Blockchain: What’s all the fuss about?

You can’t go anywhere these days without hearing the word blockchain. The development and adoption of blockchain technology and tools seems to be accelerating to a rapid pace, and it is already impacting our social and economic lives, whether we are aware of it or not.?

As someone with a tech background I’m often asked by colleagues, students and clients about it – so I decided to summarize??the basic features and trends about this technology, as it is expected to grow and further penetrate our daily lives and has "the potential to be both disruptive and sustaining", as per the?MIT SMR Strategy Forum.?

In this short article, I cover a summary of a few key aspects of blockchain that I have collated after taking a deep dive into this topic and reading some of the best available books on the topic. See at the end some of the recommended books for further reading in case you are curious to know more about this topic.

What is blockchain?

Here I cover some of the key features of blockchain using historical and currently available data and debates.

Mesopotamian clay tablets and the old idea of the distributed leger

“Blockchain is one type of a distributed ledger”, says the?World Bank. We know that ledgers have been used by humans for thousands of years. One of the earliest records of such a system can be traced back to ancient Mesopotamia, which, according to?Douglas Garbutt, "devoted great effort and considerable skills to the creation and maintenance of accounting records", and used clay tablets in creating and keeping accounting, commercial, and legal records. Our contemporary local and global economy is dependent on a reliable and fully functional accounting ledger system called?double-entry bookkeeping. However, double-entry accounting necessitates the use of a third party to guarantee that the transactions are true and precise. This is where brokers, bankers, and other middlemen come in and are paid fees to validate the validity of those transactions between the buyers and sellers. But what happens when we find out that the accounting ledger and governance systems and tools are not working as they should be, as we have seen in various corporate scandals over the years? Is there a fix for this reoccurring problem? Proponents of blockchain are confident that blockchain is the solution to such problems that have caused significant economic and social suffering over the years. The blockchain was developed first as a platform for the cryptocurrency Bitcoin, to ensure that this digital token can never be spent twice. It is done through collective monitoring of every buy and sell activity and tracking every transaction. Anyone can view the transactions since they are all live; all you need to track them is an Internet connection. In addition to credit and debit, the blockchain's digital record has a third column, i.e., verification, which removes the need for any intermediary institution for audit and verification. Instead, this work is done by the participating humans and their computers, in which the contents of the block are permanently sealed and are unchangeable after encryption, thus removing the risks associated with corruption and poor governance by providing “tamper-proof records”.?

Power to the people - Decentralisation

When a new transaction occurs on a specific blockchain, such as bitcoin's chain, it does not immediately become a block that can be added to the blockchain - it must first be validated. But who should take on this task? Should it be a bank, the government, or an auditing firm? In the case of a decentralized blockchain, it is a decentralized computer network that does this job, ensuring control and decision-making are not concentrated in the hands of a single individual, institution, or group but are distributed evenly across a network to avoid bias, error, or misjudgement. Each network participant has a copy of the same data in the form of a distributed ledger. If a member's ledger is changed or distorted in any manner, the majority of network members will reject it. Therefore, there is a strong argument that “a decentralized approach would help make it equitable for all” by taking the power away from a central authority and distributing it to a network of citizens, consumers, and users. Other benefits of decentralisation include enhanced data reliability, reduced vulnerabilities, new possibilities for competition and innovation, reduced dependency on third-party institutions, and “more independent decision-making”.?

Outsmarting the middleman – the potential of smart contracts?

Blockchain has also opened the possibility of using smart contracts via distributed applications, or "dapps". A smart contract is simply a blockchain-based automated contract with conditions agreed upon by both parties. When the contract's terms are met, an algorithm enables the payment in the digital currency and records the transaction on the blockchain, which cannot be altered. As a result, smart contracts could eliminate the requirement for centralized authority to validate the transaction, potentially reducing costs and eliminating vulnerabilities that come with human interventions or centralized administration. Moreover, on top of autonomy and cost saving,?Corporate Finance Institute?highlights security, safety, speed, and accuracy as the other key features of blockchain-based smart contracts, which could revolutionise some of our key socioeconomic and governance activities and services, including voting, supply chain management, financial services, and healthcare. On an individual level, in the same way that smart contracts have the ability to replace the need for intermediary institutions, blockchain dapps have the potential to enable various types of transactions, such as those involving tourist accommodation or taxi services. For example, instead of paying fees to Airbnb and Uber as a central arbiter for your services, you could set up a smart contract directly with a customer that would administer the enterprise for you. For example, if the customer's demands change, depending on your agreement, the fees will be adjusted accordingly and automatically.

Source:?Blockchain Council

Key milestones in the history of blockchain

Without going into detail, here are some of the key milestones in the history and adoption of blockchain. You’ll see it has gained profile and momentum at an accelerating pace!

1982:?In his study, well-known cryptographer David Chaum presents the first?blockchain-like?technology to retain a permanent and unchangeable record of information about numerous transactions.

