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What Is Blockchain Technology (Explained) – How It Will Change the Future

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In November 2008, an anonymous author using the pseudonym Satoshi Nakamoto issued the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System,” which outlined “a system for electronic transactions without relying on trust.” This system, known as blockchain, became the basis for the world’s first widely accepted cryptocurrency, bitcoin. It’s also a foundational technology that has the possibility to impact society as dramatically as the invention of the Internet itself.

Don Tapscott, author of “Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World,” claimed in an interview with McKinsey & Company that blockchain is “an immutable, unhackable distributed database… a platform for truth… a platform for trust.” An unapologetic, enthusiastic supporter of blockchain, he adds, “I’ve never seen a technology that I thought had a greater potential for humanity.”

Is the hype around blockchain justified? Let’s take a look.

The Dangers of Digital Transactions

Mutual trust is the basis for business transactions. Yet as society has grown more complex, our ability to trust another party — especially if they’re unknown and halfway around the world — has decreased. As a result, organizations develop elaborate systems of policies, procedures, and processes to overcome the natural distrust arising from the uncertainties of distance, anonymity, human error, and intentional fraud.

At the heart of this distrust is the possibility of a “double spend,” or one party using the same asset twice, particularly when the assets being exchanged are digital. When exchanging physical assets, the transaction can only occur at one time in one place (unless forgery is involved). In contrast, a digital transaction is not a physical transfer of data, but the copying of data from one party to another. If there are two digital copies of something for which there should be only one, problems arise. For example, only one deed of the ownership of a house should be applicable at a time; if there are two seemingly identical copies, two or more parties could claim ownership of the same asset.

Unfortunately, the systems and intermediaries required to ensure, document, and record business transactions have not kept pace with the technological changes of a digital world, according to Harvard Business Review.

Consider a typical stock transaction. While the trade — one party agreeing to buy and another party agreeing to sell — can be executed in microseconds, often without human input, the actual transfer of ownership (the settlement process) can take up to a week to complete. Since a buyer can’t easily or quickly verify that a seller has the securities the buyer has purchased, nor can a seller be confident that a buyer has the funds to pay for that purchase, third-party intermediaries are required as guarantors to ensure that each party to a trade performs as contracted. Unfortunately, these intermediaries often add another layer of complexity, increase costs, and extend the time it takes to complete the transaction.

Our existing systems are also vulnerable to intentional attempts to steal data and the assets they represent. International Data Corporation reports that businesses spent more than $73 billion for cybersecurity in 2016 and are projected to exceed $100 billion by 2020. These numbers don’t include security expenses for non-businesses or governments, the cost of wasted time and duplicated efforts due to data breaches, or the expense of any remedies to those affected.

Blockchain technology presents a remedy for these issues that could significantly alter the way we do business in the future.

How Blockchain Technology Works

Understanding blockchain requires an understanding of “ledgers” and how they’re used. A ledger is a database that contains a list of all completed and cleared transactions involving a particular cryptocurrency, as well as the current balance of each account that holds that cryptocurrency. Unlike accounting systems that initially record transactions in a journal and then post them to individual accounts in the ledger, blockchain requires validation of each transaction before entering it into the ledger. This validation ensures that each transaction meets the defined protocols.

Blockchain technology enables the movement of assets or information from one party to another, while simultaneously recording encrypted digital data for each transaction in an open, distributed ledger in an efficient, verifiable, and permanent way. Each transaction’s details are stored in a digital “block,” permanently time-stamped, and linked to the preceding block to create a chain.

The ledger for each cryptocurrency is maintained simultaneously on a large number of decentralized but identical databases, each hosted and managed by an interested party. Before being added to the blockchain, independent third parties called “miners” (on a public blockchain) or “transaction validators” (on a private blockchain) validate the details of transactions. When a change is made in one ledger, all ledgers are automatically updated, eliminating the need to verify and audit transactions.

Advantages of Blockchain Technology

Blockchain technology is revolutionary due to several key characteristics.

