Blockchain: The present & the future
Blockchain is one of the latest & most exciting technologies in today’s digital era and is very likely to revolutionize today’s business world. People have realized that this technology has vast applications in various sectors. It is somewhat hard to believe that blockchain as technology came to fame much later than the advent of the cryptocurrency “Bitcoin”. However, it was soon realized that Bitcoin is simply a use case of the technology and that it is an isolated piece of architecture; independent from its applications. Blockchain has huge potential in today’s world. Some of the other less common, however greatly significant innovations made possible by blockchain are Digital Identification, Smart Contracts, Blockchain Scaling, Real-time Updating, and of course, distributed ledgers.
So, let’s first get a high-level, but the accurate idea of what Blockchain is, and what it isn’t.
What is Blockchain?
Investopedia defines blockchain as a decentralized distributed ledger that records a digital asset’s origin. Pretty simple right? There are a few terms that need much more attention here than what we might think. Decentralized signifies that the digital assets are not held or managed by any single entity, but recorded by all the stakeholders of the asset. Distributed implies that the digital assets are distributed amongst the stakeholders instead of transferred or copied from/to. These assets are accessible by everyone involved in the chain and can be altered in real-time. This results in the formation of a transparent chain of changes, or “ledger”, which preserves the integrity of the assets.
Each block in a blockchain can be thought of as a page containing details of a transaction, along with the necessary information to identify the position of the block, or rather the preceding block, in the chain. In its simplest form, this information would be the hash of the block, the hash of the previous block, a timestamp, and of course, the data relating to the actual transaction that the block represents.
A few more building blocks
One would need a basic understanding of a few more concepts to truly understand the basic architecture of blockchain. Here is a brief explanation of the building “blocks” of the technology.
The singular “Block” in a blockchain is nothing more than a record, in digital form. The three major components of a block are a cryptographic “hash” or key that is unique to that block, the hash of the previous block in the chain, and the data itself (record of transaction data including a timestamp in the case of Bitcoin). Due to this hash, blocks can form a chain, and the timestamp serves as the proof of transaction when the block was created or “published”. This is the underlying reason behind the saying that it is practically impossible to alter a block in a blockchain. To do so, one would have to alter all the blocks in the chain, simultaneously, making blockchains resistant to unauthorized changes.
Now if numerous blocks have been connected to form a chain, the next obvious question is who creates these blocks? Here come the miners. Miners are the algorithms, or rather, the creators of these algorithms who create the individual blocks connected in the chain. This process is referred to as “Mining”.
This is a very complex process that requires time and computational resources to solve critical mathematical problems. To put it into perspective, the miner needs to identify the correct combinations of hashes among almost 4 billion possible combinations. This correct combination is known as the “golden combination”, & when found, is latched to the chain. All the blocks in the chain accept this new block. The incentive to the miner for completing this process is a financial one. This whole cumbersome process is another proof of concept of the safety of blockchain.
As discussed above, the data in the blockchain is stored in the form of a distributed ledger, which is connected to amongst other such copies of the ledger via nodes. Any electronic environment that stores the copy of this ledger and acts as a functioning part of the ecosystem is referred to as a node. Every such node has its copy of the ledger, and the network is required to mathematically prove that a block in the blockchain indeed belongs in the chain. This results in a level of transparency never seen before. Each participant or “node” is also assigned a unique identification code which is used to track the transactions performed by that particular node.
There are two main characteristics or properties that need to be analyzed and decided upon for every type of blockchain architecture. These decisions are:
- Private vs public architecture
The essence of this decision lies in limiting the participants and their number in the blockchain. A public architecture allows all the participants to view all the transactions linked in the chain and also lets them generate transactions for each other. Almost all the big, famous cryptocurrencies work on a public architecture where any seller can generate a transaction request for any interested buyer.
On the polar opposite, there are private architectures, wherein, only those participants are allowed to access the blockchain who are directly connected with the purpose of the blockchain. IBM uses a private blockchain to streamline internal processes and information transfers to maintain privacy and restrict transparency only to those directly concerned with the operation.
- Permission requiring vs Permissionless architecture:
The decision, in this case, is concerned with the requirement of permission by a participant to perform a particular operation, be it simply viewing, or more complex ones such as editing and reviewing the ledger. I hope it is fairly obvious that permission requiring architecture has to be a centralized one, while a permissionless architecture can be both centralized as well as decentralized. Also, public blockchains are usually decentralized while private chains are centralized.
