The blockchain is a database or ledger, however rather than being centrally controlled (like your bank does for your account) it is maintained through a distributed network of ‘nodes’.
The nodes are a network of peer-to-peer computers scattered across the world which take transactions, validate them and solve cryptography equations to enter them into the blockchain. For this work, the nodes are typically rewarded with crypto currency.
Once on the blockchain, the transactions cannot be edited making them immutable. They are ordered chronologically and are generally publicly available via blockchain explorer websites.
The blockchain allows users to use public-private key encryption to shield their wallet addresses, balances & transactions from prying eyes. This allows anyone to interact with the blockchain without the need for sharing lots of personal information. However if you publicly share your wallet address, one could very easily find your transactions and balance using a blockchain explorer.
The blocks used for the Bitcoin crypto currency contain a relatively small amount of information to describe the transactions taking place and being saved on the chain. i.e. 0.1 BTC from wallet address A to wallet address B.
However blockchains like Etherum, Solano and Algorand incorporate computer code which can be built into the blockchain expanding the use cases beyond mere crypto currency transactions from wallet to wallet.
Smart contracts are pre-programmed such that a transfer of assets can occur automatically upon a set of pre-determined conditions being met. For example, if you were renting an apartment; the smart contract would automatically send you the access code if the deposit was paid by a particular date.
Today, asset transfers, validation & facilitation often occurs through multiple intermediaries. In the future, we can expect smart contracts built on blockchains to facilitate financial, legal, compliance, real estate and many other use cases autonomously through computer code and trusted networks of nodes which maintain the system’s integrity.
You could see this as the ultimate lawyer killer or estate agent killer as it should eventually lead to much more direct access to services without intermediaries for end users. However, there are some challenges which we will need to overcome, not least to mention that one of these use cases will need to become mainstream (i.e. adopted by the masses).
DApps (Decentralised Applications) are blockchain enabled websites, commonly referred to as Web 3.0, which allows end users via web browsers or APIs to use blockchain smart contracts. Decentralised exchanges (e.g. Uniswap) which allow you convert from one crypto to another are a good example — once you connect your wallet you can start using the services immediately.
What are the use cases?
- NFTs (non-fungible tokens) are unique digital tokens which have a range of rarity, utility and aesthetics. The market defines their value and they are increasingly being used as a form of club membership which provides exclusive access to more NFTs and services
- Fractional ownership of real estate — an owner of a 1 bedroom apartment in Manhattan could tokenize the asset on the blockchain allowing end users access to real estate capital gains
- Bespoke contracts with deterministic outcomes based on a set of pre-defined conditions triggered by market data. Essentially taking what lawyers put into legal contracts and programming the clauses into the blockchain
- Decentralised Autonomous Organisations (DAOs) are company structures which can be encoded into the blockchain to handle things such as company ownership, voting, payroll and other administrative tasks
- And many more including a large range of financial services such as exchanges, wallet, lending etc.
What are the pros?
- By removing intermediaries in the facilitation of services encoded on the blockchain one would expect services to be offered more cheaply
- Once blockchains have been encoded for their task they can be run autonomously
- Blockchains are transparent and confidential — by protecting privacy we can expect decentralised organisations to act with integrity (mostly) rather than use personal information for corporate gain
- Blockchains operate 24–7
What are the cons?
- Once encoded the blockchains are difficult to change because the code is immutable
- Bad actors could exploit any bugs or loop holes in the code to steal information or crypto currency
- Regulators and governments would struggle to identify and track down any bad actors breaking the law
- Intermediaries cannot be completely removed — they would be required to help developers encode the logic, terms & conditions initially and provide context and education to users
- Weak legal and regulatory framework — the legal basis for enforcement does not exist yet and the regulatory landscape for the future of smart contracts is unclear
What happens next?
Until we have a mainstream and widely adopted use case realised, we will continue to speculate on the success of blockchain technology.
Much of the services consumers are using today are via centralised authorities or organisations (e.g. Bank of England, Facebook, Google) provide their service via websites and APIs. They are generally being run for profit and have their own pros and cons including questionable uses of personal information users give up to use the services.
There are popular opinions which question the green credentials of blockchain technologies and its popularity with criminal organisations. I would argue that central banks with their thousands of intermediary organisations currently propping up the world of payments are not nearly as green and I would expect the vast majority of criminal enterprises continuing to prefer fiat and their physical currency equivalents.
To move to a world of decentralised applications we will need to see a significant up tick in end user adoption which will come from education and influencers. Equally we will need to see regulators develop frameworks for blockchain technologies. However the centralised authorities and companies won’t give up their access to capital, data & power so easily.