1991:?Stuart Haber and W Scott Stornetta describe for the first time a “cryptographically secure” blockchain while maintaining “complete privacy”.

1998:?Nick Szabo, a computer scientist, legal scholar, and cryptographer, introduces a digital currency called “BitGold”, a decentralized digital money “of unprecedented security”.?

2000:?Stefan Konst provides his theory of cryptographic secured chains, along with implementation options, essential for transferring, securing, and processing confidential and sensitive data, e.g., in the?healthcare industry.

Source: British Medical Journal Health & Care Informatics.

2008:?A?white paper?defining the model for a blockchain is published by developer(s) working under the pseudonym Satoshi Nakamoto.

2009:?Nakamoto creates the first blockchain to serve as the public ledger for bitcoin transactions, stating, “I’ve developed a new open source P2P e-cash system".

2014:?The currency is decoupled from blockchain technology, and its potential for other financial and interorganizational transactions is pursued.??Blockchain 2.0, which refers to uses other than currency is established. The Ethereum blockchain architecture incorporates computer programs that represent financial products into the blocks.

2018:?IBM collaborates with leading banks such as Citi and Barclays to create a blockchain-based banking infrastructure, “aimed at the financial services industry”, and the other banks and financial institutions also?make blockchain progress.?

Source: BI Intelligence.

2019:?The New York Stock Exchange (NYSE) announces the formation of Bakkt, a digital wallet and cryptocurrency trading firm, and “finally opened the doors to its digital asset marketplace”, according to MIT Technology Review.?

2020:?PayPal enters the digital currency market and allowed their storage “directly within the PayPal digital wallet”, and the Bahamas becomes the world's first country to issue “government-backed blockchain-based Central Bank Digital Currency (CBDC)”.?

2021:?El Salvador becomes the first country in the world “to adopt BTC as a legal tender” followed by Central African Republic.

Source: Tweet by the President of El Salvador Nayib Bukele.

2022:?Brazilian lawmakers establish a comprehensive crypto legislative framework that governs the use of bitcoin as payment and recognized “bitcoin as a digital representation of value”. Also, the current British PM (and the ex-Chancellor of the Exchequer) announced his ambitions regarding crypto in the UK economy in a tweet.

Source: Tweet by the British PM Rishi Sunak

On the other hand, the same year, the International Monetary Fund (IMF) approves a bailout deal for Argentina on the condition that the Argentinian government take a “tough anti-cryptocurrency stance”.?

2023:?The Bank of England publishes a consultation paper called "The Digital Pound: a new form of money for households and businesses?", in which it states that the Bank “might be centralised, running as a traditional database, or it might use distributed ledger technology (that might be blockchain or another technology)”. According to?the Atlantic Council, over 20 nations will take substantial measures toward launching a CBDC by 2023. Furthermore, it states that this year, Australia, Thailand, Brazil, India, South Korea, and Russia plan to continue or commence pilot testing. The ECB is also planning to launch a trial program next year.?CBDC Tracker?can provide latest updates on the current status of CBDCs in different countries. While there are still controversies over the adoption of blockchain in?CBDC design, PwC claims that “the Bank of England is testing blockchain applications and their potential for working more closely with FinTechs”.

Source: Bank of England.

Source:?CBDC Tracker

From the Wild West to Orwell - Main criticisms

Some of the main criticisms concerning blockchain are:

• The recent collapse of Terra Luna and the FTX exchange have raised concern amongst the regulators concerning investor protection and have linked the cryptocurrency industry markets to “the Wild West”.
• The critics of the possible government-backed blockchain-based digital currencies (i.e., digital ￡, $, €…etc.) are concerned that they could be used as “an instrument of state surveillance”, and enable an environment with “no limit to the level of control that the government could exert over people”.?However, the proponents believe that the CBDCs will?protect financial stability?and?strategic autonomy in the digital age.?
• Blockchain is also labelled as a “Trojan Horse”, which, according to some critics could undermine the global financial system.?

Anti-CBDC T-shirts for the sceptics are also available at some online stores, e.g., at?Redbubble.

Whatever you think of blockchain, its history and potential, pace yourself because it’s about to disrupt many areas of business and everyday life!

I hope you have found this article helpful, and I look forward to hearing your feedback. If you like the article, please share it and let me know your thoughts.

Recommended readings

Tapscott, D. and Tapscott, A., 2016.?Blockchain revolution: how the technology behind bitcoin is changing money, business, and the world. Penguin.

Gilder, G., 2018.?Life after Google: The fall of big data and the rise of the blockchain economy. Simon and Schuster.

Williams, S.P., 2019.?Blockchain: The next everything. Scribner.

Diamandis, P.H. and Kotler, S., 2020.?The future is faster than you think: How converging technologies are transforming business, industries, and our lives. Simon & Schuster.