The Blockchain

Over the past six years, the popular opinion of Bitcoin has changed dramatically.  It was at first an obscure, underground cryptocurrency that in time became known for facilitating anonymous illegal transactions on the Dark Web. Recently, however, Bitcoin has attracted public attention and garnered a following of cultish supporters.

The cryptocurrency first achieved a media following after its rapid 658% appreciation over the course of 2013, with one bitcoin equaling $1,145 at its peak in November 2013. Although the currency has depreciated since then, the most novel facet of Bitcoin is the underlying structural protocol that allows the currency to exist without fraud: the blockchain. Start-ups and venture capital firms are realizing the huge potential the technology has in revolutionizing industries, with hopes that the blockchain will usher in a new technological paradigm.

The Blockchain

The blockchain is a distributed public ledger of transactions created by grouping individual transactions into a transaction “block” and then appending these blocks onto a “chain,” which is an encrypted, cumulative record of every transaction. This affords Bitcoin three significant advantages: lower fees, increased privacy and decreased regulation.

The fees are reduced because there is no need to pay a central institution for processing and recording the transaction. The only people gaining compensation are those who connect their computers to the network, and this amounts to a very small amount for the parties involved. The transactions are also completed via anonymous pins, meaning that users are not required to trust anyone with their personal information, and the encryption of the ledger further protects against any form of fraud or alteration of past transactions. Transactions are processed by every node on the network, which means that tampering from any single node or group of nodes is impossible, thereby allowing the currency to exist without regulation.

As a result, the role of prevailing institutions in guaranteeing ownership, executing transactions, and enforcing contracts is obviated by this emerging ledger-based system. These advantages alone make the blockchain protocol enticing for companies and investors. Developers at the moment are racing to conceive of new applications, as start-ups ahead of the curve utilizing the technology hope to gain traction.

Hitting the main stage

But it is not merely startups that have been intrigued by the blockchain model – well-established businesses have also caught on to the potential of the blockchain. In October 2015, Nasdaq introduced “Nasdaq Linq,” which the company bills as a blockchain-based platform for their Private Market division. The service will use the blockchain “to facilitate the issuance, cataloging and recording of transfers of shares,” and will be the first service of its kind. In the years to come, the blockchain will likely see increased use in the financial services market because it reduces the demand for human laborers, enabling institutions to save huge amounts of money. A Santander report cited that a thorough implementation of the blockchain could reduce costs by up to $20 billion, and a 2015 Goldman Sachs report concurred that blockchains can potentially “make interactions quicker, less-expensive and safer.”

The venture capital world has also caught wind of this new generation of blockchain companies and are investing heavily. Blockchain Capital, for instance, was founded in 2013 with the express purpose of supporting blockchain start-ups that “create new markets and disrupt legacy industries”. Over the past three years, the firm has invested in thirty-seven of such companies and will continue to do so after their successful $7 million fund raising campaign in 2015. Not just niche funds are investing heavily in blockchain, however. Companies such as Bain Capital, Deloitte, and Citi Ventures have been huge contributors to fostering the industry. In fact, as of late 2015, over $1 billion has been invested in Bitcoin-related companies, which characterizes the growing importance and popularity of the blockchain as a technology.

But the use of blockchains has not been confined to the financial world as a mechanism for facilitating transactions. Storj, which is currently undergoing a second round of testing, uses the blockchain as a means of revolutionizing cloud storage, an arena currently dominated by giants like Dropbox and Google.  Their innovations allow users to circumvent the need for a centralized third party data provider, which eliminates possible server stress and downtime and also, through encryption, increases security. Storj would then be not only faster than a traditional centralized cloud storage option, but also 10-100x cheaper, according to the company’s expectations.

The company makes use of blockchain protocol in its distribution of its own cryptocurrency, Storjcoin X (SJCX). After converting from any one cryptocurrency to Storjcoin X, users can use the currency to purchase more storage. Alternatively, users can also rent out their extra hard drive space to other anonymous, encrypted users in return for Storjcoin X. The currency operates on the same protocol as Bitcoin, but the creators feared Bitcoin’s notorious volatility and desired supply-control to meet changing levels of demand for storage. This is a growing trend for some start-ups and represents a new frontier on how users interact with companies.

Another start-up, Wave, attempts to utilize the blockchain in order to address longstanding issues surrounding international trade. Currently, bills of lading are exchanged through primarily physical means, which exposes the process to fraud, counterfeiting and delays. Such delays are often due to banking, insurance and postal procedures which may take longer than actual shipping times. A blockchain-based system would allow for direct communication between parties on the supply chain and eliminate mistrust between parties given the blockchain’s guaranteed proof of ownership. The barriers to the full, global integration of such a system may be prohibitive, but the current flaws and inefficiencies epitomize why new technologies – such as blockchains – are valuable.

A Revolution?

The benefits and potential applications of blockchain technology are clear, and the increasing media attention that the technology has received is certainly well-deserved. Nonetheless, blockchain technology faces several significant challenges going forward.

For blockchain technology to succeed on the grand scale that investors and entrepreneurs propose, acceptance by entire industries will be crucial. Not only does widespread implementation improve the speed and security of the technology, but is also simply necessary in some cases. For instance, if Wave is to succeed in transitioning their industry to the blockchain such that every transaction in the industry is processed on one ledger, each and every party must buy in. Such a revolutionary development in the industry therefore faces large network externalities.

The potential future ubiquity of the blockchain also introduces a cultural conflict between the two communities with the most at stake. On one hand, established businesses are just beginning to recognize the broad applications of blockchain technology and its effects on efficiency and security. On the other hand, there is a contingent of the strong, tight-knit blockchain developers who see the blockchain as more than just a tool for industry. They see the technology as the keystone of a new, decentralized economy, which must necessarily bypass some major institutions. How this conflict plays out remains to be seen, but compromises will need to be made on both sides. In all likelihood, both parties will come to see each other as tools for propelling their interests.

Although full-scale usage of the technology is still years away, some challenges are already being suggested. Securities and Exchange Commissioner Kara Stein in November of 2015 already began to hint at the prospect of regulation should the blockchain be integrated into the financial world. She remarked that “regulators need to be in a position to lead” in order to respond “quickly to potential weaknesses,” though she expressed an overall cautious optimism for the technology.

These potential weaknesses are certainly present, but the benefits of the blockchain have already been demonstrated by test-trial of Bitcoin. Already today, finance, world trade, ecommerce, and online business models have felt the impact of blockchain. Just precisely how much blockchain technology can change our world remains to be seen, but the creativity and innovation in prior blockchain projects promise a great deal of promise.