and a piece of IP, handle licensing issues, and even create “limited editions” of digital information, securely limiting the amount of times a piece of information (for example an artwork) can be displayed, shared or copied
There are, as I previously said, an almost limitless number of applications for the technology. Fraud-resistant voting systems to be put in place, where the owner of one private key is assigned one vote, and no third party referee is necessary. Censorship-resistant distribution of information. Decentralized reputation and recommendation engines, provably free of interference from intermediaries such as moderators or advertisers.
In my opinion, blockchain technology looks set to be one of the most impactful developments on the horizon. I often find myself writing about “buzzwords” – Big Data, machine learning, predictive analytic – and now undoubtedly “blockchain” will join that list. But remember that the word “internet” was a buzzword, too, not so long ago in objective terms (although it seems like another lifetime!). The fact is that with all these concepts, while there may be a lot of hype around them, the potential they offer for change is just too big to overlook
Bernard Marr is a best-selling author & keynote speaker. His new book: ‘Big Data in Practice: How 45 Successful Companies Used Big Data Analytics to Deliver Extraordinary Results‘
First appeared at Forbes