These two decisions combined can produce four variants of the blockchain architecture. These are:
Permissioned Private Network
- Owned centrally
- Limit on accessibility as well as the number of users
- Used by Private companies for internal matters.
Permissioned Public Network
- Limitations on accessibility
- No limitations on the number of users
- Governments, insurance, taxes
Permissionless Private Network
- Limitations on the number of users
- No limitations on accessibility
- Used by open-ended projects and collaborations within communities
Permissionless Public Network — Used by Cryptocurrencies
- No limitations on the number or accessibility of content by users
- Most widely used by cryptocurrencies
Applications of Blockchain
As stated earlier, the technology behind cryptocurrencies came to fame much later than the application of the technology itself. However, after the arrival of Blockchain, people were quick to realize the vast potential of applications of the technology. From data storage to auditing and forensic accounting & insurance, every sector needed a safe and transparent system. Hence, sectors such as Supply Chain Management, property record keeping, healthcare, banking & finance, and even elections in some countries found themselves relying on the network created by this technology.
Applications specific to Accounting, Auditing, Banking & Finance
Many academicians have been quick to pen the various advantages of blockchain technology over the traditional pen, paper, and whitener approach towards record keeping and auditing. Blockchain has streamlined the process and has reduced the risk of manual manipulation and increased the efficiency of the system manyfold. It is rather obvious that the technology was first tried out by the Big Fours.
Deloitte came up with a software platform called Rubix, which enabled the users to build customized blockchains and smart contracts.
KPMG also realized the potential in reducing costs and automating their back-end processes and came up with their blockchain integrated Enterprise Resource Planning Platform.
Blockchain has proven especially successful in applications in the accounting domain, wherein a special variant, called the Triple-entry accounting system, is employed to ensure the validity and integrity of entries. In this system, there are three main aspects — the debit, the credit, & the additional & most important, the signature validity. A company can use this variant to store records of financing, inventory, LOCs, receipts, etc so that at the end of the financial period, compiling them into one single ledger is a matter of clicks, and the validity of such transactions is never compromised.
Because there is a single database in blockchain and the ability to pinpoint the source of origin of any particular transaction, there is immense intercompany transparency in the system. The transactions can be tracked, viewed, checked as well as reviewed by all the stakeholders involved. Hence the reconciliation of the accounting figures can be done in a real-time manner, without any time-consuming manual intervention whatsoever. Auditing firms have been the first ones to jump on this technology and motivate their clients to adopt this technology as well. However, this technology is so adept, that it may act as a double-edged sword, snatching most of the work that is required of auditing firms, and forcing them to either reduce their prices or act only as a supervisor instead of a reviewer.
Smart contracts are another breakthrough that has been made possible by the advent of this technology. Investopedia describes smart contracts as a digital contract which is executed automatically upon the fulfillment of the terms of the contract. These terms are stored in the blocks of the blockchain, and every execution is irreversible & traceable. Also, since the participants or nodes of the blockchain, which are the stakeholders of the contract, can view the blocks containing the terms of the contract at any point in time, the contract is highly transparent and integral.
This has immensely reduced the costs of setting up and enforcing a contract. Many businesses have been forced to shut shop, such is the disruptiveness of the technology. It is undoubtedly the best technology in increasing the privacy and security of participants as well as making the whole enterprise more secure. The decentralized aspect of the technology has made it much more reliable than the traditional data storage models followed by companies. Also, it has streamlined many processes and shortened the time that used to be usually designated to redundant activities such as manual verification and checks.
What does the future hold?
The future holds immense possibilities for companies that have to deal with a lot of people securely. That includes almost every industry with different stakeholders such as producers, suppliers, customers, owners etc. And this is not your “flying car, robot maid” future. This future is now. The insurance industry has already made more than significant investments and is coming into the field of blockchains. The main goal here would be the reduction in fixed costs by automation of claim settlements. Needless to say, there would be a lot of data that will need to be integrated into the system to make this possible. There is also scope for the implementation of smart contracts in this system, which will further improve the trust of the policyholders in the company by receiving genuine claims diligently, as well as reducing the claim settlement times by as much as a hundred times.
Another most probable future implementation of blockchains will be in data storage for governments that need to keep records of sometimes billions of people, while at the same time ensuring proper confidentiality and integrity of this data. Imagine if the Aadhar System of India worked on the blockchain, there would be no waiting period while your Demat account was pending verification or you had to submit your identification details to the bank to open a new account.
The essence of this article is that blockchain is a robust, reliable system of data storage and distribution, which is already being used across a host of different systems, and as unsurmountable applications in the not-so-distant future.
Thanks for Reading!