Records representing 10% of global GDP will be stored on blockchain by 2025, according to a World Economic Forum (WEF) report. Momentum is gathering and this nascent technology is potentially game-changing across several industries.
Blockchain technology is both simple and beautiful, in a way that mathematics can be beautiful. So how does it work? At its simplest, blocks of data are arranged sequentially to form a chain. Data (such as transaction or contract records) are stored in a database in blocks. Each data block is permanently locked by adding the hash of the block to the contents of the following block in the chain. The hash is date stamped and acts as a grappling hook permanently locking the block to the subsequent block in the chain, and ensuring is cannot be altered.
Blockchain contains the following attributes:
- Block data is permanent and irreversible. Because each data block stores a hash of its preceding block in the chain, any single block cannot be altered without nullifying the hashes of all subsequent blocks. Blockchain thus ensures integrity and embodies inherent security from tampering.
- Transparency. Data in a block is available to any of the nodes in the system. Transaction verification is simple.
- Distributed. The processing and storage of blocks in the chain is disseminated among numerous peer-to-peer nodes. There is no need for a central authority. The system randomly selects nodes for each processing task. Decentralisation ensures the process is robust as a failure in one network is taken up by other networks. More nodes increases security.
The bitcoin digital currency is the most well-known use of blockchain technology. Bitcoin transactions are anonymous, and bitcoin mining includes a method of rewarding nodes for keeping the ledger up to date. Bitcoin is limited to 7 transactions per second globally. The currency has suffered from wild fluctuations in currency value, as well as from negative press surrounding darkweb Silk Road payments. Currently the total worth of bitcoin is about £20b, equivalent to about 0.025% of global GDP.
Several industries are now exploring potential applications of blockchain technology, many with disruptive potential. The Bank of England issued a challenge for groups to identify ways in which blockchain technology could potentially change society. Examples include storing university qualification records, digitally fingerprinting diamonds, and managing car leases.
SETL are deploying an institutional payment and settlement infrastructure based on blockchain technology. The SETL system enables participants to move cash and assets directly between each other. The system maintains a permissioned distributed ledger of ownership and transaction records. Bitcoin is anonymous, whereas SETL contains a legal entity identifier (LEI) in the data. It is capable of handling more than 1 billion transactions per day – up to 5,000 transactions per second in tests, and expected to reach 100,000 transactions per second in an enterprise environment.
R3 is a blockchain technology company which leads a consortium of financial institutions looking at easing cross-border settlements. The consortium includes some of the largest financial institutions in the world such as Barclays, Credit Suisse, Goldman Sachs, Bank of America, RBS, Citi, HSBC, Mitsubishi, Morgan Stanley, Societe Generale, BNP Parabas, and Santander.
Insurance is a blockchain use case attracting a lot of attention with the development of smart contracts. Blockchain technology can be used to record the transaction/contract and then make automatic payouts if contract conditions are met.
Health care giant Philips is exploring blockchain applications.
A WEF report revealed that 73% of respondents predict that tax will be collected by government via a blockchain, by 2025.
Other potential blockchain applications tackle digital content/document storage, digital identity, proof of ownership of assets such as property, and patient records. With an expectation of impacting 10% of global GDP in the next 10 years, we will see blockchain permeating many aspects of information technology like a rampant virus through an ill-configured firewall.