What is blockchain technology, and how is it changing the economy? That’s a question with a complex answer, but our goal is to answer it in the simplest way possible. A rapidly emerging trend in technology, a blockchain is a list of records that are linked using cryptography. If your next question is, “What is cryptography?”, you’re not alone. Cryptography refers to the practice of techniques for secure communication in the presence of one or more third parties. (Secure communication = communication that cannot be intercepted by third parties). In blockchain technology, records are called blocks, and each block contains a cryptographic hash of the previous block and transaction data. A blockchain can record transactions between two parties in a permanent way that can be verified. More importantly, a blockchain cannot be altered by modification of data.
How Blockchain Technology Works
Blockchain technology essentially enables digital information to be distributed but not copied. It has been dubbed “the new internet”, but is it really? One of the reasons blockchain technology has become so valuable in the corporate world is that it can be programmed to record more than just financial transactions- it has the ability to record practically anything of value. Al transactions are time-stamped and managed by a group of computers not owned by any singular entity. If this sounds both exciting and a little scary to you, then you’re on the right track to understanding the implications this advanced form of technology potentially has on countless industries.
What connects this time-stamped series of resistant data records? Well, each block of data is bound together by cryptographic principles. You may be wondering how blockchain technology is projected to be such a powerful game changer in the corporate world. Sure, it’s impressive and notably complex, but computers have been keeping complicated records of economic transactions for a while now. In and of itself, that fact is hardly new. But blockchain technology is marked by a distinguishing feature: It lacks a central authority, and thus is highly transparent. Nonetheless, records are encoded cryptographically. No one with access to your network is able to see your name or personal information.
What is so special about blockchain technology and why are we saying that it has industry disrupting capabilities? Although blockchain technology employs cryptography to keep records that cannot be modified or falsified, these records potentially have a high degree of transparency. Why are these records so visible? The answer lies in the process of creating blockchains.
Here’s how it works: In a transaction, one party creates a block. This block is then verified by thousands or even millions of computers around the internet. The block is ten added to a chain that is stored across the net. The process creates secure records that are fundamentally resistant to falsification and have their own unique identity. The falsification of even one record would falsify the whole chain, which is next to impossible. At this point in time, it is essentially impossible. What’s more, creating blockchains is free, enabling companies to replace business models that charge a small fee per transaction.
How Will Blockchain Technology Affect the Economy?
That question does not yet have a single, definitive answer, but it does have several projective ones. Although blockchain technology was originally invented to secure records of monetary transactions, its application supersedes the world of finance. Let’s learn from an example. How many industries sell tickets? (That’s a rhetorical question). Think about an airline. Most people buy airline tickets on the internet, and the credit card company takes a cut for processing the purchase. We are going to theoretically apply blockchain technology to airlines. Using blockchain technology, the ticket becomes a block, which is uniquely encoded across the internet and cannot be altered. At the tail end of the blockchain process, the airline company has potentially created a record of all transactions for the network. That unique blockchain encompasses every ticket sold by the airline. Imagine that kind of reach- and with no extra cost!
Now you can begin to understand the massive effect that blockchain technology potentially has on industries. In theory blockchain technology makes companies that buy and sell securities for its own account disappear. The prices that these market-makers display in trading systems will no longer be valid. Auction and brokerage houses will cease to exist, effectively shutting down the entire market maker industry. Picture blockchain technology as the third party who cut in during a two-way dance. This may be an overly simplistic comparison, but it’s the easiest way to think about blockchains. And like we said, the finance world isn’t the only population that could be changed forever by this new technology- far from it. Even transportation companies such as Lyft, which are known for giving drivers the freedom to choose their own schedules and routes, stand to be affected by blockchains. Creating a blockchain for just one transaction disrupts the business model of the transportation company.
Consider the publishing industry, which has been facing challenges spurred by advancing technology for several decades now. Twenty or even ten years ago, many people still paid for subscriptions to magazines. But now you can pay small fees to pay for single articles on various apps- or read them for free on social media? Blockchain technology further threatens print because they’re free. That means you can charge mere cents per article or other materials available on the internet. Since blockchain technologies have no transaction cost, they allow you to charge for anything- in unlimited amounts- without having to deal with third parties that take cuts from your profits.
Large industries may initially be adversely affected by blockchain technology, but independent artists stand to gain. By shutting down music distribution companies, artists could feasibly use blockchain technology to charge fees for their own music. These independent transactions would be indelibly and permanently encoded across the internet, overwriting transactions by large distributors such as Spotify or iTunes. With the right social media following, customer base, and technology, self-published authors of ebooks might be able to cut out the companies they pay to make their books available. That may be a stretch, but it’s one worth looking into as technology continues to advance.
