When it burst on the scene a few years ago, the cryptocurrency, bitcoin, made the headlines for two reasons. First, it enabled people anywhere to trade online quickly and anonymously. Second, in the early days, the value of a unit of this currency increased rapidly (though it fluctuated wildly ever since), and some people made big profits from buying and selling it.
The media hyped it as a cool alternative to "old-fashioned" fiat money. The publicity excited the public's imagination but paid scant attention to the core technology: the blockchain.
Beyond Bitcoin, Blockchain Applications
Only relatively recently are traditional businesses looking seriously at using blockchain technology for other purposes. This delayed interest may be explained by wariness of bitcoin's price volatility combined with technical ignorance. It took time for non-technical people to realize that cryptocurrencies and the blockchain technology behind them are two separate matters.
While those currencies need the blockchain technology to exist, the converse is not true. Blockchain technology is autonomous and has many potential uses unrelated to a cryptocurrency. Once they understood this, it took still more time before non-tech people identified what those other uses might be.
It turns out that blockchain is perfectly suited to the business of global trade finance. That's why big financial institutions have not only taken an interest in it, but are beginning to adopt it. For big companies especially, using traditional procedures to trade with global partners is complex and time consuming.
Normally, a single purchase involves multiple emails, phone calls, faxes, and couriered documents going back and forth between buyer and seller and both parties' banks and lawyers. Even without hitches, completing a relatively straightforward order can take weeks. Errors in the paperwork are not uncommon and may not be spotted immediately, so further delays ensue. All that must happen before any goods leave the supplier's warehouse.
Time being money, any system that could speed up and simplify this process would be valuable. A blockchain distributed ledger system could reduce the time to arrange a similar trade from the average of about ten days to a matter of hours. In fact, it's no longer a case of "could" because it's already starting to happen.
Recently, for example, Tricon Energy in Texas used a blockchain distributed ledger system to purchase polymers from Reliance Energy in India. They were able to agree the terms of the deal in minutes, sign the contract, and then arrange letters of credit through two banks, completing a process that used to take up to ten days in about as many hours. Every element of the transaction was done on a private blockchain. All parties to the deal, including the buyer, the seller, their lawyers, and their banks, had transparent access to the blockchain's distributed ledger and all documents registered in it were unchangeable.
Another novel use of blockchain technology is in the charity sector. AID:Tech, a company with a presence in Dublin, London, and New York, has created a mobile app donation system called TraceDonate that allows fully transparent end-to-end monitoring of all stages of the donation process. Donors can track precisely how their donations are being processed from the moment they are made to the moment the intended beneficiary receives them. The Irish Red Cross is an early adopter of this system.
Blockchain technology is complex and a deep understanding of programming and cryptography is needed in order to fully appreciate it. The general concept, however, is relatively straightforward.
Essentially, a blockchain is a decentralized distributed database equally accessible by all those who have authority to use it.
- Public blockchains like the one underpinning bitcoin are accessible to all.
- Private blockchains, like the ones used by Tricon Energy and The Red Cross in the examples above, are restricted to authorized users. Being distributed means that many identical synchronized copies of it exist simultaneously in different places, and being decentralized means that no one party alone controls its contents. To use a computer network as an analogy, it is like a peer-to-peer network rather than a client/server one. It has no one single critical component or node, which, if it failed or was exploited by a hacker, would threaten the whole blockchain's integrity.
The special software needed to use a blockchain system ensures that all copies of the database are linked and all are constantly in sync. That means that all users can see the whole database and all additions to it as they occur in real time. The systems are called "blockchains" because they organize data in blocks, which are joined together sequentially like links in a chain.
Each block references and is dependent on all previous blocks, which ensures that no part of the chain can be altered; it can only be added to. This linking system is called "an append-only mode." In addition, data integrity is further enhanced by encryption.
What's ahead for Blockchain
Most experts anticipate that the use of blockchain technology will grow exponentially in the next few years. The World Bank expects it to help solve challenges that have dogged the financial industry for decades. It also believes that the technology is likely to transform sectors like manufacturing, government, financial management, and energy.
For many businesses, blockchain technology will solve two persistent problems: It will greatly speed up transaction times and drastically reduce costs. It may not be a miracle cure for all ills, but it should certainly help improve the efficiency and financial health of many organizations.