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How Cryptocurrency, Bitcoin & Blockchain is changing everything!
How Blockchain will change Banking, Finance and Business.
The world of technology is witnessing significant discussions about blockchain, which is a relatively new technology. Cryptocurrencies like Bitcoin have been developed using blockchain. Cryptocurrencies have recently attracted a lot of attention because of media and hype. The importance of blockchain, however, goes well beyond digital currencies as a significant technological advancement.
In this article, I discuss what is blockchain in detail, and what the various applications are for it. Subsequently, I will explore the future of blockchain. By doing this, I intend to inform you where blockchain is heading in the near future, the potential impact on the economy and how it may affect you directly.
Overview of Public Blockchain Networks
Using Bitcoin As An Example
We first look at what public blockchain networks are, and we review the Bitcoin (BTC) network for this. This famous cryptocurrency emerged a decade ago, and it uses blockchain as its underlying technology.
The Bitcoin network has the following characteristics:
- Since it is a public blockchain network, it allows anyone to join it. An individual can join this network anonymously or by using a pseudonym.
- The Bitcoin network is a “Peer-to-Peer” (P2P) network, and we call the computers in this network “nodes.”
- A full Bitcoin node has all data in the Bitcoin network; therefore, it has all the Bitcoin transactions. The network resembles a distributed ledger; consequently, we often call blockchain the “Distributed Ledger Technology” (DLT). It means that if a hacker or a 3rd party shuts down one node, all other nodes will continue to have the entire data. Shutting down one node does not impact the Bitcoin network adversely.
- The network uses encryption to protect the sanctity of the data.
- Every full node has equal access to the Bitcoin network, and this network does not have a centralized administrator or server. It is a decentralized network.
- All users of the Bitcoin network need to use their digital signature to authenticate themselves.
- This network has “blocks,” which have several transactions grouped together.
- All nodes take part in validating a Bitcoin transaction. We call the transaction validators “miners.” Miners pick up transactions waiting for validation from a pool, and they try to include them in a new block.
- Miners need to solve a mathematical puzzle to create a new block and include the transactions in it.
- This cryptographic puzzle does not require skills to solve it. It requires repeated attempts to find the answer.
- Many miners try to solve this puzzle. Miners that can run fast computing operations for extended periods stand a better chance to solve the puzzle.
- The miner that solves the puzzle wins a certain amount of newly created Bitcoins as a reward.
- This miner creates a new block, which has a cryptographic reference to the previous block. This way, you can visualize that the blocks representing an arrangement in the form of a chain. Therefore, we call this technology, “blockchain.”
- This entire process of transaction validation is called “mining.” It is hard to solve the puzzle, and miners need to invest in high-performance computing resources. Miners also run up massive electricity bills for running such computing operations for a long time.
- The process of solving this puzzle is transparent, and everyone can see it. Suppose someone tries to manipulate this process unfairly. In that case, they need to gather over 50% of the total computing power in the entire Bitcoin network. That will be very expensive. Moreover, any attempts at manipulation will be instantly visible to everyone else on this transparent network.
- Transaction validation in the Bitcoin network uses a consensus-based transparent process. We call this a “consensus algorithm.” In the case of the Bitcoin network, this consensus algorithm is called the “Proof of Work” (POW) algorithm.
Note: There are other consensus algorithms, too, e.g., “Proof of Stake” (PoS). In this case, transaction validators stake their own money to get the work of transaction validation. Any attempt to manipulate the network will mean that they lose their money, which creates a natural incentive for fair play.
The Next Generation of Public Blockchain Networks
Using Ethereum as an example
Bitcoin has one use case only, and that is transferring digital currencies from one Bitcoin network address to another. Ethereum, another public blockchain network, changed that.
The native cryptocurrency of the Ethereum blockchain network is “Ether” (ETH). The Ethereum blockchain network retained all key characteristics of the Bitcoin network; however, it added more.
Ethereum introduced “smart contracts.” These are open-source pieces of code with the following characteristics:
- Programmers need to store smart contracts on a blockchain network.
- You cannot modify a smart contract after you deploy it.
- Smart contracts contain “If-Else-Then” statements and transfer cryptographic tokens from one network address to another based on the fulfilment of predefined conditions.
- Smart contracts execute autonomously when they get a trigger condition, and you cannot reverse the outcome of their execution.