Think about it. Authors either get their ebooks published by traditional publishers (may of which are becoming more independent and less traditional by the day) or self-publishing companies. In either scenario, ebooks are made available through online pages of major retailers and corporate giants like Amazon. But what if ebooks are encoded with blockchain technology? Neither Amazon nor the credit card companies used in transactions would take a cut. Instead the money would be directly go to the author. But just how close are we to a blockchained world?
Blockchain Technology in Finance
The financial world is closer than any other. Blockchain technology is expected to significantly change the world of finance in the near future. It will obviously change the stock market, insurance companies, and banking. Banks will be backed into a corner and forced to make a choice: shut down or change systematically with the times. Can you imagine a world in which banks no longer hold your money, beholding you to them, but exist to advise you? They will no longer be able to take a cut of your transactions. With blockchains, records of transactions can be visible to all parties at the same time, and there is no period in which access is unavailable to anyone involved. Although this transparency may make some people nervous at first glance, remember that blockchains make records virtually impossible to change or falsify. No one will have the ability to tamper with them.
Centralized vs. Decentralized Systems
Centralized systems are convenient in many ways. For one thing, you only have to interact with one party to use them. (This is how banks and other centralized systems build customer trust and loyalty). But what happens if your trusted company, server, or other business entity shuts down? All records of transactions and information could be permanently lost. Let’s use the example of an internet server or even a blogging page such as Wordpress. When the business model for entities like these changes, you have to work within the new parameters. There is no other choice. You also have to trust that websites like Wordpress or even social media sites are infallible, which even the most secure ones are not. When you look at the internet from this broader vantage point, you begin to understand just how much of our lives are lived online. We bank online. We socialize and store memories online, rarely bothering to develop digital prints of cherished photos. We rely on corporate giants like Amazon to buy products and sell our own. The list could go on and on, but you get the picture. When we rely on just one entity for a particular service, we stand to lose a lot if that entity shuts down. Information would be irretrievably compromised. Yet stripping the world of its centralized systems makes people understandably nervous.
We’ve come to rely and trust certain companies with important parts of our lives and careers. Do we really want to take a chance on facilitating our own transactions? The prospect comes with a lot of freedom, but with a degree of freedom comes responsibility. Ownership becomes an issue. In a decentralized system, information is no longer kept by one entity, and everyone in the network owns said information. But just because everyone in the network technically owns the information doesn’t mean they can change it. Remember, records are permanently encoded with blockchain technology. You’re also in charge of your money, and can send it directly to anyone without incurring a fee.
The Future of Blockchain Technology
Remember, you still have some fundamental control over your own personal information. Your identity is always well hidden by cryptography. What people in your network can see is your public address, which reads like a complex code. The benefit of this is that larger institutions can never change or falsify transactions made by you. Thus, much less of your life is controlled by corporations. The long transaction history of any corporation is visible to anyone who knows its public address.
The magnitude of this is huge and far-reaching. In the modern world, large corporations hardly answer to anyone, and many of their transactions are corrupt. Corruption among large centralized systems has become a norm in society. Although we may not like it, we’ve accepted it, mainly because most of us don’t feel like we have a choice. But forcing all transactions into visibility would not only highlight corrupt histories but prevent future corruption. Unfortunately, this corruption has become the cornerstone of many sizable industries. If blockchain technology becomes fully integrated in society, many of these corporations would be shut down, giving us more control over our own lives and finances.
The catch 22? Well, it’s probably obvious. Why would these corporations choose to use blockchain technology when they stand to lose so much? They wouldn’t. The technology has to become deep rooted in their systems. Imagine that companies could not have access to the products or services they sell without encoding these transactions into blockchains. Then we might see a real difference in the economy. But no one can give an exact date and time when this will happen- or even guarantee that it will happen. Still, substantial data projects that decentralized systems are likely to overtake many centralized ones in the relatively near future.
Taking companies like Uber, Lyft, and Airbnb into account, the public has had a largely positive reaction to the decentralization of companies. More and more, people want control over their own agendas, and they’re taking steps to get it. It’s all in the balance of extremes; as corporations become more corrupt and flagrantly controlling, the public feels a righteous increased need for freedom and individuation. Could blockchain technology be part of the answer? Only time will tell, but its prospects are looking good.