Blockchain: a Game-Changer?
Understanding the technology transforming the future of finance
Is blockchain the Next Big Thing?
Since 2009, the price of bitcoin has risen rapidly and traded above $3,000 this June. What is even more interesting is the technology that lies at the basis of this cryptocurrency, as the future of finance will likely be dominated by blockchain. Major Wall Street banks have been investing in this technology for years now. Its smart and transparent infrastructure will likely become a game changer for all market participants, as it can validate and protect all kinds of data, as the way the system operates is much safer that the cloud technologies applied earlier and ensures the integrity of stored and transmitted data.
Earlier people used to rely on intermediaries like governments and banks when it came to transactions with anything of value. The blockchain technology takes authorities out of the system of trusted contracts and enables agreements to be maintained collectively by anyone, putting an end to a monopoly of a single node on the absolute truth.
“[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.” — Sally Davies, FT Technology Reporter
Decentralization is what makes this kind of system essential for operations with cryptocurrencies, because the transactions that are stored in multiple locations can’t be compromised as easily as the transactions processed by traditional banking systems.
The blockchain technology in a nutshell
Blockchain is a distributed database or a ledger of replicated databases that keeps records of all digital transactions. The networks built on blockchain can be both private and public, where every transaction is visible to anyone in the system. The database of this kind maintains a list of ordered records that is continuously growing. The chunks of data in the ledger are called blocks. The links of blocks to each other are validated cryptographically. The system together becomes a chain that cannot be broken and eternally stores a record of transactions.
The main features of the blockchain technology include the distributed architecture and a large number of nodes that participate in the blockchain operation without a single management center.
Operations in blockchain rely on collective consensus-building (to put it simple, how the system participants agree on something). The blockchain network implements the algorithm of group consensus generation between all participants, including those who are not identified and between the participants that do not trust each other or even don’t know each other.
Consensus here means that what is regarded true in the system is what is considered to be true by the majority of the participants in the system. The rules that are determined by the algorithm for developing a consensus in a specific blockhain implementation are taking into account. The entire history of operations is immutable and is stored eternally. You cannot remove or modify any item in the blockchain’s history. Each full-scale blockchain node stores the entire blockchain database, which includes the history of all blockchain operations. This makes the system complex and ensures that all transactions are trusted and will stay unchanged, as every node will store them forever. There are options with simplified storage of only portions of data on different nodes.
The method of smart contracts and the eternal storage of the history of all operations in the unchanged form allow to:
- Carry out strict verification and authorization of various transactions, including payment transactions;
- Always store the state of various objects in a form that is protected from modification, for example, the payment balances of system participants;
- Maintain various registries with strict content verification and protection against fraud, forgery, spoofing and the destruction of content.
Is blockchain viable for instant messaging?
Blockchain is a technology that allows users to interact with each other and exchange sensitive data while staying completely anonymous. Two users in the network needn’t trust each other and even know each other to exchange the data that is valid, as it is verified by several other nodes in the system. This makes bitcoin attractive for being applied to organize secure communication networks, where privacy is ensured at all nodes and users can interact securely. However, not all the characteristics of the blockchain technology make it viable for instant messaging and sharing various kinds of files.
The attempts to apply the blockchain to additionally protect the operations in secure instant messengers occur regularly. One of them is the DARPA competition to create a distributed protected messenger based on the blockchain technologies.
However, the blockchain technology as it is now can hardly be applied for organizing instant messaging in a way people are used to it. A blockchain cannot handle large volumes of operations with small delays in message delivery that are required for messaging.
For example, delays in the development of the next block in Bitcoin can take up to several minutes, and for complete transaction validation it is recommended to get verification not less than through a chain of 6 blocks. The history of operations in blockchain is eternal which means that all the data that gets into the system will be stored there forever, and this is a negative characteristic for secure messengers with the need to remove and edit the history. Considerable resources are required to store data on all the nodes of the blockchain, not for all objectives it’s viable.
De facto, some central resources are still employed in blockcains: within the protocol of the system — in order for the new participant to receive the first list of nodes from other participants and outside the system protocol, for example, in the web, — for storing and distributing the protocol description and the applications built on it. If there is an attack, it can be targeted at these “super-nodes”.
Another drawback to the reliability of blockchain is a small number of transactions per second.
In in a standard banking system, a money transfer is a relatively simple and fast operation, and in blockchain it requires the calculation of a complex mathematical function.
What is the bright future like that blockchain is about to bring?
Blockchain is already being pervasively adopted by financial organizations worldwide for digital transactions as a transformational technology that allows to build trusted decentralized networks. The technology has a potential for changing the way financial institutions deal with data and business processes. Blockchain is used for tracking and recording transactions, verifying assets and automating contracts.
“There are advanced governments all around the world. Central Banks in Estonia, UK, Russia are testing cryptocurrencies and their potential. Actually, people interested in cryptocurrencies are everywhere, but another question here is how to convince others to start learning about it at least, and then make them understand that this thing should be allowed and not forbidden. At this point, it all looks bright I think, we will see what happens next.” — Vitalik Buterin, Ethereum co-founder
Blockchain is a game-changing technology for many industries as it allows to maintain a variety of activities in a safe and efficient way that involves collaborative participation.
Developing a blockchain based on the open source code is available to anyone, and employing it, for example, using the Ethereum platform, is a not a very tough task to do. Ethereum is used in Blockchain as a Service (BaaS) Microsoft Azure, where you can quickly deploy your own block infrastructure. In addition to Ethereum, BaaS is used in Chain Core, Corda, Nxt, Lisk and Waves.
The blockchain technology is likely to be employed by regulators in the near future. These rules enacted by the CFTC can be embedded into blockchain smart contracts, which will result in more adherence and transparency. Law firms are also likely to be using smart contracts stored in blockchain instead of traditional contracts that today can still become vulnerable despite all precautions.
Some say, that «giving billions of people access to a global financial system can change the very fabric of our global society». But it’s the ideal scenario, in real life the future is hardly all rosy.
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