Ethereum also introduced the “Ethereum Virtual Machine,” and you can think of it as a platform to create Ethereum blockchain-based applications. We call these applications “Decentralized apps” (DApps), and they have the following characteristics:
- DApps are open-source web apps, and you can code the front-end using any web technology. However, the backend must consist of smart contracts running on a decentralized blockchain.
- One needs a cryptographic token to execute any transaction on a DApp.
- A DApp must store all its data on a decentralized blockchain by following cryptographic standards and algorithms.
- No one user of a DApp can hold the majority of the cryptographic tokens, which ensures that one user can’t control the fate of the app.
- You can modify a DApp only after achieving consensus in its user community.
Ethereum helped many developers and entrepreneurs to create decentralized businesses. Many of the cryptographic tokens you see in the crypto market today use the Ethereum network.
The Pros and Cons of Public Blockchain Networks
Public blockchain networks offer several advantages, which are as follows:
- Hackers or other 3rd parties cannot shut down the Bitcoin or similar public blockchain network. These networks do not have a central server or administrator.
- All data in a public blockchain network is available with all nodes, and every node has equal access. It ensures transparency.
- Encryption, digital signatures, and consensus algorithms make it very hard to hack a public blockchain network like Bitcoin or Ethereum.
- Smart contracts have enabled many entrepreneurs to build decentralized businesses. Take Storj, for example. This blockchain-based decentralized cloud storage solution intends to provide a viable alternative to cloud computing giants like Amazon, Google, and Microsoft.
There are a few disadvantages to using public blockchains too. These are as follows:
- Public blockchain networks like Bitcoin and Ethereum don’t scale well, and they offer sub-optimal transaction throughput. The decentralized nature of a public blockchain network makes it hard to hack it. The more the nodes on a network, the higher is the computing power requirement that a hacker must gather.
That’s expensive! However, this decentralized security adversely impacts scalability and transaction throughput. Every node participates in transaction validation, and every full node has all data in the network. It reduces its scalability and transaction speed. - Anyone can join a public blockchain network and can view all transactions. It makes such networks unsuitable for storing confidential and sensitive information.
- The POW algorithm offers the best form of decentralized security. However, it is energy-intensive. Bitcoin mining consumes more energy in a year than many countries, and this is despite its limited adoption in day-to-day life. Questions remain whether Bitcoin mining is environmentally sustainable.
- Centralized “crypto-mining” companies have emerged in many places. These companies utilize a lot of computing and energy resources to improve their chances of solving the cryptographic puzzle we talked about in the context of Bitcoin. Such centralization defeats the very purpose of creating decentralized blockchain networks!
Enterprise Blockchains: The Other Flavour
We now talk about enterprise blockchains, the other type of blockchain networks. We often call them “private blockchains” since they do not allow everyone to join the network. Enterprise blockchains retain several features of public blockchains like digital signature, encryption, and distributed ledger.
Enterprise blockchains differ from public blockchains in the following areas:
- Participation: Enterprise blockchains allow only trusted parties to join their networks.
- Data privacy: Enterprise blockchains process sensitive and confidential data. They implement access control, data partitioning, and other tools to ensure that only appropriate people can view sensitive information.
- Scalability and performance: Enterprise blockchains utilize transaction approval processes like what enterprises use. These blockchain networks use consensus algorithms. However, these are different from the energy-intensive POW algorithm. As a result, these blockchain networks deliver better scalability and performance throughput.
Hyperledger Fabric is a famous enterprise blockchain framework. Hyperledger Consortium, an industry association with participation from major enterprises, have created this. R3 Corda is another enterprise blockchain framework, and R3 offers this.
These frameworks include easy-to-use open-source tools, which makes it easier to implement an enterprise blockchain. Enterprises also take advantage of “Blockchain-as-a-Service” (BaaS) platforms offered by cloud computing giants like AWS, IBM, Microsoft, and SAP to host their enterprise blockchain network.
How Blockchain Will Remain Important
Let us examine how the various flavours of blockchain will remain important in the future.
Public Blockchains: Will they continue to be significant?
The volatility in the crypto market raises a fundamental question: Will cryptocurrencies remain popular? In turn, this raises another question: Will public blockchain networks remain essential?
Let us review the case of cryptocurrencies first. There is a committed group of crypto enthusiasts globally. They argue that cryptocurrencies will remain very important. They advance the following arguments for this:
- Cryptocurrencies do not require any intervention from governments and central banks since they are currencies created using mathematical algorithms. Governments and central banks cannot shut them down.
