How does Blockchain work? The technology that will change the world as we know it

The decentralized, public Ledger that was created to serve as the foundation for Bitcoin has evolved and proven its viability for other industries. As a result, the Blockchain Technology has got into its Growth phase, and a wide range of organizations and start-ups are exploring how to utilize its numerous benefits for their advantage.

Blockchain

The Blockchain that is referred to oftentimes by incumbents as a distributed ledger or a decentralized verification mechanism has been around since 2008, when the mysterious Satoshi Nakamoto wrote the Bitcoin detailing its protocol and, thereby, created the new digital currency peer to peer market.

Due to several scandals around Bitcoin, many organizations and start-ups have started to explore Blockchain, the technology on which the digital currency is founded, rather than focus on Bitcoin. As a result, there has recently been a shift in the business world from Bitcoin-oriented solutions to Blockchain-oriented ones. That does not mean that Bitcoin is falling behind, but rather that the smart Venture money is betting on the underlying Blockchain technology and its potential rather than the digital currency itself.

bitcoin

So what is Blockchain?

The Blockchain combines cryptography and distributed computing to enable secure, direct, trustless P2P transactions. At its core, it cryptographically stores all accounts and transactions that were ever made on top of it. This information is shared by all of the computers that run the system (these are usually referred to as miners or nodes), and that actually means that no one really owns the platform and its data. The Blockchain, therefore, becomes an arbiter of trust rather than a 3rd party such as a Bank or a Government.

The accessibility to the entire Blockchain information without being able to tamper with it, makes it auditable and compliant-ready, which make it attractive also for regulators. As long as Blockchain participants are known and identifiable, also known as Know-Your-Customer or KYC in financial services, and not pseudonymous as on the Bitcoin or other public Blockchains. Hence, the preference of regulators and large companies for private, also known as permissioned Blockchains where all participants are known, versus the public, permissionless Blockchain where everyone can participate and all the participants are not a priori identified.

Furthermore, since the ledger is openly accessible to the participants, it enables everyone to know how much assets belonged to each account at any point in time. . Beyond the immediate benefit out of this, the Blockchain data could be used for statistical modelling and analytics to generate business insights later on.

Costs of operation and associated fees are also a major advantage of the platform. The Blockchain, enables Peer-to-Peer information transfer and money transfers that eliminates the need of a middle-man in the transaction. This reduces dramatically the fees that are currently an integral part of these processes and considered as a critical pain-point for the end customer.

From a user experience point of view, the platform’s capabilities, when programmed correctly, enable a seamless, easy-to-use feel that should not make a difference at all to the end user experience from today. This fact, makes the back-end capabilities of the technology even more appealing.

Current use-cases of the Blockchain Technology

Taking the above benefits in mind, numerous companies and start-ups are working on optimizing or re-inventing existing processes by utilizing the Blokchain in a wide range of industries.

Here are some exciting examples:

Abra has decided to revolutionize the money transfer network by utilizing the peer-to-peer capability of the platform. Using the company’s mobile app, every individual can become a “human teller” who can assist other users in depositing/withdrawing funds anywhere in the world. This shared network assists users in transferring money in Fiat currency across the globe while paying minimal fees without the need for a bank account.

OpenBazzar in comparison has decided to tackle a different market and to create an open-source, free e-commerce platform for products and services. In order to participate in the platform, one should download and run a program on its computer which directly connects it to other participants of the platforms who are interested in buying and selling goods and services. The platform, that currently supports only Bitcoin, is not maintained or controlled by any company and therefore there are no associated fees with these services.

La’zooz tries to tackle a completely different important problem, transportation. La’zooz works to maximize the utilization of already-existing vehicles by connecting between drivers with empty seats in their cars and passengers. To do so ideally, La’zooz invented their own cryptocurrency: zooz that is used to compensate the drivers for their effort and costs. The zooz can be used later for other purposes in the community (e.g. specific service providers who accept the unique cryptocurrency). It can be seen as a P2P competitor to Uber that is currently structured as a non-profit organization.

R3 CEV has established a consortium that attempts to optimize existing financial processes. According to the financial technology start-up, their Blockchain-based process will transform the banking industry and will make it much more efficient. So far, 50 leading global banks including Morgan Stanley, Citi, Bank of America, HSBC and others have joined R3 for this exciting journey.

Nowadays, in addition to the above companies and initiatives, there are more than 800 Blockchain & Bitcoin early stage start-ups (according to VentureScanner.com) which are tackling many other thrilling problems. Following these companies, there are various investors who are interested in getting involved in this space. Up to early 2016 more than $1B in VC investments were made in Blockchain & Bitcoin initiatives with over $100M in new funding just announced for just two start-ups (Digital Asset Holding and Blockstream). Out of this impressive amount, ~$500M was in 2015 alone (based on data from Crunchbase and CoinDesk).

Blockchain-Usecases-and-Startups

The Blockchain’s Challenges

Still, as a new technology, Blockchain is far from being perfectand faces several problems that concern some of its users, developers practitioners and thought leaders.

Below are some of the major ones:

First, there is the issue of the platform’s scale. Oftentimes when comparing the Blockchain to centralized platforms, thought leaders like to use a comparison to Visa’s scale. Nowadays, Visa process ~54,000 transactions per second globally, while the Bitcoin Blockchain can process only up to about 7 transactions per second globally. For the Blockchain technology to be   adopted as a main stream technology, this issue must be solved.

Secondly, interoperability among Blockchains is another challenge that must be tackled before the Blockchain capabilities could be completely utilized. This challenge refers to the question of how different Blockchains will be connected to each other taking into account a reality in which different organizations and communities will be interested in creating their own Blockchains for their own purposes and then connect them to a larger global Blockchain ecosystem.

Third is the issue of privacy. In order to make Blockchain appealing to the general public, people should have control about their own privacy meaning that an individual should be able to control its own data and have the ability to allow others to see it without exposing it to everyone. Currently, there is no optimal solution to solve this issue. However, several promising attempts to tackle it.

Thankfully, due to the open source nature of the platform, we are getting closer and closer to solving all of these challenges with new layers, protocols and upgrades that appear on the internet on a daily basis.  The many developers that are fascinated by this new technology constantly try to tackle these challenges and reduce the friction and pain-points of the end users, such that more and more will feel comfortable with the technology and join. Another cool example for these capabilities is the below Visa proof of concept:

As a result of these developments and the many benefits of this technology, I am certain that the adoption of Blockchain for our every-day uses will be faster than we anticipate and that the level of disruption for our current reality and known processes will be much higher than we expect.

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