1. Transparency

The information in a public blockchain is visible to everyone. Every member of the network has an identical record and is instantly aware of any change in that record. This visibility replaces the need for intermediaries. Since each party to a transaction can verify that the other party owns the asset they seek to exchange and subsequently initiate the transfer, there is no need for third-party verification.

2. Authentication

Transactions in a blockchain are unchangeable. Since the blockchain resides simultaneously on many computers, it is virtually unhackable and tamper-proof.

3. Permanency

Data cannot be erased, canceled, or reversed once it’s entered in the ledger and added to the blockchain. Each record is time-stamped, attributed to a specific party, and validated by every copy of the ledger residing throughout the network.

4. Programmability

The marriage of blockchain and “smart contracts” — self-executing software that contains rules for the execution of a contract, verifies that the rules have been met, and then executes the contract — eliminates the need for human intervention, reduces costs, and speeds up transactions by executing them automatically.

Potential Uses of Blockchain Technology

To be accepted on a broad scale, new technologies must deliver advantages greater than existing systems and processes. Potential benefits can include lower costs, faster execution, more reliable data, better security, ease of use, scalability, or a combination of these. Early results of blockchain programs suggest that the technology excels in most applications currently relying on third-party intermediaries.

Many observers predict that blockchain technology has the power to remove the middleman in financial transactions, blur geographic borders, and even change the forms of our primary organizations. As the Brookings Institution puts it, blockchain technology provides a “transfer of trust in a trustless world. It offers a system whereby the Internet can reach its full potential; users, no matter their location, can safely participate in transactions with unknown parties without the use of third-party guarantees.”

Potential blockchain adopters include any organization that:

  • conducts transactions that are subject to a high risk of fraud
  • uses costly intermediaries to complete transactions
  • processes high volumes of data
  • deals with relatively stable data (e.g., land titles, personal data)

The following industries are especially likely to feel the impact of the adoption of blockchain technology.

1. Financial Services

The financial services industry is perhaps the most vulnerable to the impact of blockchain technology. According to Techworld, major financial institutions such as JPMorgan Chase, Citigroup, Barclays, UBS, and Wells Fargo are investing hundreds of millions of dollars in blockchain technology to protect their turfs.

As Jamie Dimon, CEO of JPMorgan Chase & Co., wrote in a 2014 annual report to shareholders, “There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking.” The bank subsequently announced a new blockchain-based system that would significantly reduce the number of parties needed to verify global payments, cutting transaction times from weeks to hours.

Blockchain technology has also significantly affected the venture capital and IPO markets, according to Bloomberg Financial. Today, companies of any size can raise funds in a peer-to-peer manner by initial coin offerings (ICOs) that are outside existing securities regulations. These offerings are similar to crowdfunding and distribute a digital coin or token to buyers rather than equity in the sponsoring company. Bloomberg reports that in the first half of 2018, unregistered ICOs raised over $9 billion in new funds  more than double the entire amount raised in 2017.

The impact on financial intermediaries such as investment bankers, exchange operators, auditors, lawyers, and financial printers could be devastating. Even the Intercontinental Exchange, the American company that owns the New York Stock Exchange, has invested in blockchain technology, according to CNN.

2. Cybersecurity

The security aspects of blockchain technology can reduce the risk of cyberattacks across all industries. As Steve Langan, CEO of Hiscox Insurance, told CNBC, “cybercrime cost the global economy over $450 billion, over 2 billion personal records were stolen and in the U.S. alone over 100 million Americans had their medical records stolen.” Adopting blockchain technology would reduce conventional cybersecurity risks by lessening the threat of hacking, corruption, and human error.

While blockchain technology appears to offer an unprecedented level of digital security, experience shows that “black hats”  hackers, thieves, and scam artists  are constantly discovering new ways to breach seemingly unbreachable security. The increased use of blockchain will undoubtedly encourage new efforts to compromise the technology, securing a profitable future for cybersecurity firms.

3. Real Estate

The real estate industry uses outdated technology and processes, often relying on paper records to register land and property ownership. The entire process of transferring and verifying ownership is costly, non-transparent, arduous, and prone to fraud. Blockchain technology is likely to replace costly intermediaries such as title companies, lawyers, and agents with smart contracts and automatic verification of property ownership based on blockchain records.

