How blockchain will change your business
Blockchain is coming and could change the way we transact, keep records and manage contracts. Here’s a simple explanation of what it is and what it does.
Blockchain is a little like Einstein’s Theory of Relativity – everyone has heard of it, but not many of us can claim to understand it.
Nonetheless, it is important for businesses to have at least a rudimentary understanding of blockchain because it will start to change the way we transact, manage contracts and keep records.
Many large companies are exploring the uses of blockchain. Those that aren’t will still potentially be affected in the near future, when they send or receive money overseas, buy or sell a property, or enter into a new contract.
So what is blockchain?
Blockchain solves the problem of how to ensure digital assets are only transferred once.
If someone hands you a twenty dollar note, you can be sure that they haven’t given that money to anyone else, because you know that particular twenty dollar note can’t be duplicated.
But if you receive $20 digitally, such as through an electronic funds transfer, how can you be sure that someone hasn’t transferred that “same” $20 to a lot of other people as well? Up until now the answer was via intermediaries. Banks act as middlemen to keep records of who owns what and who has paid who to ensure money isn’t duplicated.
These central registries also exist for a wide range of other transactions, such as property transfers and share sales.
Blockchain does away with the need for a middleman or a central registry. It is best known as the technology which underpins the bitcoin digital currency which is where it all began.
It was devised in 2008 by a man calling himself Satoshi Nakamoto to allow bitcoin to be transferred between owners without the need for a central registry to ensure that each bitcoin was traded only once.
Bitcoin has had a chequered history since then, with the collapse in 2014 of one of the largest bitcoin exchanges (which allow people to change their bitcoins for conventional currency) and concerns the technology was being used for money laundering and drug trades.
Despite the problems, the blockchain technology underpinning bitcoin remains sound and many businesses are interested in its potential to let companies make and verify transactions instantaneously without the need for a central authority.
How does it work?
Blockchain creates a single digital ledger of transactions and shares it with a network of companies, who each concurrently hold an up-to-the-minute (or indeed up-to-the-second) copy of the blockchain. It uses cryptography to enable each participant in the network to add to the ledger without needing to resort to a central authority.
Before a participant can add a transaction to the existing ledger, the other participants in the network have to verify it. The other participants all have a copy of the same blockchain and run algorithms to evaluate and verify the transaction. If a majority agree that the identifying information matches the blockchain’s history, it is added to the ledger, forming another part of the chain.
The distributed ledger technology of blockchain gives it two main advantages.
The first is security. Once a “block” of data is recorded on the blockchain ledger it is difficult to change or remove. It also provides a reliable history of transactions and asset ownership.
The second advantage is speed and cost. Assets can be transferred almost immediately and costs are lower because there is no need for the transactions to pass through a central author or registry.
What will it do?
Blockchain is mostly in the experimental phase, but companies are exploring its potential uses, particularly in financial services.
Australian banks and their global counterparts are looking at how they can use blockchain to move money between banks across borders, without having to clear the payments through central banks which can take several days for the transactions to be reconciled.
Like other stock exchanges around the world, the ASX is exploring how blockchain could speed up share transactions.
Generally when an investor buys a stock, it takes three business days from the time the trade is made on the exchange until the payment and transfer of legal ownership is completed. Blockchain has the potential to make these trades near instantaneous so that an investor selling their shares would receive their money almost immediately.
But there are applications beyond finance.
One is property purchases. Even in this digital age, buying and selling is a cumbersome process, involving certificates of title that need to be amended by lawyers and stored in a land titles office. Blockchain has the potential to simplify this, enabling all changes to a title to be stored on a digital ledger to help people quickly and easily conduct property transactions.
Lawyers are also seeing its potential. Currently lawyers spend a lot of time going back and forth with changes to contracts during complex negotiations. But if a proposed contract is put onto blockchain, all changes made by each side can be easily seen and tracked, saving a huge amount of time.
Blockchain can also be used to track and record ownership of physical goods. Everledger founded by Australian woman Leanne Kemp, uses blockchain to record information about the provenance and ownership of individual diamonds and other valuable items.
The government has thrown its support behind blockchain, leading a global project to introduce international standards that will ensure the interoperability of the technology as it becomes more widely adopted.