“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tapscott.
What is blockchain?
Blockchain is a list of cryptographically threaded blocks that contain data in the form of transactions or events.
Chaining through cryptographic hashing guarantees integrity of the blocks and therefore, transactions. So, if someone wanted to change existing transactions later, all posterior hashes would have to be recalculated.
This property does not make blockchain safe against manipulation, as who generates hashes is crucial. If I am the only entity that generates block hashes, I have full control over blockchain, and it is a private blockchain. There are two main forms of blockchains: private and public.
Forms of Blockchain
A private or permissive blockchain restricts access to the ledger so that only selected participants can interact with data. This results in the following properties, among others:
– Centralized validation
One or only a few authorized entities generate block hashes of and determine its validity.
– Potential single point of failure
If the validator(s) fails, the system no longer functions.
– Able to be manipulated or based on trust
All participants must trust the validator(s). In principle, the validator determines whether a transaction is valid or not and can therefore also change previous transactions and regenerate blockchain hashes.
– High performance
Due to the absence of distributed voting, validation can be performed much faster, which contributes to a high processable transaction rate.
Different from Private blockchain, in public blockchains validation and hash generation are created through a democratic consensus. This results in the following properties, among others:
– Distributed and democratic validation
Validation is performed by network participants (knots or pairs). This is often accompanied by a process called “mining,” where the miners propose appropriate hashes that are accepted by the network by a majority of votes.
– No single point of failure
The failure of individual knots or miners have little or no effect on blockchain functionality.
– Immutable or “trustless”
Consensus validation makes it extremely difficult or even impossible to change previous transactions, making blockchain history virtually unchangeable. This means that data can actually be trusted.
– Low transaction frequency
The democratic voting process takes time, which significantly affects the transaction rate.
This isn’t a black-and-white world, and there are certainly mixed forms of blockchain that are suitable for different areas of application. It is possible to distribute read and/or write permissions as desired. Therefore there are open systems, where everyone can read and write as desired, and closed systems, where the write permissions in particular are granted only to selected participants. This results in the following combinations and corresponding scenarios:
|PUBLIC||Elections, Digital Identity||Digital Currency, Bets, Video Games|
|PRIVATE||Tax, Military, National Defense Statements Among Companies||Government Records, Supply Chain, Health Records|
Blockchain technology is constantly evolving. While at first (around 2008) it was a matter of solving non-trivial problems in distributed systems in relation to digital currency, today the focus has shifted in particular to automation and programmability through smart contracts. This results in application-specific implementations such as cryptographic currencies, and in real platforms that offer flexibility and diversity of unimaginable applications. This is also the analyst firm Gartner’s view.
Gartner categorizes blockchain technology in three evolutionary stages:
Blockchain-inspired solutions use three of the five elements: Distribution, encryption, and immutability. These solutions generally lack tokenization and decentralization.
Complete enterprise-ready blockchain solutions will emerge around 2023. They will use all five elements of blockchain and offer a path to completely new business models.
From 2025 on, blockchain will incorporate complementary technologies such as the Internet of things (IoT), artificial intelligence (AI), and decentralized self-sovereign identity (SSI).
One of the key technologies for the “blockchain-complete solution” is the so-called smart contracts. Smart contracts are, in the broadest sense, programs that are ideally stored immutably in blockchain. They be used to automate transactions as well as to create new types of digital assets or tokens, thus opening new application areas. There are almost no limits to imagination here. Current application areas are digital collectables, event ticket systems, polls, digital licenses, digital identities, fiduciary services, etc.
Closely related to smart contracts are decentralized applications, or dApps for short. Typically, dApps have a visual user interface, for example, a web application, which relies on decentralized backend technologies rather than centralized server solutions. That is, dApps use blockchain itself as a data source and also the functionality of smart contracts. Decentralized applications are very robust because blockchain is generally fault-resistant; there is no single point of failure. In addition, dApps are easy to scale in the form of static sites.
By far, the best-known application of blockchain is cryptographic currency. There are currently more than 8,000 different projects registered, although a large portion of these are barely active, if they are active at all. Currently, the financial sector is the most influenced area, but there are many others that can benefit from blockchain. For example, intellectual property with licensors and licensees, health with patient data and insurance payments, supply chains, notary, official de-bureaucratization, and much more.
Wherever there is light, there is also shadow. The technological development of blockchain is in full swing, and there is something new almost every day. And there are a number of challenges to be taken into account. For one thing, the challenges are much greater for public blockchains than for private blockchains.
Systems such as Bitcoin or Ethereum are used by millions of people, so correcting errors or adjustments of particular protocols are complex and time-consuming processes. In the context of a large volume of transactions, the scale of classic blockchain is a serious problem. Another major challenge is the interoperability between the blocking chains, because there is no uniform criterion yet. Currently, interoperability is achieved mainly through central gateways, that then become a fragile link in the system as a whole. Another more sociological factor is the incentive for participants to support and maintain a public blockchain. In typical cryptographic currencies, it is often an interaction between knots and mining operators. While mining companies are compensated through transaction fees and rewards of mined blocks, other measures are needed to encourage knot operators to run the required blockchain software continuously on a server. This is currently an active area of research and often involves the theory of games.
Based on Gartner analysis, blockchain technology is expected to have an extremely promising future with exponential growth prospects. For example, while digital money is initially seen as one of the pioneers, analysts believe that blockchain will outstrip digital money as a technology for integration between companies around 2030. Other sectors, such as public registers and corporate application fields, are also expected to grow strongly.
The future of blockchain, as envisaged by IHS Markit, paints a similar picture. By 2030, the financial sector, logistics, and identity management will be the areas with the highest value growth.
Blockchain is, by no means, only about Bitcoin and Ethereum. It is a technology that is now considered to play a significant role. It has the potential to permanently change both the financial world and our society. We can expect the current Internet, with its tendency to accumulate unimaginable amounts of data in some corporations’ data centers to evolve once again to a more decentralized form. Blockchain is certainly not the solution to all problems; however, it will be a key technology in the coming years.
At Cinq, we are internally experimenting decentralized and distributed technologies, such as blockchain, because we also realize that the potential for innovation is huge.
By, Oliver Hager