Bitcoin has been on the market for approximately 8 years, accepted by over 100,000 merchants and vendors and counting at least 3 million unique users. Virtually everyone has heard of the cryptocurrency or seen the logo when shopping online and understands that Bitcoin is not a traditional currency and not linked to a central government, but what really sets Bitcoin apart is one of its less-understood core components: the blockchain.
Fans of Bitcoin lore can tell you about the mention of this component in the 2008 white paper published by the pseudonymous Satoshi Nakamoto, but the concept itself is much older. Originally described as a “chain of blocks” by Stuart Haber and W. Scott Stornetta in the Journal of Cryptology, it was initially understood as a way to efficiently collect and move multiple pieces of data.
Essentially, blockchain is an accounting/bookkeeping ledger that constantly grows and records entries/transactions over time, or it is like the popular cell phone snake game, only with a growing amount of data.
Though it may sound simplistic, this technology – both within and outside of the realm of cryptocurrency – has the potential to transform how we do business.
Fraud Reduction: With online business, transactions typically only require point-of-sale validation (a credit/debit number is entered by someone and the transaction is processed by the business), which, without the ability to identify exactly who is making the purchase, makes fraudulent purchasing easier. By using a blockchain system, which requires system-wide communication and validation, identities and purchases are confirmed, thus removing anonymity and making fraud harder to commit.
Increased Uptime and Stability: Regardless of how well-made a website is, sometimes servers go down or minor glitches prevent sales. Not only is this frustrating, but it can lead to lost sales. While blockchain can’t prevent such occurrences, it can function around the problematic areas until these are restored and then rapidly update to process transactions that occurred during the problem, giving any business the holy grail of connectivity – 100% uptime.
Data Integrity: Whether intentional or not, when handling, processing, or entering data, mistakes happen, and mistakes can be costly. Not only does blockchain inherently keep details of data entered (the who, where, when, and why), but in order to be processed, data needs to be approved by a majority of parties. Furthermore, once the data has been approved and becomes part of the chain, it is impossible to remove or alter it.
Data Security: The more information is stored online, the greater the threat of a security breach becomes. Currently, data security protection involves heavy spending on payment gateway security on the business end, and, for the consumer, periodically checking credit reports and changing passwords, though breaches still happen. Blockchain, conversely, would offer end-to-end encryption as well as public and private keys, thus providing greater end-to-end protection and, if not eliminating all possible breaches, limiting any breach to the singular key that was breached.
The blockchain is likely to represent a big step forward in terms of technological evolution for how we do business and how financial and banking institutions function, with estimates that the technology could reduce the cost of securities trading, cross-border payments and regulatory compliance by between USD 15bn and 20bn p.a. from 2022 onwards.
Blockchain has the potential to optimise business models, reduce the damaging effects of financial crisis and frictions in global commerce, yet in order to fully explore and utilise it, financial and regulatory institutions must collaborate and come up with adequate regulations and industry standards. The next couple of years will see the blockchain regulation debate and the jurisdictional challenges posed by the shift to a blockchain-based decentralized global economic system.