4. Global Logistics & Shipping

With worldwide markets, the movement of goods across borders and long distances involves as many as 30 different parties — including carriers, terminals, forwarders, haulers, drivers, and shippers — requiring hundreds of email, phone, and fax interactions. Blockchain technology can reduce costs and increase efficiency by simplifying this process.

For example, Everledger introduced a blockchain system in 2016 to track the mining and distribution of individual diamonds so buyers can be sure they’re purchasing authentic, conflict-free gems. Jody Cleworth of Marine Transport International noted in Supply Chain Digital that “any type of supply chain business, be it marine-, air-, or land-based, can take advantage of such a system [as blockchain] — the cost savings that we envisage are as high as 90%, as a result of substantially streamlined processes.”

5. Pharmaceuticals

Counterfeit drugs are a worldwide problem with real human consequences. According to a 2010 report by the World Health Organization, worldwide sales of counterfeit drugs were $75 billion in that year alone and resulted in more than 100,000 victims.

The supply chain in the pharmaceutical industry is complex, with drugs passing from manufacturers to distributors, repackagers, and wholesalers before reaching the retailer and customer. There is little to no visibility throughout this supply chain to track authenticity. Companies are working with blockchain technology to bring integrity, traceability, and transparency to the global supply chain.

6. Health Care

Paradoxically, health care records are all too available to hackers while unavailable to physicians and health care workers who need up-to-date data to provide optimum care. According to a report by the national consulting firm Deloitte, medical blockchain solutions have “the potential to connect fragmented systems to generate insights and to better assess the value of care. In the long term, a nationwide blockchain network for electronic medical records may improve efficiencies and support better health outcomes for patients.”

7. Public Services

Blockchain technology will allow governments to deliver citizen services more effectively, thus increasing trust and goodwill and providing savings. According to MIT senior lecturer Brian Forte, blockchain technology has the potential to “cut through the hodgepodge” and frustrations of dealing with government services. He writes that “blockchain-based solutions will give [anyone] the ability — without having to wait in line at the motor vehicle department or any similar place — to automatically do a transaction with the government, yet still have complete trust that the government certified that transaction.”

8. Charity

Blockchain technology provides another route by which charities can fundraise and accept donations, but “crypto-philanthropy” is just the beginning. The Bill & Melinda Gates Foundation is using blockchain technology in its innovative Level One Project to create a “digital financial services system” to help the estimated two billion people worldwide who lack bank accounts.

9. The Arts

Digital artistic works are especially vulnerable to copyright infringement, thus depriving artists of their rightful royalties. A blockchain application ensures that the product cannot be transferred until the sale is recognized and payment is made.

IBM, ASCAP, and PRS for Music are partnering to adopt blockchain technology in music distribution and copyright management. In 2017, DJ Deadly Buda released “Rock the Blockchain,” the first DJ mix that pays the artist almost instantly via blockchain

Block Chain Diagram Grey Suit Visual

Obstacles to Blockchain Adoption

The expectations for blockchain technology are immense. Vinay Gupta, a software engineer, disaster consultant, and global reliance guru, claims in Harvard Business Review that “blockchain is about to revolutionize databases, which will, in turn, revolutionize literally every aspect of our civilization.” Cisco’s Connected Futures magazine calls blockchain “a fast-rising technology that will shake the foundations of how people, companies, industries, governments, supply chains, and, yes, robots interact.”

While the excitement surrounding blockchain stems from genuine opportunities, the changes it’s projected to bring about will require decades to implement. Furthermore, the adoption of blockchain technology will undoubtedly run into obstacles as it evolves, and many of these obstacles are as yet unknown. Gartner, one of the world’s leading research and advisory companies, ranks blockchain at the peak of “Inflated Expectations” in their 2017 report “Hype Cycle for Emerging Technologies.”

Specific obstacles to the widespread adoption of blockchain include the following.

1. Entrenched Resistance

The Economist describes blockchain as “a machine for creating trust” that “is bad for anyone in the ‘trust business’ — the centralized institutions and bureaucracies, such as banks, clearing houses and government authorities that are deemed sufficiently trustworthy to handle transactions.” Established intermediaries will not easily cede their positions in transaction processing to new technology or new organizations.

