“Blockchain today is somewhat like the internet in the 1990s. There was a lot of ‘boom and bust’ in the early stage, but the underlying technology eventually evolved into an inseparable infrastructure of society.” This is what Joseph Lubin, a co-founder of the Ethereum blockchain, told the Observer. Everyone has heard of this technology, often in connection with cryptocurrencies, but not everyone knows how it works and what it can do.
Blockchain has the potential to transform many industries. It can cut out intermediaries, connect consumers directly with producers, eliminate bureaucracy and cut costs. Some say it will revolutionize what a company is and how people are taxed and governed.
But first, what exactly is blockchain and how does it work?
Transparency and trust
Blockchain offers a trusted way for people to exchange value (and not just monetary value). Think of how modern web-based software, like Slack or Google Docs, allows people anywhere in the world to work together. They work on a central platform that’s always up to date without the inefficient process of sending different versions to each other or needing an administrator to coordinate everything.
Blockchain can track millions of transactions or products in a supply chain. Anyone can look at the record to verify the quality, provenance, sustainability or freshness of any product, quickly and cheaply.
Blockchain verifies transactions on a network of computers. It is a communal ledger that is maintained by all users — each transaction is recorded and verified by all the computers in the network. Transactions are collected in “blocks”, and the blocks are all connected (forming the blockchain). Thanks to this distributed computing power, blockchain creates an open record of transactions that, realistically, cannot be tampered with. This is why it offers such a high level of transparency and trust.
As blockchain is decentralized and shared across a network, everybody is in charge, which also means that nobody is in charge. There’s no need for a central authority, like a bank, that works behind closed doors. The ledger is updated according to rules established by the software. In short: don’t trust the bank — trust the code.
The power to change everything
Blockchain could revolutionize any area in which people want traceability and trust — like in the food and beverage industry. Food producers and retailers are exploring how to track supply chains with blockchain. It would give everyone the chance to log their part in the production, transportation and sale of any product. The completely transparent record offers a high level of trust, from farmer to consumer.
In the near future, shoppers may be able to scan any product in a supermarket with their phones and see its whole history — where it came from, when and how it was produced, transported and stored. And not just general information about a certain brand or batch, but the individual history of the product they’re holding in their hands.
It’s not just consumers who will benefit. Without intermediaries, farmers and growers could get a larger share of the income from the sale of their produce. The technology can help businesses manage food scares and recalls. The US retailer Walmart, for example, has tested blockchain to track shipments of mangoes in just seconds.
Supermarkets could easily verify where any shipment of fresh produce came from, the date it was picked and whether it’s been stored at the correct temperature at all times. This data would allow quick decisions about whether to accept a shipment or not.
Home Depot, America’s largest home improvement retailer, uses blockchain to resolve disagreements. All players in a supply chain can verify other participants, share data or confirm that nothing has been produced under questionable working conditions.
Less time, more profit
All of this could save a lot of time and money. IBM and the Danish shipping giant Maersk estimate that blockchain could cut 15 per cent off the cost of transporting goods around the world by reducing manual procedures and the risk of corruption.
Ownership of property could also be secured on a blockchain, where contracts and title deeds are registered, eliminating a lot of costly, repetitive work. Data security, proof of digital identity, healthcare and even electronic voting are all areas that could be improved by blockchain.
And to come back to finance, small businesses could benefit from microfinance and crowdfunding thanks to blockchain’s ability to automate many small transactions. The technology opens up possibilities for people in developing economies who can’t use banks, for example, or to reward creators with fractional payments.
Smarter contracts
Blockchain will be the basis for a whole generation of smart contracts. These are self-executing agreements that follow simple if/when/then statements coded into a blockchain, making transactions between two or more parties fast and automatic.
Smart contracts can be used in decentralized applications (dApps). Just as software developers build apps for phones, dApp developers create applications for blockchain networks — mostly Ethereum, which is a kind of all-purpose industrial blockchain. There are already thousands of dApps with millions of users, creating billions of dollars in value.
Decentralized finance (DeFi) could transform the financial system, because dApps can do a lot of the things banks do. US investor Mark Cuban says: “It’s a hassle to borrow money from a bank. [DeFi] allows anyone with funds to be a lender...” Smart contracts let consumers participate in all sorts of financial markets, with no need for a bank, while keeping control of their money and data. Potentially, smart contracts could completely redefine what a business is and how it works.
The rise of the DAO
Imagine a global company in which everyday tasks are controlled by software instead of by managers. Algorithms assign jobs and manage incentives for those who want to do the work. The information that’s needed to run the company flows into a blockchain rather than through a management hierarchy.
This describes a decentralized autonomous organization (DAO). There are no employees, no HR — just sets of contracts, some of which are perhaps offered anonymously. DAOs are collectives that make decisions by automation and crowdsourcing. In the DAO world, some clients may actually be machines. An electric car, for example, could itself become a business that pays for its own charging and other costs through automatic payments from passengers and drivers (at least until the day when cars no longer need drivers).
The social, economic and political effects are too big to understand yet. The consequences for systems of taxation and government are going to challenge our existing concepts of the nation state, the welfare state and a lot more. While such dramatic changes are still some way off, William Mougayar, in his book The Business Blockchain, describes the technology as “...a tsunami-like phenomenon, slowly advancing and gradually enveloping everything...” Considering its fast growth over the last several years, it is not hard to believe that blockchain will one day be as common and familiar as the internet is today.
Takeaways...
- Blockchain is a communal ledger. It is maintained by all the computers in the network, so there’s no need for an intermediary, such as a bank.
- Transactions are verified in blocks. Each block is connected to the one before, forming the blockchain.
- Blockchain is best known in connection with cryptocurrencies, but it also has other uses, such as managing supply chains.