Blockchain technology hit an inflection point in 2017. It evolved beyond a fringe format of storage and exchange for a digital asset—Bitcoin—and broke into public consciousness as a new way to share and store information. While this technology is still developing, its broad and far-reaching applications are poised to impact a range of industries. Though it’s not yet mainstream, we will continue to monitor blockchain technology as it matures in 2020. For that reason, in this section we have outlined key themes within blockchain and distributed ledger technologies.
Blockchain technology is a method of sharing and storing information on a distributed ledger where identities and transactions are cryptographically protected. At its core, blockchain enables multiple parties to agree on a single source of collective truth without having to trust one another individually. In theory, blockchain reduces the need for intermediaries such as banks to coordinate or verify transactions. Blockchains fall under the umbrella of distributed ledger technologies, a new family of technologies that are enabling radical advancements in the fields of data sharing and data management.
Blockchain technology offers enormous opportunity to protect data, safeguard privacy, build trust in supply chains, and to automate transactions across numerous industries.
The term “blockchain” refers to a specific type of data architecture—often in the context of a network or an ecosystem. It’s on the blockchain where transactions occur. “Tokens” or “cryptocurrencies” can be part of a blockchain network: They represent units of value. They can be traded or spent to make purchases or investments, to facilitate transactions, or to reward work that benefits the network. Most people have heard about “bitcoins.” These are units of cryptocurrency in the Bitcoin network.
There isn’t just one blockchain. In fact, there are different types: private, public, and federated. (This is similar to how there isn’t just one “internet”—there is internet architecture and protocols, but there are different versions, networks, repositories, sites, and services based all around the world.) Blockchains can be started by individuals, companies, or consortiums, and they live on multiple machines simultaneously. They can run on different protocols just like mobile phones can run on different operating systems. There is no singular place where “the blockchain” is hosted.
Imagine editing a Google Doc or a Wikipedia article. These are distributed systems where transactions—in these examples, informational transactions in the form of textual edits—are verified by a central authority—in this case Google and Wikipedia, respectively. Blockchain systems replace the central administrators with consensus algorithms and network miners.
Let’s assume we have a network of 100 individual nodes (individual computers or clusters of computers) running a blockchain ledger. In a public blockchain, every node has access to see the full ledger because the ledger is distributed. No single node controls the network, and all nodes have the opportunity to verify transactions, in exchange for a reward. This is generally referred to as “mining.” The more nodes that choose to become miners, the more the network is decentralized. As a reward for their efforts, every miner that verifies a block of transactions wins a block reward—this is represented by a cryptocurrency unit or a token. Miners can be anyone: people who want to help build the infrastructure, startups with spare computing resources, or even huge investment banks looking to get into crypto markets. Miners compete against each other to verify transactions. Once a miner verifies a set of transactions, or a “block,” the node broadcasts the new block to the entire network. If the majority of the network agrees the block is valid, it is cryptographically added to the existing chain of blocks or “blockchain,” which forms the ledger. Miners then can work on the next block.
Not in the traditional way. Since it is impossible to predict which miner will verify the next transaction, it is nearly impossible to collude against, attack or defraud the network. The network is secure as long as miners act independently of one another. However some clever hackers know that it’s possible to manipulate a network by doing more of the work than anyone else. One known method of attack is to control greater than 51% of the mining activity. Believe it or not, this has happened in the past—in 2019 hackers took control of the Ethereum Classic blockchain with a 51% attack.
The concept of blockchains was first introduced in 2008 when a person or group of people under the name Satoshi Nakamoto published the seminal paper, “Bitcoin: a Peer to Peer Electronic Cash System.” To this day, it’s still not clear who Satashi Nakamoto really is, whether or not they are Japanese, and what their true motivations were in helping get blockchains started in the real world.
It took several years for the information in the paper to evolve from an interesting concept to usable code at scale. But once Bitcoin gained recognition as the first cryptocurrency, other versions soon followed. In 2015, Canadian computer programmer Vitalik Buterin released Ethereum, a blockchain-based protocol that allowed for more sophisticated functionality in the form of smart contracts, or self-executing agreements, the terms of which are written directly into lines of code. Ethereum was the first blockchain project to fundraise through an “Initial Coin Offering” or ICO, raising $19 million in 2014. An ICO is similar in some ways to an Initial Public Offering, but instead of shares in a company, investors receive tokens which may or may not eventually be of some value or use in the digital ecosystem that the money is being raised to develop. In 2017, more than 400 ICOs raised $5.6 billion.
The year 2018 was dubbed the “crypto winter,” because the total market cap of cryptocurrencies fell by 85% over the course of 12 months. Despite the bear market, finance, tech, and retail heavyweights like Fidelity, IBM, Facebook, Google, Microsoft, Amazon, and Walmart all made significant investments in the industry. Bank of America, Mastercard, and IBM collectively owned more than 100 blockchain-related patents.
Blockchain is still a nascent technology, and many challenges must be addressed before it can reach mass adoption—namely speed, scale, and regulation.
Decentralized systems are inherently less efficient than centralized systems, and there are trade-offs between security and scale. Bitcoin and Ethereum process between three and six transactions per second, while Visa processes thousands of transactions in the same amount of time. As systems improve, this is changing—but there’s still a long way to go.
However, the bigger challenge is likely to be regulatory. The fate of blockchains, cryptocurrencies, and tokens is uncertain, to say the least. In the U.S., the Securities and Exchange Commission (SEC), congressional offices, and local state governments all have specific and, at times, conflicting policies related to blockchains and cryptoassets. In fact, the SEC still does not have a regulatory framework ready for use in the crypto domain. In the summer of 2019, the Internal Revenue Service caused a mini-shockwave when it sent out 10,000 warning letters to the owners of cryptocurrencies. Some believe it may be a similar effort the agency took when it went after Swiss banks a few years ago, rooting out financial hideouts for people avoiding taxes.
While the primary use cases for blockchain technology evolved in the field of financial services, blockchains are proving their use in wider contexts where authentication matters. Many different industries are building new applications and uses for blockchain technology. We are paying close attention to what’s happening in professional services, commercial real estate, financial services, supply chain management, logistics, healthcare, and identity management.
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