The Blockchain Exposition
Want to learn more about Blockchain? Check out this article that presents an in depth look at Blockchain and how it became one of the world's largest software platforms.
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What is Blockchain? As the technology is still in its infancy, I think writing an article on "What is Blockchain" will still be relevant for many.
So, set yourself up for a rendezvous with Blockchain! This article is presented as a conversation. I think good questions/doubts are as important as good descriptions. So, let me introduce you to the people in the conversation here — myself, Rohit, and my wife, Madhvi. I hope you enjoy it.
Ideas and Trends
Madhvi: What is Blockchain?
Rohit: Hmm... it's a new platform technology that is now a global technology trend. People all over the world are talking about it.
Madhvi: Tell me more...
Rohit: What is making you so interested in this?
Madhvi: I want to know what it is that is taking your time and capturing your attention. Also, I like to stay up to date on the latest trends. I am also not averse to modern technology.
Rohit: Hmm... Looks like, you have good questions. Tell me what do you want to know?
Madhvi: OK, so... Blockchain, whatever it is, what problem does it solve?
Rohit: Let's look at few examples to understand those problems.
Assume you come across a website put up by a company. The website is not well known, so you can not be sure if it is genuine. You find some unique item on that website, which is not available elsewhere, and you want to buy it. The transaction can happen in one of the following ways:
- Trust-based — You decide to trust the website and make payment to purchase the item. Here, there is a chance that the website company is not genuine, so you may not receive the purchased item and your money is also gone.
- Contract-based — You decide to get into some contract with the website company before making the payment, which they had previously agreed upon. However, if the company is not genuine, again you may not receive the purchased item and your money is also gone. In this case, based on the contract, you have legal ways to recover your money. But, if the amount spent is not too high, it may not even be cost effective to take the legal route. Contracts are just documentation about the deal, which can be used in legal matters if the deal is broken. There are no means to enforce the contract while the deal is happening.
- Third Party (Central Authority) — This is a third party trusted by both of you. You make the payment to this third party. Once the third party confirms the payment to the website company, they ship the purchased item. Once the shipment is confirmed, the third party makes the payment to the company. This works well for both the parties and both are happy. In the process, both parties make an extra payment to the third party. A service charge to build trust, which, otherwise, would not be possible to build.
In the above scenarios, the situation can be reversed as well. Even after making the shipment of the purchased item, the website company may not receive the payment. Before blockchain, this was the usual way to exchange value. While these systems work, they have their own problems.
- Problem #1: Trust-based systems limit business opportunity, as they can be created only between people who know each other.
- Problem #2: A contract-based system is better than a trust-based system, as it can work between two unknown parties. But in case the contract is broken, it requires time, effort, and money to recover the loss.
- Problem #3: A third-party-based system requires you to pay extra to the third-party to build the trust factor.
- Problem #4: There is a thin possibility of this third party also turning rogue and running away with the money.
Further, let's look at the remittance industry. A remittance is a transfer of money by a foreign worker to an individual in their home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries. According to world bank data, in the year 2017, officially recorded remittances to low- and middle-income countries was $466 billion, and global remittances to high-income countries was $613 billion. The detailed report can be found here.
Remittance charges, on average, are as much as 9 percent. If we do simple math, when a remittance of $466 billion came into the respective countries in 2017, these remittance firms made somewhere around $40 billion.
- Problem #5 Transaction fees for cross-border money transfers are quite high. Now, let's look at micropayments. A micropayment is a financial transaction involving a very small sum of money and usually one that occurs online. One problem that has prevented the emergence of micropayment systems is a need to keep costs for individual transactions low, which is impractical when transacting such small sums even if the transaction fee is just a few cents.
- Problem #6 Conventional systems make it infeasible to perform micropayments. Blockchain is the answer to all these problems. It is a technology that allows value to transfer without incurring any significant extra costs. It also allows value exchange without established trust or any central authority.
Madhvi: In the context of these examples, I understand the problem that it solves. But, for any technology to become a global trend, it should have an impact that is much wider and across various industries. So, what impact can it have on different industries and business?
Rohit: The idea of blockchain is groundbreaking. It can (and possibly will) change the world as we know it today.
Blockchain today is a lot like the internet in the early '90s — a new technology used by just geeks, a technology with an obscured future.
Blockchain is also similar to the internet in that Blockchain radically eases and reduces the cost of sharing, transferring, or exchanging value. Almost any industry that deals with some sort of transaction can and will be disrupted by the Blockchain.
Blockchain Is for Value What Internet Is for Information
Blockchain entered the Gartner Hype Cycle for Technology Trends in the year 2016, making it to the list of top technologies being evaluated by different industries across the globe.
There is a lot of information available on the web about its potential impact on various industries. Here is an image that lists real-world use cases for blockchain.
There is an interesting initiative to create a new, anti-fragile system that improves humanity, as we create converging, exponential technological changes. This is an interesting read that talks about "creative destruction externality," which is a result of technological innovation that changes/destroys the existing structures/systems. When that happens, it leads to instability. The article also further talks about how to counteract this by "internalizing the creative destruction externalities."
Technology, in the olden days, was seen as means to bring efficiency and cost-effectiveness into existing systems. But, over a period of time, technical advancements brought disruption into several industries and transformed the traditional and conventional systems. In the process, several companies waited for the "next-new-thing," thinking it wouldn't impact them. But, those companies greatly perished.
Having said that, any new technology cannot simply be another thing added to the comany's checklist — it has to become a trend. A careful analysis of business and technology should be done to understand how it can transform the business to create strategic advantages or new business avenues. Technical advancements have become critical for any business. Its careful evaluation and adoption are required to survive, succeed, and edge out the competition.
If it Sounds Like an Arms Race, That's Because it Really Is!
Madhvi: Hmmm "Blockchain is for value what internet is for information." That's an interesting remark. Blockchain does seem to be bringing on an unforeseen change in the transaction world, where, before, building trust without having any third-party was unthinkable. Hey, by the way, can you tell me how this whole thing got started?
Rohit: Yes, I missed talking about it. Good, you brought it up. Any conversation on blockchain is not complete without mentioning this. Blockchain was invented as part of the most-talked-about digital currency project, Bitcoin. A person or a group of people, pseudo named Satoshi Nakamoto is (are) the brain(s) behind it.
Madhvi: OK, now I have a fair idea of the problem it solves and why it is a global technology trend. It will be interesting to know what's inside. Can you explain the technical details on how it works?
Rohit: At a very high level, blockchain is built using peer-to-peer networking, asymmetric cryptography, hashing algorithms, and Merkel Trees. The peer-to-peer network makes blockchain a decentralized system, replacing the central authority in a conventional system. With asymmetric cryptography, any transaction cannot be repudiated. Hashing is used to build various security features. The ultimate aim of using hashing is to make any transactions immutable. Lastly, Merkel Trees are a tree-build based on a hashing algorithm. It is used to maintain transactions within a block. It's also used for optimization purposes.
These basic computing concepts are weaved together to build something that has the potential to disrupt various industries.
Published at DZone with permission of Rohit Kumar. See the original article here.
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