- Cryptocurrencies offer a disintermediated mode of payment. They take away the controls imposed by governments and central banks.
- Cryptocurrencies like Bitcoin are stores of value; therefore, they will remain important as an asset class.
- The time for digital currencies has come, and the growth of cryptocurrencies will continue.
Other market observers counter these points. They offer the following arguments:
- The price of cryptocurrencies witnesses too much volatility; therefore, people do not use them for day-to-day use.
- Currencies are essential tools for a national government to exercise sovereignty. Federal governments will not allow digital currencies that weaken their currency. For example, Donald Trump, the United States president, does not want cryptocurrencies to weaken USD’s Position.
- The relative anonymity offered by cryptocurrencies makes it very hard to investigate the financing of organized crimes and terrorism. Many transactions on the dark web use cryptocurrencies to finance criminal activities.
- Cryptocurrencies have not proved their mettle as a resilient asset class. For example, Warren Buffet, the legendary investor, remains very critical about cryptocurrencies. Take another example. At the time of writing this, the world is combating the COVID-19 pandemic. It was the right moment for cryptocurrencies like Bitcoin to prove that they are resilient assets for investors. However, their prices fell notably.
Will cryptocurrencies remain important? The answer lies in the womb of the future.
This brings us to the applications running on the public blockchain networks like Ethereum (DApps). Will they remain important? It depends on whether they deliver value to their customers. A business with a decentralised model and uses a blockchain does not guarantee that it will provide value. However, decentralised companies that offer tangible value to their customers will remain important.
Enterprise Blockchains: How significant will they remain?
Enterprise blockchains are very different. Businesses using them are not building cryptocurrencies to replace the existing modes of payment. They are not trying to offer a new asset class for investors, either.
The following are a few key examples of enterprise blockchain use cases:
- Transforming the “Know Your Customer” (KYC) process: Regulatory requirements have made KYC processes very important. However, KYC processes are mostly manual and time-consuming. The distributed and immutable ledger of blockchain can make them more efficient.
- Making regulatory audits easier: Enterprises have multiple data repositories. Reconciling them can be challenging due to silos, and this adversely impacts the regulatory audits. Enterprises sometimes find it hard to provide a single source of truth to auditors. The immutable distributed ledger of blockchain ensures data integrity. It can help both enterprises and independent auditors.
- Cross-border payments: Cross-border payments involve multiple intermediaries and time-consuming processes. Enterprise blockchains can simplify and expedite these processes, thanks to its transparency and distributed ledger.
- Combating the menace of counterfeit drugs: Counterfeit drugs can cause several adverse health impacts on patients, resulting in the general lack of confidence in the healthcare delivery system. Blockchain can help with its immutable ledger. It can track the entire lifecycle of the components that went into making a drug and ensuring transparency.
- Making “Electronic Medical Records” (EMRs) more comfortable to use: EMRs are paperwork-intensive. Moreover, patients currently have little or no control over their EMRs. Blockchain can change that with its distributed ledger and security features.
- Supply chain assurance: Not just to combat counterfeit drugs, but blockchain can make a big difference in supply chain assurance. IBM uses it in its TrustChain, which helps consumers verify their purchase of precious diamond for ethical sources. Walmart is working with IBM to ensure food safety using blockchain.
A key point to note here is that enterprise blockchains are not easy to implement. The following factors impede their adoption:
- It is hard to find enough blockchain developers and architects.
- Enterprise blockchain development needs better tooling support. Note that popular enterprise blockchain frameworks like Hyperledger Fabric and popular BaaS platforms address this challenge as we write this.
While enterprise blockchains do not receive the focus that Bitcoin gets, we see that enterprise blockchain has many real-world use cases of practical value. If businesses can translate the promises into tangible value, enterprise blockchain networks will likely become very important in the future.
Conclusion
We reviewed various kinds of blockchain networks and examined their pros and cons. A key finding is that blockchain offers far more than Bitcoin. Many factors will determine the future of cryptocurrencies and public blockchain networks.
However, if businesses can deliver on the promise of enterprise blockchain, this type of blockchain network will become very important. Fundamentally, Blockchain and cryptocurrencies are two different technologies and the future for blockchain has significant beneficial applications for numerous purposes.
Shantesh Mani is a Data Scientist, Machine Learning Engineer & Artificial Intelligence Specialist. A jazz drummer, percussionist with experience from symphony orchestras, concert bands, heavy metal bands and even Indian music; classical and Bollywood.
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