Blockchain is being touted as the future of the internet and China is leading the way, writes Tom Pattinson
Hands up who has heard of the term blockchain? Not many of you? Well it is about time that you did. Some argue that blockchain is a form of technology that is going to revolutionise the internet and be a core component of how transactions take place in the future.
It is a decentralised “distributed database” that acts as a digital ledger. It records transactions – which could be the movement of goods, money or data – in a robust and secure way.
Because it is decentralised it is not controlled by a single party, company, bank or government, but it is monitored by a consensus of users. Furthermore, the security of blockchain means that once a transaction has been made it is virtually impossible to add, remove or change the data on it. This means it can’t be tampered with.
In short, blockchain could be a revolution in the way business, governments, organisations and individuals work together. It provides a simple, secure way to establish trust for any kind of transaction: the movement of money, sensitive information or products.
It’s worth understanding a little bit about the history of blockchain, which emerged as the key open-source technology behind bitcoin. Bitcoin is a crypto-currency or digital coin that was released in 2009 and used to make transactions as an alternative to traditional currencies held by nation states.
There are an infinite number of uses for blockchain – and the potential is only just starting to become clear
Blockchain was the public ledger that recorded all transactions of bitcoin autonomously, which meant that it didn’t need an administrator. It also solved the double-spending problem, by which a digital token can be copied or falsified.
How blockchain works is a little complex (see “How blockchain works”), but what it means is that the autonomous ledgers establish trust and provides a paperless way to establish ownership of money, information and objects.
So what does it mean for us?
Governments, banks and major institutions are setting up labs and research centres around the world to work out how blockchain can bring more efficiency to their businesses and the internet.
Banks such as UBS have research labs working out how to reduce fraud, increase efficiencies and speed up transaction times.
There is an infinite number of uses for blockchain – and the potential is only just starting to become clear. Some examples include:
These are decentralised currencies that are not held, owned or controlled by a nation state, bank or government. They are peer-to-peer currencies used for fast and secure transactions without incurring the costs of a middleman.
Companies like Golem have launched with an aim to create a supercomputer that enables users to share the power of all the world’s computers. People can make money from renting out their idle computer power. Other companies such as Storj aim to use the blockchain to decentralise storage. So instead of all your data being stored in a cloud held on one server, it is held across multiple servers.
This would mean contracts would be automated and payments would be made when certain criteria are met rather than based on a third-party agreement. This creates an audit trail of verifiable date. This could ensure safety and transparency for supply chain financing. It might also mean your car insurance payments automatically change based on your real time driving habits. Or perhaps your mortgage rate automatically reduces if you change jobs. For companies such as Uber, Spotify, Airbnb and others that have to deal with receiving and sending funds, smart contracts would save time and money and reduce risk. For example, for a company like Spotify, a smart contract could make payments to an artist in real time as the listener plays their music.
Passports, wedding licenses and birth and death certificates as well as medical records could be kept on digital IDs ensuring that no fake identity or identity cloning would be possible. Digital security would mean the billions lost in identity fraud would stop.
The biggest barrier to online voting is security. Using blockchain voters would be both secure and anonymous and ensure that there was no voter fraud.
Purchasing of services and goods
For products that need their authenticity verified, such as concert tickets, blockchain would ensure that the tickets cannot be sold multiple times and can verify the authenticity of the product.
Last month the UN World Food Programme (WFP) used the Ethereum blockchain to deliver food to Syrian refugees in Jordan. The operation allowed refugees to collect food, paid for by the WFP, from participating markets in the refugee camp in Jordan by having their eyes scanned to confirm they were on the register of more than half a million refugees cleared to receive aid.
From the multiple potential uses of blockchain so far it has been crypto-currencies that have got the most traction. Last month the International Monetary Fund (IMF) said that banks should consider investing in crypto-currencies more seriously than they have in the past. Prominent economists such as Dong He, Ross Leckow and Vikram Haksar, said in the IMF paper that “rapid advances in digital technology are transforming the financial services landscape.” These advances provide opportunities for consumers, regulators and service providers, it said. And crypto-currencies would provide solutions for consumers related to trust, security, financial services and privacy.
China leading the way
China is very much on the forefront of research into crypto-currencies and blockchain technology. A new blockchain research lab has just been launched in Beijing’s Zhongguancun Science and Technology Park, to launch collaborative trials of the tech. A number of blockchain research centres in Nanjing, Shenzhen and Hangzhou are also home to a number of successful start-ups.
Another decentralised blockchain platform is Ethereum and it is especially popular in China as it allows other apps to build on top of it.
Peking University has created an Ethereum Labaratory to work on applications for improving supply chain management and energy markets.
Chinese companies such as Baidu, Ctrip, JD.com and Meituan are utilising Ethereum technology for aggregated payments services. And Alibaba’s $60 billion financial arm, Alipay, is experimenting with Ethereum technology to improve their global payment platforms.