As Niccolò Machiavelli noted in his book “The Prince” more than 500 years ago, “the innovator has for enemies all those who derived advantages from the old order of things… Whenever the opponents of the new order of things have the opportunity to attack it, they will do it with the zeal of partisans.”

2. Investments in Existing Infrastructure

The potential users of this new technology already have huge investments in the status quo. These investments are financial and organizational, with long-established processes and procedures to maximize their existing infrastructure. Established organizations naturally resist change with the mindset “better the devil you know than the devil you don’t.”

Studies indicate that the diffusion of any new technology is a continuous but lengthy process. The decision is more often a choice of when to adopt, rather than if to adopt. After all, while the financial benefits of a new system are typically recovered over time, its implementation requires an upfront fixed cost that may never be recovered.

3. Lack of Skilled Programmers

According to AngelList, more than 25,000 of the world’s best startups are currently looking for blockchain developers, architects, software engineers, and programmers. While supply will eventually catch up with demand, the initial lack of capable, experienced blockchain talent will delay the migration from traditional transaction systems to the new technology.

4. Legal Uncertainties

Existing transaction systems operate within rules, responsibilities, and liabilities established by decades of regulatory and court decisions. Participants understand their recourse when those rights are revoked or ignored. Participants in a blockchain transaction, however, lack any formal or established boundaries and guidelines. The legal questions to be resolved when it comes to blockchain transactions include:

  • Ownership. Who owns the data on a blockchain?
  • Jurisdiction. Where does the transaction occur within a global network?
  • Liability. Who is responsible if the blockchain or smart contract fails and a transaction is not completed or contains errors?
  • Privacy. Is complete anonymity of parties desirable? If not, what limits should be imposed?

The possibility of a new legal entity, a decentralized autonomous organization (DAO) that operates automatically with precoded rules (e.g., smart contracts) without human intervention, is especially troublesome. What legal status should DAOs have — corporation, partnership, or contract? What oversight should be implemented, and who should provide that oversight? Who is responsible if laws are broken? Who or what has liability for the actions of a DAO? The lack of rules and regulations for blockchain technology will likely slow its adoption.

5. Private Blockchains

Existing intermediaries such as banks and insurance companies are spending millions of dollars to protect their positions through “private blockchains” whose participants are limited to known, selected partners within a single industry. By employing blockchain technology to capture most of the benefits of a public blockchain — lower costs, speed, and permanency — these companies may be able to delay the entry of public blockchains that threaten their businesses.

Some of the most ardent proponents of public blockchain technology concede that private chains have a place. Max Kordeck, CEO of the public blockchain Lisk, told Bitcoin Magazine, “The biggest advantages of private blockchains in comparison to centralized databases are the cryptographic auditing and known identities. Nobody can tamper with the data, and mistakes can be traced back. In comparison to a public blockchain, it is much faster, cheaper and respects the company’s privacy.”

6. Potential for Fraud

For all of blockchain’s security features, scam artists and cybercriminals can still find ways to use the technology to their advantage. In early 2018, hackers stole $530 million from the Japanese cryptocurrency exchange Coincheck. The exchange failed to implement the suggested multifactor authentication process, allowing the hackers to exploit a single private cryptographic key.

Final Word

Blockchain technology is likely to be adopted in various degrees over the coming decade, replicating the spread of Internet usage over the previous decade. However, knowing which of the companies offering new blockchain solutions will be successful is difficult, if not impossible. As a consequence, there will be millions earned and millions lost by companies and investors as the market shakes out.

If you’re considering a blockchain ICO investment, be sure you understand the application of blockchain technology, the markets it will affect, the benefits it might provide to its users, and its likely rate of adoption. Limit your financial exposure to blockchains and cryptocurrencies to what you can afford to lose without hardship. Understand that, while significant profits might result, it is far more likely that you will lose all of your money.

Do you believe blockchain technology will impact the future? In what ways? Do you think the hype is warranted?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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