Blockchain: a potential game changer? [5 Reading Tips]
What exactly does blockchain mean?
In the physical world, one transaction can be something like going to the grocerʼs, picking up 1 kilo of strawberries and paying the cashier the corresponding price (ca. 2€). This transaction worked because the value of 2€ is represented by a coin previously created by a government which both parties trust, recognise and accept. Once the transaction is completed, it has to be saved in an account book.
Moving to digital transactions, although 3rd parties such as banks or payment providers like PayPal or Klarna come into play, the currency in use (the Euro or the Dollar) remains centralised.
However, the scenario changes dramatically when the currency is virtual and not issued by a financial institution or government. Integrity and liability of the transactions are then guaranteed by applying the principle of consensus.
At this point blockchain comes into play. According to Goldman Sachs, the term ‘blockchain’ refers to “a database of transactions (between two or more parties called node) split into blocks (with each block containing details of the transaction such as the seller, the buyer, the price, the contract terms, […]) which are validated by the entire network via encryption by combining the common transaction details with the unique signatures of two or more parties or nodes”.
In case there is a non-authorised amendment made by one of the node’s computer, this is immediately notified to the parties involved (with relevant information such as where this change has been made und who is involved). Then the amendment can be accepted or rejected. As a result, there is no need of a central entity that approves transactions because all the parties or nodes involved own a copy of the account book and agree on the terms.
What are the main opportunities?
This new way of understanding transactions, which is facilitated through the huge strides made in software, communication and encryption, allows companies, authorities, and people to distribute information transparently. Moreover, the implications for existing and new markets are huge and go beyond its origins (bitcoins):
- Security: Blockchain relies on encryption to validate transactions by verifying the identities of parties involved in a transaction. This ensures that a “wrong” transaction cannot be added to the blockchain without the consent of the parties involved. KYC compliance and AML mechanisms can also be enhanced.
- Transparency: Blockchain is a distributed database that is maintained and synchronised among multiple nodes, and where consensus plays a decisive role.
- Efficiency: Blockchain controls information and avoids duplication of efforts among multiple parties.
According to Goldman Sachs, blockchain has the potential to help accelerating the adoption of the Sharing Economy that Uber and AirBnB started to boost, by allowing users, for instance, to identify themselves by validating their identity and past behaviour. Smart contracts are also said to revolutionise processes that are currently spread across multiple databases and ERP systems, like supply chain documentation.