Introduction To Blockchain

 

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– Blockchain is the offshoot technology of bitcoin and it is a distributed public ledger system that has wide potential usage particular in this age of mobile apps. It is the uncontroversial part of bitcoin.

– Features of blockchain explained.

– The advantages and disadvantages of blockchain are explored in detail.

– Blockchain is in its early stage and at the frontier of fintech with startups and venture capital interest due to its vast untapped potential.

 

Introduction

Unless you are deep in the IT industry, chances are high that you have not heard of this new technology called blockchain. Blockchain is a distributed public ledger system that was originally conceived to transfer bitcoins according the International Business Times.

 

Intro_Blockchain_01

Source: Financial Times

 

When bitcoin was founded on 09 January 2009, it required a decentralized method to transfer bitcoin to preserve its privacy. Today bitcoins are worth USD$5 billion collectively and various industries have expressed interest in its backbone technology blockchain.

Bitcoin had been controversial since its founding. Its supporters appreciate the fact that central banks cannot print bitcoin at will due to its advanced cryptography. However its  privacy feature opened it to abuse. Criminal syndicates used bitcoin to move massive amounts of money overseas.

The blockchain technology used to transfer bitcoin took a life on its own and it is quite uncontroversial. We would cover both the advantages and disadvantages of blockchain later. Blockchain has also spawned applications in several industrial applications which would be introduced in subsequent articles.

For now, we would focus on explaining the basics of the blockchain technology for you to appreciate its widespread appeal. The very first interesting feature about blockchain would be its intensive security feature.

 

Blockchain Feature

Blockchain works because there are different parties involved for each block and each party hold an identifiable puzzle to check the authenticity of the block. Each party would utilize their CPU for the authenticity check and they are rewarded with a unit of bitcoin. Blockchain are created in linear and chronological order. Once they are created, they cannot be erased.

 

Intro_Blockchain_02

Source: Microsoft

 

The need to identify the fraudster is similar to process of uncovering a traitor in the famous Byzantine Generals Problem. If there are only 3 computers involved, it is impossible for 1 of them to know who is the traitor or fraudster.

The founder of Bitcoin, Satoshi Nakamoto, solved this problem by asking numerous computers to verify to the same ledger. It is only when a majority of computers agreed that the transaction is valid, then the ledger or block would be created or amended.

 

Intro_Blockchain_10

Source: Bitcoin

 

As each CPU verifies each block, it creates proof of work which creates the next block for the next CPU to verify. These block are chained together permanently to form a blockchain. If there are 2 version of the same transaction, the longer blockchain will prevail as there is a limit to the CPU that the fraudster can use.

After we have looked the feature of blockchain, we can list the advantages and disadvantages of blockchain.

 

1) Advantage

The advantage of blockchain would include

  • Reliability

 Intro_Blockchain_03

The reliability advantage of blockchain has been explained. It would be its security feature which prevents fraud and double spending. This can apply to any thing which you are trying to track, be it bitcoins or inventory. It is an audit as you go process where you and this will prevent large frauds like Enron. While the current inventory system are prone to errors and fraud, the peer checking mechanism would make it virtually impossible.

 

  • Cost Savings

Intro_Blockchain_04

This would save businesses much time and cost. Currently major banks are researching on how they can implement blockchain for their system. Santander Bank expects to save $20 billion a year when it implements blockchain by 2022.

 

  • Earnings potential

Intro_Blockchain_05

Interestingly anyone with a strong CPU can make some money through blockchain by verifying a blockchain. They can join as a miner and they would only need to purchase a strong computer. Incremental cost would be electricity and storage place. Coindesk estimate that you are earn $1.42/day nett after cost.

 

  • Decentralized exchange without middleman

Intro_Blockchain_06

The revolutionary aspect of blockchain is that it allows 2 parties who don’t know each other to exchange over the Internet without a trusted middleman. The blockchain infrastructure served as a guarantee and they can do so anonymously.

 

  • Scope for industrial application

Other usage of blockchain would include smart contracts where it would automatically capture details for the 2 transactional parties. Each smart contract would be unique and irrevocable. This can be applied to different industries like banking, Internet of Things, trading and logistics.

 

2) Disadvantages

Blockchain is not without his drawbacks. The main disadvantages of blockchain would be:

  • Lack of maintenance and support due to its decentralization feature

Intro_Blockchain_07

Just like how the privacy feature is both the strength and weakness of bitcoin, the decentralization of blockchain is both a strength and weakness. Blockchain is ultimately a software and it requires maintenance over time. Periodically these software will encounter issues and blockchain users would need to talk or communicate with someone to solve their issues.

As there are no firm that is developing blockchain, there is no customer service representative to help users troubleshoot their issues. Hence the serious blockchain user  would have to be a large organization that has the financial power to employ full time staff to research and solve periodic problems that arise.

 

Intro_Blockchain_08

Source: Vetusware.com

 

Otherwise, blockchain can easily be abandoned and there is a whole list of abandoned software here. They may develop a fast following but interest can fade when new technology comes out and when they are not paid for their efforts.

For blockchain, it has been around for 6 years and public support for it is strong for now due to bitcoin. It is uncertain how long this will last but several large organizations had shown intention to adapt it for their own industrial usage.

 

  • Large storage required and difficulty in scaling

If you had read understood the network effect of blockchain earlier, you will notice that it will face a storage constraint. As of November 2014, Bitcoin magazine noted that blockchain has reached 20GB for bitcoin and it can grow to 3 terabyte in 10 years. Today it is nearer to 50GB.

 

Intro_Blockchain_09

Source: Blockchain

 

As blockchain faced exponential growth, it will also need exponential online and offline storage for its miners. There are technologies being proposed to store these blockchain such as cloud based Metadisk and engineering solutions to reduce the size of blockchain.

For now, if you want to join bitcoin as a miner, you better prepare to have large storage space. For organization that wish to use blockchain as an enabling technology, this is something which they have to be concerned about.

 

Conclusion

Blockchain is a relatively new offshoot of bitcoin and it is very much in its experimental stage now. There are promises of disruption especially in the banking industry and it is the new frontier of fintech.

You have understood briefly about how blockchain works along with its strengths and weaknesses. Blockchain is not a low laying fruit. Whoever that wants to harness its strengths have to overcome its weaknesses and it is not an easy challenge.

Its wealth creation potential is enormous if someone can crack this transportation and trust technology problem. Think of how Mark Zuckerberg made his billions by starting Facebook to solve the social networking problem or how Larry Page and Sergery Brin scored big after they wrote the search algorithm for Google.

As it is with any lucrative field, startups are popping up like mushroom and venture capital are rushing to bet on the right horse. In the next article, we will be looking at the emerging industry application and the startups that are behind them. Thanks for reading.

 

 

Ong Kai Kiat_Photo

This article is contributed by Ong Kai Kiat. He is a professional freelance writer who enjoys the process of discovering and collating new trends and insights for an article. He adds value to society through his articles especially those related to finance and technology. He is reachable at ongkaikiat86@gmail.com.

 

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