People often have the idea that Bitcoin is the same as Blockchain technology. This is partially true, because Bitcoin is based on the technology. It is the first and currently only large scale successful implementation of Blockchain technology. However, the potential of Blockchains exceeds what Bitcoin is today. So why is almost every big company in the world currently looking into this technology? And what is the reason that this technology will change the world, according to McKinsey?
The definition of Blockchain
To understand why Blockchain is bigger than the Bitcoin, we need to look at the definition of the technologies. There is no standardized definition for Blockchain technology. The definition given by PWC is: “A Blockchain is a distributed, decentralized transaction ledger, saved by each node in the network, which is owned, maintained and updated by each node. It’s a peer-to-peer system and no central authority manages the flow.” Blockchain technology is based on three principles:
- Fault tolerant
The system is still able to perform it’s tasks if one or more components fail. - Byzantine fault tolerant
The system is still able to perform it’s tasks if one or more malicious component(s) give conflicting information. - Consensus algorithm
An algorithm developed to reach consensus about every transaction that is done within the blockchain.
The above principles result in a system in which all participants in the chain can perform transactions with each other, without having to worry about trusting the other party. Every participant knows that if a transaction is accepted into the chain, this transaction is free of errors and is accepted by everyone.
More than currency transactions
At the moment these principles are only being used in the Bitcoin technology. Therefore, when we speak of transactions you automatically think about a currency transaction. However, in the Blockchain a transaction can be of any kind. For instance, think about buying a house. Regulations require a notary to verify the transaction between the old house owner and the new one. With Blockchain technology the transaction can be done in the shared ledger and is verified by everyone. The trusted third parties we now know (e.g. governments, notaries, accountants, banks) will become history for storing our data and processing our transactions.
http://www.pwc.com/us/en/technology-forecast/blockchain/definition.html
http://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-change-the-world
Hi Niels! Very interesting topic indeed! My team and I did out TOTW project on blockchain as well, but then we focused on the real estate industry. It is really interesting to see how the blockchain works and what it can do, and I am really curious to see what it will be used for in the future! I think the core advantage of Blockchain lies within its decentralized structure.The Blockchain is essentially a database that provides cheap, durable, time-stamped and transparent records of all transactions online. Next to that real estate industry and bitcoin, it could be used for so much more! Did you know that countries such as Sweden are already running pilot projects with Blockchain for their public land registers? I am really curious how these pilot projects turn out, and which country will be next!
Hey Niels, thank you for your post, I really like the topic.
Our Technology of the Week project is also about the Blockchain and it’s different applications. I think it’s a very interesting and revolutionary technology when there is enough support for it. We have seen that the Bitcoin has a relatively huge succes, because of this support. The possibilities of the Blockchain are endless, but don’t you think that the trusted third parties (governments, banks, notaries, accountants as u mentioned) won’t accept the Blockchain as a replacement of the traditional third party system? Especially the government, which can possibly make laws against a public ledger.
I’ve read some articles about the Blockchain as an addition to the traditional third party system, but I share your view and doubt that the Blockchain can work together with the traditional system. However, maybe they will find something which will makes this possible.
(If anyone is interested in the whole story behind the Blockchain, there’s a pretty big (88 pages) government rapport about it. I’ll post the link below.)
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledger-technology.pdf
Hi Niels, thank you for your post on this interesting topic
the article is well written and you give a good explanation with the definition and the three principles. You only forgot to name the technology which will have the most impact called; the Ethereum blockchain. The Ethereum blockchain stores contracts instead of currency.
on paper the possibilities of the blockchains are endless, but I’m not sure of this will work in the real world. The biggest problem is as Justin already mentioned, the recognition of the system. There will be a lot of resistance from established trusted institutions, for example from the strong wall street lobby. Also governments from dictatorial countries where the dictator takes land and houses from the people and gives it to friendly party members won’t care that the property rights are stored in a blockchain. It’s unfortunate because the people in these poor countries can profit the most of this innovation because blockchains can offer them easy access to the world market. A worldwide recognition will probably never happen, but I’m hope some countries will implement it. Thats why I’m very curious how the pilot in Sweden will turn out.