Some claim Blockchain will fundamentally change the world. Others dismiss it as hype. The truth probably lies somewhere in between. Naturally, reaching your own conclusion of what Blockchain might mean for the world, your industry, or your business requires an understanding of what it is. Here we attempt to cut through some of the noise and describe, in accessible terms, what this technology, whether transformative or hype, really is.
In order to understand Blockchain, let’s put it into context and remind ourselves of how society has gone about tracking and recording not only financial transactions but ownership and transfer of any assets or ideas with value.
It all started with multiple ledgers
Since recorded human history, commerce has been based on multiple ledgers. The first written language, in fact, consisted of symbols pressed into clay tablets which Sumerians used to record transactions: quantities of goods (e.g., wheat) that were received at specific ports by certain merchants.
Five thousand years later, a Franciscan friar named Luca Pacioli invented double-entry bookkeeping in which each transaction is offset by another transaction – a debit and credit. Since then, having clean books has been the mark of a well-run business, government, or economy.
The resulting ledger system, on which nearly every company and economy is currently based, involves each party maintaining its own “version of the truth”, its own ledger, which it must periodically reconcile. For example, you may maintain your own checking account records and each month reconcile yours with that of the bank, to check that the bank hasn’t made a mistake.
This multiple-ledger approach has also allowed trusted gatekeepers – banks, stock exchanges, and other financial middlemen – to amass considerable power, and wealth, by serving as trusted intermediaries. When you find a discrepancy between your checking record and that of the bank, the onus lies with you to prove the bank wrong, rarely the other way around.
Expansion equals complication
As globalization expands, the current ledger system has grown more complex. Raw-material providers maintain their ledger, as do the shipping companies that move those raw materials, as do the brokers that sell the materials, as do the manufacturers that turn raw materials into products.
Throughout the network of industry players – wholesalers to logistics providers to retailers – each entity maintains its own ledger, which must periodically be reconciled with others’ ledgers.
This “status quo” system has three problems:
- It is expensive because it requires a duplication of effort with intermediaries adding margin.
- It is inefficient because transactions must be duplicated by every network participant.
- It is vulnerable because if a central system (e.g., a bank) is compromised (e.g., through fraud, cyberattack, or human error), it affects the entire network.
Blockchain disrupts the status quo
Blockchain is a distributed database or ledger that maintains a constantly growing list of timestamped records and transactions (blocks). In a Blockchain network, different parties no longer keep separate ledgers, but rather, are continually updating and reconciling the same “shared” or “distributed” ledger.
This shared ledger exists tens, hundreds, or thousands of times in a network of trusted nodes (computers that validate transactions, relay transactions, and store a copy of the Blockchain). Cryptography ensures that everyone is working with the most up-to-date verified ledger and that network players are only able to edit data they “own” using a personalized key.
In such a system, you no longer need to spend time on monthly reconciliations. A central authority ceases to exist because trust has already been established and is shared by each network “node” that has validated and approved a transaction. Instead of asking your bank what your balance is, you simply look at the shared ledger that had been already witnessed and approved by all the “nodes” in the network. This, as we’ll see shortly, has enormous implications for entire swaths of industries.
Leaving a transaction trail
Another component of Blockchains is that every transaction that is verified in the network is linked to a previous transaction (hence the idea of a chain) so that you can trace back the “provenance” of the transaction or asset being recorded.
Think of this the same way you do with a car’s VIN number that traces its entire life history from manufacture, to sale, to repairs, to accidents, to resale, to the junkyard. Every time a transaction is approved for inclusion in the ledger, it becomes permanent. It can never be changed. If it was a mistake, it can only be corrected by inputting a new transaction into the ever-lengthening chain of records.
A simple conceptual analogy and way to think of Blockchain is Google Docs vs. traditional Word documents. When you collaborate with someone in a Word document you send a copy of the document to someone, they read it and make adjustments, and then send a new copy of that document to you. With Google Docs, multiple people can work on the same document in real time (so everyone is always looking at the most up-to-date version of reality). All edits and previous versions of the Google Doc are timestamped and available for anyone to go back and look at.
Benefits of Blockchain
Blockchain technology promises a shared, replicated, permissioned ledger that provides:
- consensus (all participants agree that the transactions are valid),
- provenance (participants can trace where an asset came from and how ownership changed over time),
- immutability (once participants reach consensus on a transaction, no participant can tamper or alter it. There is no one centralized version of the data and it would require unreachable levels of computing power and a simultaneous hacking of each node in the network in order to corrupt the data), and
- finality (there is ONE place to determine the ownership of an asset or completion of a transaction).
We appreciate that this definition is a mouthful. But such is the norm for new innovations. Keep in mind that the thing that Orville and Wilbur Wright first built was considered a machine for “sustained and controlled heavier-than-air powered flight.”
Making sense of a radical innovation
We believe that what most slows down the adoption of radical innovations is less technical than conceptual. Radical innovations initially don’t make sense because we cannot link them metaphorically to what we already know. We cannot name them. To read more about the mechanics through which new innovation concepts emerge, see here.
But eventually, the world will untangle, make sense of, and ultimately name what Blockchain really is and, just as the Wright brothers’ machine was eventually called an “airplane” – a flat wing for the air – people will start appreciating what Blockchain is and what it is for.
But first, we need to dismantle several misconceptions about Blockchain, which we will cover in our next few posts.
*Photo by Markus Spiske on Upsplash