The Chinese government are also getting in on the action. The People’s Bank of China (PBOC) is reported to have developed a prototype of a crypto-currency on the Ethereum blockchain that could end up in circulation in the near future. This would make them the first country in the world to test a national crypto-currency.
Why would China look at launching a crypto-currency? When it comes to digital payments, China already leads the world. It wasn’t long ago when we had to pay out Chinese landlords in stacks of cash. We had to queue in banks to pay utility bills and waste hours trying to transfer funds to friends and colleagues. Now that can all be done on our smart phones. Alipay and WeChat pay (who collectively process more than a $1 trillion of transactions a year) have changed the way people transfer funds in China and are increasingly making China a cashless society.
Although China is concerned about their hard currency (the renminbi) leaving China, the establishment of a crypto-currency could solve that problem. Allowing people to spend with their international crypto-currency may well take the pressure off the renminbi. Furthermore, a crypto-currency might help rural people in China who might have access to a smart phone but not a conventional bank. And also the tight security found on blockchain means it has the potential to reduce fraud and counterfeiting and weed out corruption.
Challenges and the future
Blockchain is a very new technology and few companies have implemented it on a major scale. It is still slow, there is no standardised implementation and there are still fears of hackers. Lawmakers need to solve questions on legal issues and liability, but the level of transparency of blockchain means that it is great for regulators who can spot fraud and deception. For governments and business alike blockchain could well be a way to democratise the internet and have true, free records for all. For individuals, it is certainly something to be aware of.
What is blockchain and how does it work?
Blockchain technology was first developed as part of the bitcoin digital currency but they are not the same.
Blockchain can support a wide range of applications including peer-to-peer payment services, supply chain tracking and more.
Blockchain is a digital ledger. It is a record of transactions. This can be tracking the movement of money, data, or goods, from a purchase at a supermarket or a government ID number.
Block chain is secure – it is virtually impossible to add, remove or change the data without being detected by others.
Most transactions or ledgers are held by a company or government such as a credit card clearing house. Blockchain is decentralised so not held by a single party and verification comes from the consensus of users.
How blockchain works
The blockchain needs to gather data into blocks and then chain them together using cryptography.
If a transaction takes place, the transaction record is shared with other computers in the blockchain network.
The record is combined with other transactions into a block like a traditional computer database. The transaction is time stamped. When all transactions are complete, it is time stamped and sequenced to avoid duplicate entries.
The complete block is sent out across the network to join a chain.
Other participants might be sending out other blocks but the time stamps ensure the data is in the right order and the participants have the latest version.
Securing the chain
A bit of cryptographic math makes the links between the blocks unbreakable. A hash function takes the information in each block and uses it to make a hash – a unique string of characters.
The hash from one block is added to the data in the next block so when the next block goes through the hash function it is woven into the new hash, and so on through the chain.
So if there is an attempt to alter a previously created block in the next block it won’t match up any more and the mismatch will run through the subsequent blocks denoting an alteration in the chain.
For further explanation of blockchain visit the Goldman Sachs site here: http://www.goldmansachs.com/our-thinking/pages/blockchain/
What is Bitcoin?
Bitcoin was launched in 2009 on blockchain as a digital currency. Initially it received publicity as the currency used to make anonymous payments and transactions, and therefore was favoured by criminals. However, bitcoin is now accepted by hundreds of thousands of retailers and online stores around the world, and Japan recently become the first nation to pass a law to make bitcoin a legal currency.
Invented by the person or group known as Satoshi Nakamoto, bitcoin is decentralised, meaning it is not under the control of a person or state, and it was launched with a monetary policy based on scarcity. New bitcoins are being created as more blocks are added to the blockchain, and for every 210,000 new blocks created the number of bitcoin rewards halves. However, when the total number of bitcoins reaches 21 million – which is expected to be by 2140, then the scarcity will further increase their value.
When bitcoin was launched, a single coin was worth just a fraction of a dollar but the value has continued to rise, especially in the last 12 months, as more mainstream investors and retailers are using the currency. In March this year the value of bitcoin overtook the value of gold and has risen from $1,000 in January to $3,000 in June.
Bitcoins work on blockchain. As every new transaction is entered into a system, every computer in the chain has to verify that transaction. Therefore no single person controls the system and it is impossible to hack. The process of verifying a transaction is called mining and as a reward, the miner receives the right to create a very small bit of that currency. As there are a finite number of bitcoins (21 million) the value of each bitcoin increases. There are a number of bitcoin mines set up purely to verify transactions and reap the rewards. This process is energy intensive, hence the rewards.
Sichuan, where there is an abundance of cheap hydro-electricity, has become a bitcoin mining centre. The soaring price of bitcoin meant that miners were making major profits. However, a lack of regulation has meant that many of these mines have closed.
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