The term blockchain is derived from Satoshi Nakamoto’s Bitcoin white paper in which he describes the underlying system via which a distributed ledger is compiled and stored across a peer to peer network to create a distributed store of data. Through a clever combination of cryptography and the fact it is distributed between all users of the blockchain, the blockchain becomes incredibly hard to alter once confirmed thus protecting it from being retrospectively edited. Whilst Satoshi never actually uses the term blockchain, his paper does describe both blocks and chains. The blocks are added sequentially and are made up of a hash (a unique digital code), some data and the hash of the previous block. The fact that a block contains both its hash and the hash of the previous block essentially chains the blocks together creating a blockchain.
The hash is essentially a digital fingerprint which is calculated using all the data stored within that block. If you change the data within the block you change that block’s hash. This in turn would affect the hashes of all subsequent blocks making it easy to detect if the data in any single block has been compromised. However, this in itself is not enough to prevent a modern computer which can calculate hundreds of thousands of hashes per second from editing a blockchain and recalculating all the hashes of subsequent blocks to hide their edit. To protect the blockchain from this form of misuse the blockchain concept known as “proof of work” is used to slow the process of the creation of cryptographically valid new blocks.
When a new block is added to the blockchain 50%+1 of the users must agree this. Once this threshold is reached the blockchain achieves consensus and the new block is added to all ledgers. To compromise a blockchain you need to edit all the blocks on the chain, redo the proof of work for each block and take control of more than 50% of the peer to peer network. It is the difficulty of this almost impossible task that allows you to trust the accuracy of data stored in the blockchain. The collective self-interest of the members of this peer to peer network guarantees the blockchains safety and reliability.
Whilst the term blockchain is often considered synonymous with distributed ledger technology the two are not the same. Blockchain is a type of distributed ledger but not all distributed ledgers need to be arranged in chain.
Anticipated effect on intermediated markets
Blockchains and distributed ledger technologies lend themselves very well to performing transactions digitally. Not only can information be exchanged but value. It is due to this, that currently the most popular uses for blockchains are digital currencies. However, the scope of potential uses for these technologies is much wider than banking and digital currency with implications for all organisations of all shapes and sizes.
Blockchains have the potential to disrupt every part of an organisation and indeed the way organisations themselves are perceived. The corporations of today are built on practices refined over the last century and our most successful ones tend to be hierarchical, vertically integrated and their shares traded on intermediated markets. Blockchain technology will change the way we think about human resources, procurement, finance, accounting, sales, marketing, legal affairs and raising capital. It will change how they are managed, funded and create value. In many instances it will minimise or completely remove the need for management roles allowing swathes of functions to be automated by software.
The internet initially streamlined how companies worked by improving the way information flows within an organisation. However, it did not allow for the transfer of value both inside and outside an organisation without the help of 3rd party intermediaries. This used to occur on the application layer of the internet. Blockchain removes the 3rd party and moves the transfer of value to a protocol level. Traditional payment gateways such as credit cards and paypal will find themselves no longer needed.
The vertical nature of many companies will be transformed, as stakeholders self-organise and reshape their organisation through software to respond to industry challenges and market forces.
A good blockchain encourages its participants to behave in an ethical manner. Through the use of smart contracts shareholders can more easily ensure that executives meet their commitments to the organisations they work for. Mega scale corporate scandals have recently shaken industries from finance to the automotive sectors. Rather than having to wait for books to be compiled quarterly or annually, staff and shareholders will be able to see the books in real time reducing the opportunities for deception. This also ensures that constantly changing information about the financial well-being of a company can always be determined and it never becomes out of date.
When recruiting staff, human resources employees will be able to verify candidates employment history and qualifications via blockchains streamlining the recruitment process and eliminating the possibility of candidates making false claims on their applications. Recruitment consultants could finder their roles as intermediaries made redundant.
Various blockchains will assist corporations in identifying potential contractors and customers. Thus, changing the nature of procurement and marketing.
Blockchains and smart contracts will also allow corporations to automate many of their legal affairs. It allows companies to enforce terms and payment. As these contracts are self-enforcing additional consideration is going to be required before entering into them.
With a blockchain based system, corporations will be able to sidestep traditional funding avenues and make easier use of crowdfunding and ICOs. Blockchain has the potential to disrupt the global finance system and as a result of this we are seeing many leading stock exchanges and banks investing in blockchain exchanges and investigating how their current business models will be affected.
Whilst the true value of and the level of disruption caused by the use of the blockchain in most of these areas is unproven and often untested, you can guarantee that those who fail to at least attempt to experiment with these technologies in their business models will in time be left behind by those that do. No industry will be unaffected by the changes blockchain adoption will bring with banks and stock markets who make the majority of their income through transaction fees finding their traditional roles no longer required. Existing businesses will have to adapt to the new technological environment or die.