What is Blockchain?
Mentioning blockchain immediately brings to mind headlines of bitcoin and other cryptocurrencies. This conflation is not unfounded as this technology was originally developed to support the use of bitcoin markets. Although blockchain is certainly applicable to the financial industry, the world of banking and finance is just one of many possible implementations.
At its core, blockchain technology is a new way to store information. Traditionally, information is stored in a centralized database – meaning information is kept in one place. With blockchain, encrypted information is stored in a public ledger which acts as a decentralized database. Because it is decentralized, each user of a particular blockchain maintains a public record of the information. The information is stored in a “chain” of consecutive “blocks” after a self auditing mechanism ensures data accuracy—hence the name. Because information in a blockchain is stored in an encrypted, decentralized manner, it is less vulnerable to data manipulation and fraud. The public database is stored across all public blockchain nodes, making any sort of data manipulation extraordinarily difficult.
A useful metaphor for understanding blockchain versus a traditional database is by likening it to a Google doc, while a traditional database works similar to Word document. In a blockchain, like a Google doc, information is stored across multiple users, and each edit is logged by user and time. Moreover, multiple users can make edits on the same database, and edits are audited and saved at set points and time. This contrasts with a Word document, where only one user can make edits at a time, and the document must be sent back and forth between users – similar to conventional database architecture. The obvious implication is that blockchain offers a more efficient and transparent data storage mechanism.
Because blockchain is a decentralized way to store information, it has applications for a plethora of industries—and in some cases, can radically change the way said industry does business. For example, in the financial sector, blockchain allows users to directly make user to user payments via private security keys, without the need to use a 3rd party like a bank or other service (i.e. PayPal). The record of this transaction is encrypted and stored in the chain, mitigating the risk for fraudulent transactions. Musicians also make use of blockchain, allowing users to purchase music on a per-use basis without needing to pay a streaming service.
Blockchain enables the use of “smart contracts” which provide a secure and verifiable avenue for individuals and businesses to create and execute contracts automatically. Smart contracts improve efficiency and reduce legal costs by automatically executing provisions in the contract that are stored in blocks. Blockchain’s applications extend to intellectual property rights management, automatic payments for advertising, thereby enabling a pay-per-stream model for media consumption.
If blockchain is such an innovative and potentially revolutionary technology, then why isn’t it more widely adopted?
Today, there are three main obstacles to blockchain implementation. First, blockchain technology in its current state is not user friendly. A simple cryptocurrency exchange between users requires a multi-step process requiring multiple encryption keys. The average consumer does not possess either the technical literacy or patience for this yet. Second, transactions over the block are comparably slow. Currently, major blockchain based currencies have a transaction per second (TPS) rate of 1-5 TPS. This means that only a maximum of 5 transactions can occur across the entire global blockchain every second while Visa, on the other hand, can handle 24,000 TPS. Third, blockchain transactions require a tremendous amount of electricity. Maintaining the blockchain requires a global community of special computers that run complicated mathematical equations to continuously resolve the blockchain. The result is that a single blockchain enabled currency consumes the same amount of energy per year as the entire country of Greece.
Despite the obstacles, blockchain remains a promising technology that will impact the future of multiple industries. Large multinational companies like Xunlei and Overstock.com have invested in it. Technology companies like IBM, Qualcomm, Google, Dell and Microsoft actively develop blockchain technologies of their own. Some of the largest financial institutions like Bank of America and Fidelity Investments keep a close eye on blockchain development. Praescient’s technicians have experience with Blockchain technology and can advise clients on innovative application solutions. Blockchain’s shortcomings, like energy consumption, are actively being researched and resolved. The United States government is interested in implementing blockchain for increased security and efficiency. Cryptocurrency may have cornered the blockchain market for now, but it is here to stay.