Blockchain technology explained with 5 industry examples
The year was 2008, two major investment banks Bear Stearns and Lehman Brothers had just collapsed. Economies around the world were in a recession, people lost their jobs, life savings, and homes. Right around this time, a white paper was published on a cryptography mailing list by an unknown person identifying himself as Satoshi Nakamoto. In this white paper labeled 'A Peer-to-Peer Electronic Cash System', Satoshi describes a new kind of peer-to-peer financial system that's decentralized, transparent, and immutable.
The technology invented to power this peer-to-peer financial system was blockchain, but its uses go far beyond just fueling Bitcoin and other cryptocurrencies. Let's understand what blockchain technology is and find out about industries that have implemented this technology.
Understanding Blockchain Technology
Blockchain technology is simple to understand. Essentially, a blockchain is a distributed ledger that's always up-to-date. The records or entries are stored in blocks that are linked together in such a way that the unique identity of the next block is tied to the identity of the previous block.
Let's understand it better using an example.
Imagine a hacker attacks block 2 and tries to change the data. This causes the hash of block 2 to change which in turn makes block 3 and all following blocks invalid because they no longer store a valid hash of the previous block. This is how blockchain has attained immutability. Even the smallest change in data is immediately noticed and nullified by each preceding block.
Hashing alone is not enough to prevent hacks. Computers nowadays are very fast and can calculate thousands of hashes per second. One could ultimately tamper with a block and recalculate all the hashes of other blocks to make their blockchain valid again. To overcome this problem, blockchains use a consensus mechanism called proof-of-work. Essentially, it's a mechanism to verify the accuracy of new transactions being added to a block and also slows down the creation of new blocks. E.g. In the case of Bitcoin, it takes an average of 10 minutes to do the required proof-of-work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks because if you tamper with one block, you'll need to recalculate the proof-of-work for all the following blocks.
Blockchains are distributed, and there is no central authority to manage the chain. Instead, blockchains use a peer-to-peer network and are completely open for anyone to join. People who participate in the network use computing power to solve complex mathematical problems and add new blocks to the blockchain which are then verified. The solutions to these problems cannot be predicted, they can only be guessed. Once a user solves a block's puzzle, they get a reward. The user then gives the solution to everyone else to add to their ledger, so that they can start working on solving the puzzle for the next block.
How is a new block added to the chain?
Once a new block is created, it is sent to everyone on the network. Each node (user) verifies the block and adds it to their blockchain. All the nodes in the network form a consensus and any blocks that are tampered with will be rejected. So to successfully tamper with a blockchain, one would need a lot of computing power. E.g. to create fraudulent transactions, one would need to control 51% of the network's power which amounts to billions of dollars worth of hardware and the potential reward is far less than the cost incurred.
The Double-Spending Problem
Before we discuss industries that have implemented blockchain technology, it is essential to understand the problem of double spending, the key problem solved by the proof-of-work model.
Whenever you watch a video on YouTube or read an article like this one, what you're essentially looking at is a digital copy of the original. But what if we talk about assets like stocks or money? The problem is that you don't want copies of these things. E.g. you don't want to send someone $100 yet still have the $100 under your name. The proof-of-work consensus acts as a central authority on a blockchain network thus solving the double spending problem. Before this, the only way to overcome the double-spending problem was having a central authority like a bank that would verify if you had the $100 in your account, and once it's sent, it would deduct the balance from your account and reflect it in the beneficiaries account.
Understanding Smart Contracts
Blockchain technology is constantly evolving and one of the recent development is the adoption of smart contracts. The term 'smart contract' was first described by Nick Szabo in 1997. He wanted to use a distributed ledger to store contracts. However, smart contracts only became popular when used with blockchain technology. Essentially, smart contracts are programs that are stored on the blockchain and automatically execute when predetermined conditions are met. E.g. we have two parties A and B who agree on some terms. These conditions are written into the code of a smart contract, and when the conditions have been met, the contract is automatically executed. There is no need for lawyers, there are no mediators involved and disputes do not arise as the conditions are already predetermined.
By linking smart contracts together, it is possible to create a decentralized autonomous organization (DAO for short). A DAO has a computer code that governs the rules and decisions instead of a central authority. E.g. imagine a ride-hailing application built using smart contracts that matches passengers with drivers of vehicles for hire.
Now that you have a thorough understanding of blockchain and some of the recent developments in the field, let's have a look at a few industries that have implemented the technology.
Which industries are using blockchain technology?
While blockchain technology can be used in a variety of industries, its true potential lies in transforming processes or industries where there is a high possibility of fraud or middlemen involved. Let's discuss a few of these starting off with the healthcare industry.
From encrypting and storing patient data to managing disease outbreaks like Covid-19, from vaccine distribution to a patient's medical history, blockchain has transformed the healthcare industry. Estonia, a country in Northern Europe has set an example for all nations by starting to implement blockchain technology as early as 2012 to store healthcare data securely. Now all of the country's healthcare billing is done on a blockchain and 95% of health records exist on a ledger helping people access these records effortlessly.
In the context of finance, the most groundbreaking development is Decentralized Finance (DeFi in short). DeFi offers financial instruments like bank accounts, investments, and loans without relying on intermediaries such as banks, brokerages, and exchanges by using smart contracts on a blockchain.
Manufacturing units are dependent on the availability of raw materials, labor, and funding for smooth operations. A delay in any of these inputs can hamper entire operations. With the use of blockchain technology, a manufacturing unit can streamline operations, track assets and strengthen their fragile supply chains. E.g. The XCEED blockchain project built in association with IBM is helping Renault certify the compliance of all vehicle components, from design to production.
Travel & Transportation
From increasing efficiency to decreasing costs, blockchain has solutions to issues that have been troublesome to the transportation industry for decades. By acting as a reliable data verification tool, blockchain solves issues such as longer dispute resolution processes, low administrative efficiency, and poor order tracking. Maersk, the shipping giant is using blockchain-based IoT systems to streamline its supply chain management;
Blockchain technology can help brands build customer trust with products that would be verifiable for authenticity. All participants in the supply chain can track products effortlessly within seconds and have access to information helping them plan and prepare as the situation demands. E.g. Home Depot is using blockchain technology for increasing visibility into the supply chain, leading to faster vendor dispute resolutions, stronger relationships with suppliers, and more time for innovation.
What we covered is just a fraction of what's going on in the blockchain space. Companies are realizing blockchain's potential and are getting onboard so that they don't miss out. E.g. IBM alone has worked on 500 blockchain projects so far.
All in all, the biggest winners of blockchain will be the industries and processes where there is a high possibility of fraud or middlemen involved.
Blockchain technology does have a few downsides, but it is evident that blockchain or similar improved technology will be an integral part of our future.