From time immemorial, ledgers have been used to record transactions in money, assets, property etc. In the last two decades, ledgers moved from papers to bits on computer softwares. In the last decade there have been many attempts at creating a working digital currency that got success in 2008, when Satoshi Nakamoto wrote his paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ based on a protocol called Blockchain.
Bitcoin Blockchain is a digital distributed ledger, collectively owned by a group of people in peer-to-peer mode that records all the bitcoin transactions put together every 10 minutes in the form of blocks in a linear fashion. That is why the name Blockchain.
Blockchain is a distributed database shared on thousands of computer nodes spread across geographies. Each node has same copy of the ledger and any transaction happening anywhere on the network, gets validated and recorded in a time stamped block through a process called mining and gets reflected in all the ledgers across nodes. The security is maintained cryptographically through the use of digital signature and hash function based on SHA256.
Each block in the blockchain includes a hash function pointing to previous valid block and gets added in a chronological order in the chain of blocks. Anyone in the network can add a block of transactions by solving a cryptographic puzzle and gets rewarded with bitcoins. Currently 12.5 bitcoins are awarded as an incentive to the person solving the puzzle and adding a new transaction block. The incentive will go on decreasing with number of bitcoins increasing in the system to ensure that the total number of bitcoins do not exceed 21 million. The whole process of validating transactions and adding a new block to the blockchain is called bitcoin mining.
Blockchain is the next revolutionary technology to have deep impacts across industries. It can record everything, be it information or transactions like money transactions, exchange of goods, contracts, birth & death certificates, educational degrees, medical records, governments records, intellectual properties etc. Economist called blockchain the TRUST MACHINE.
Blockchain helps two people to transact without having any trust between them. In other online transactions where one party uses credit card, debit card to make payment to other party, the trust is generated from a third party that validates and authenticates the transaction. It could be bank or any other such similar organisations. Blockchain helps exchange value with out intervention from any such third parties. We will see in later posts, how the trust gets generated in a blockchain.
World is exploring new use cases of blockchain technology.
Financial institutions and banks are exploring building private blockchains which will consist of known participants with a computer acting as nodes. Each node has same copy of the entire ledger with a set of rules to accept a transaction and add it to the blockchain.
Currently when a financial transaction happens in a bank, it goes to a central clearing house for approval. Once blockchain technology is implemented, the role of central clearing house becomes redundant. All the branches/ nodes have their copy of ledger with a common network protocol and consensus mechanism to validate any transaction.
Blockchain technology will enhance the operating efficiency by redundant-ing the central clearing house. It is more secured and economical to current systems of online transactions.
IBM’s ADEPT project, a blockchain powered Internet of Things, is creating a distributed network of devices . A product with sensors will get registered to a blockchain as soon as it comes out of the factory and starts its journey. Devices on IoT running on blockchain will exchange data without a central mediating authority.
Nasdaq Linq is the first financial platform showcasing how trading could be managed running on blockchain technology. Currently Nasdaq Private Market is using it for share trading in private companies.
Estonia is a digitally advanced country in Northern Europe. All the Estonians carry smart card to access over 1000 online government services. Estonian Government uses blockchain in tax and business registration systems and is planning to implement blockchain in Healthcare to secure Patient Health records. Currently, organizations across the world, use centralised large IT systems to store and manage such data along with network and messaging systems for secure data exchange. This not only increases the cost but also adds several layers of complexities. These systems are also exposed to cyberattacks and pose a very high cost of single point failure.
Blockchain based ledger systems are less prone to cyberattacks due to their distributed nature.
According to IBT, Estonian Government’s Bitnation – the decentralised governance project, will allow e-residents to register their birth certificates, marriages, business contracts and other such things on the blockchain. Foreigners who become e-resident can live anywhere in the world and do business in Estonica. E-residents can establish a company in Estonia online in 24 hours and operate it from anywhere in the world. In Estonica, Company income is not taxed, compliance is simplified and all income is available for reinvestment. The person will pay the taxes in the country of his residence, for the money that he takes out of Estonia.
The whole project is giving birth to the idea of a virtual borderless nation where a person can access his choice of governance service provider among thousands competing globally to offer better services at a competitive price rather than the person being forced to accept the services of a service provider within the physical border of a country, as is the scenario today.
Blockchain technology is still evolving and it has many issues to address around identity, scalability, performance, energy efficiency and others before its full potential can be harnessed.
Keep visiting to learn more about this amazing technology.