While Bitcoin may be a bubble or passing fad, the technology behind it will revolutionize the way we do business in the near future
Part I: What is Blockchain?
While Bitcoin became a household name in 2017, most people know little of the technology underpinning the digital currency. This technology, known as “blockchain,” has far reaching implications beyond digital currency, and will likely revolutionize the way we do business in the near future. In a 2017 study conducted by Gartner, Inc., it estimates that the business value-add of blockchain will grow to slightly more than $176 billion by 2025, and will likely exceed $3.1 trillion by 2030. In fact, a World Economic Forum report from September 2015 predicts that by 2025, ten percent of global GDP will be stored on blockchain technology.
In a January, 2017 Harvard Business Review Article titled “The Truth About Blockchain,” professors Marco Iansiti and Karim R. Lakhani describe blockchain as a foundational technology that may not immediately overtake our traditional business models, but has the potential to create new economic and social systems and enormously change the way we transact over the coming decades. Moreover, companies already see the writing on the wall – IBM, Microsoft and Intel are offering blockchain software tools to their business customers, Goldman Sachs, Nasdaq, Walmart, Visa and the State of Delaware all have started blockchain initiatives.
How could such a new and little known technology have such massive business implications? In this series of articles, we will first provide a general overview of what blockchain technology is and how it works. In our second piece, we will provide an overview of how blockchain will change a variety of industries. Finally, in our third piece, we will provide a more in-depth look at how blockchain will impact the legal industry, contracts and financial institutions.
While Bitcoin uses a specific implementation of the blockchain, blockchain in general can be described as a decentralized, shared, public ledger that is maintained by a network of computers that verify and record transactions into the same decentralized, shared, and public ledger. No single user controls the ledger – it is maintained by all of its participates, in the cloud, or by a network of designated computers that collectively keep the ledger up to date and verify its transactions. Bitcoin, as the largest implementation of blockchain technology today, uses competitive “miners,” or individual users that solve ever more difficult math equations with monetary rewards if they are successful, to verify and record transactions.
When a transaction is verified and recorded, the blockchain system sends transaction data to all of the users of the blockchain ledger, thereby ensuring the validity and accuracy of the transaction and prevents one party to the transaction from lying about the details or failing to perform. Each transaction, or “block,” is encrypted into its own original piece of information, which is called a “hash.” Even the slightest modification of data will result in an entirely different hash. For example, in applying SHA256, the encryption algorithm used by Bitcoin, to the number 1000 generates the following hash, “40510175845988F13F6162ED8526F0B09F73384467FA855E1E79B44A56562A58” while the hash for the number “1000.01” generates a wildly different result in “6B481FC35196FA215BB30D39ECB919CE7DE410488EC08D692356E22E5A67B2B9.” Because each hash is unique, it becomes exceptionally difficult to tamper with the system as it is nearly impossible to generate an identical hash to fool the system.
Essentially, blockchain is a tool where trustworthy records of transactions can be kept, verified, and made publicly available. Blockchain is revolutionary because it creates confidence between counterparties and negates the need for neutral third-parties or transactional facilitators, such as escrow companies, government authorities or clearing houses. Transactions are “peer-to-peer,” or directly contracting party to contracting party. If there’s a disagreement, there’s no need to call a lawyer because there is only one database.
The implications of blockchain will be enormous and will impact almost every industry. 2018 is likely to be a huge turning point for blockchain technology and the year we see the technology significantly implemented beyond Bitcoin. As we will discuss in Part II of this article, there are a wide variety of businesses and industries that are currently experimenting with blockchain technology.