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What makes blockchain so disruptive?

The disruptive potential of blockchain, the back-end technology that powers Bitcoin, lies in its ability to radically simplify financial processes. The mathematics behind the system are complex, but the ‘end product’ is simple: a highly secure, self-maintaining network which dramatically increases efficiency for transacting parties by rendering ‘centralized authorities’ like payment processors, notaries and possibly even banks, redundant. 

A world of possibilities

Largely due to its first incarnation as the supporting tech behind Bitcoin, blockchain is commonly associated with currency payments. But since the blockchain model can theoretically support any form of transaction, it is also applicable to many other things besides tracking payments. It could simplify trading in energy, property or other assets. Equally, it could apply to less obvious forms of transaction, such as digital voting, the verification of personal ID, or even blocks of time invested in organized initiatives for charities, medical research or local community support.

In fact, blockchain can underpin any form of value exchange imaginable, as long as those wishing to participate in the exchanges all agree on the parameters.  In this way, it has been described as the system that can enable a new kind of ‘programmable money’. Users can collectively define ‘value’ according to what they wish to trade and use these properties to create their own unique form of digital currency.

How does blockchain work?

Put simply, blockchain is a shared digital ledger, which is collectively updated and maintained by its enrolled users, and enables strangers to transact with each other in a completely transparent manner. Each transaction is public and its details, together with the time and date are unanimously verified by the other users on the network. Since there is no mediator between parties, completing a transaction becomes cheaper and simpler to achieve.

Blockchain security: Safety in numbers

Security is taken care of thanks to complex cryptographic rules that prevent any single participant from updating the system without seeking validation from the network. This makes the system immune to manipulation as inconsistencies are automatically identified and rejected. Since no single participant holds a master copy of the ledger (multiple copies are simultaneously updated by different participants), no single party is able to take full operating control. These factors ensure that the system can maintain its integrity without the oversight of a centralized authority.

Use-cases for blockchain and programmable money

There is huge potential for the blockchain model, together with the concept of programmable money to enable efficiencies across a whole host of sectors.

Financial services

Today’s financial services sector is the first to be impacted by blockchain’s potential. Almost any significant transactional system is ripe for disruption. Due to its transparent nature, financial auditing and book-keeping can be dramatically simplified. The management of some consumer financial products that are prone to fraud, like gift cards, are already being transferred to a blockchain environment. Investment and insurance providers are actively examining how it can assist them with security, operations and regulatory compliance.

Corporate budgeting efficiencies

Large organizations stand to benefit significantly. The corporate finance department could program their budgets into a purpose designed unit of currency, so allocated funds could only able to be spent on the intended purchase. By setting these specific parameters, companies could enable pinpoint accuracy in their accounting and track each purchase precisely against the funds allocated, saving a substantial amount of time and bureaucracy. 

Internet of Things: Smart vending machines, package drones, machinery maintenance

In a world where connected machines are communicating without human intervention, the ability to conduct transactions that are programmed specifically for an automated environment could enable a new level of efficiency in supply chain management.

Vending machines could automatically pre-order and pay for the delivery of more soft drinks before they run dry. Factory machine could monitor their own componentry and initiate and pay for required maintenance and parts automatically.  Package delivery drones could not only verify a recipient’s address but also collect payment once that verification has been received.

The number and breadth of potential use cases for blockchain are enormous. Even though it currently only supports Bitcoin and other cryptocurrencies, blockchain’s promise of mass efficiency gains is causing almost everyone to stop and think about its disruptive potential. Whether or not this potential is ever fully realized will depend more on the willingness of key stakeholders to adopt the model than on the limitations of the technology itself. In financial services, for example, it threatens to rattle the cages of some of the sector’s most established players. As a result, it may yet meet with considerable resistance. It will be interesting to see which of the described use cases actually make it to commercial deployment in the coming years.

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Comments: (2)

Matt Scott
Matt Scott - RenovITe Technologies Inc - London 03 December, 2015, 12:23Be the first to give this comment the thumbs up 0 likes

Nice article Martin - and just to confirm your point - last week's BBC Click programme covered how some musicians are using the BlockChain to manage how their music is sold and to whom - cutting out (many) middlemen in between.  I have also heard that some entities are looking to use the BlockChain for equity certificates associated to property ownership.

Vaughan Jenkins
Vaughan Jenkins - PA Consulting - London 07 December, 2015, 12:51Be the first to give this comment the thumbs up 0 likes

The potential for the blockchain protocol has been widely written up but beyond the hype there are some profound problems to overcome. Security and scaleability are still open issues and it is not clear that the cost reduction potential, relative to alternative existing technologies is that clear-cut.  The blockchain hype does reveal two things though - 1) it shows up the inefficiencies of current processes and 2) how easy it is to confuse investment news and PR with genuinely new, tangible and extensive applications.