Everyone knows a number of revolutionary inventions that have changed our lives forever – the wheel, the printing press, electricity, the telephone, the television, the Internet – and blockchain will probably be the next on the list. Created seven years ago, blockchain, or distributed ledger technology, is now coming to the forefront and promising to affect not only the financial services sector but all aspects of our society, including business, economics, politics, and law, in the foreseeable future.
So, What is Blockchain?
The blockchain technology was introduced in 2008 to underpin bitcoin, a digital payment system invented by Satoshi Nakamoto – it is still a mystery whether it was created by this one person or a group of people.
As a relatively new paradigm, blockchain lacks a commonly agreed upon definition and is open to various interpretations. In 2015, however, the term was added to the Oxford Dictionaries web site with the following concise definition:
A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
In a nutshell, blockchain is a giant distributed and decentralized public ledger of transactions that everyone can inspect but which no one controls. With no central authority, it is a peer-to-peer system, which is possessed, maintained, and updated by all its users.
Source: Santander “Fintech 2.0 Paper”
Each transaction on the blockchain is verified by all nodes in the network. If a certain transaction looks valid to everyone, a new block is created and added on ‘top’ of the chain. Thus, a blockchain is a continuously growing list of transactions that are organized into a series of blocks.
Theoretically, any type of information can be digitized and placed onto a blockchain, which means that any data of value can be transferred in the blockchain world. The distributed ledger technology could potentially be used in the broader sphere – beyond payments and currencies – and this makes it even more attractive.
Though the blockchain technology had been created as the backbone of bitcoin that was supposed to change the future of the world economy, it is blockchain, not bitcoin, which is now seen as the main revolutionary innovation and called by IDC one of the most hyped topics in 2016.
A lot of debate arose regarding blockchain’s potential to replace Society for Worldwide Interbank Financial Telecommunications (SWIFT) for financial transaction processing, allowing financial institutions worldwide to send and receive transaction data faster, cheaper, and with greater transparency.
In 2015, over 50 of the world’s leading financial institutions formed the R3 blockchain consortium to collaborate on research and development of blockchain usage in the financial system. In March 2016, the consortium completed a trial of five cloud-based blockchain solutions with 40 of the world’s largest banks.
Also in 2015, the most innovative companies in finance, banking, Internet of Things (IoT), supply chains, manufacturing, and technology teamed up to start the Hyperledger Project to support blockchain-based distributed ledgers and advance enterprise application of blockchain technology.
The world’s tech giants, such as IBM and Microsoft, invested on a big scale in the blockchain technology and launched new Blockchain-as-a-Service (BaaS) offerings to allow developers to build, deploy, and run blockchain solutions on the cloud. At the same time, Microsoft is a partner of R3, and IBM is a part of the Hyperledger Project.
Moreover, such majors as IBM and Samsung have already started to apply the blockchain concept to their IoT initiatives. In the IoT industry, blockchain has the potential to become a foundational element of IoT solutions, allowing smart devices to exchange data, or to execute financial transactions, autonomously.
Interestingly, blockchain is moving beyond fintech and finding its way into new industries, including the government sector, energy, and healthcare. Moody’s Investors Service, a large credit rating agency, has recently released a report on the potential of blockchain, which identifies 25 use cases for the technology and more than 120 ongoing blockchain projects.
The Next Big Thing?
According to a new research from Greenwich Associates, blockchain spending, primarily by financial and technology firms, is forecast to exceed $1 billion this year. Many parties, from financial institutions to government authorities, are experimenting with the ledger technology, deploying pilot projects and testing the efficacy of blockchain.
The majority of experts expect more blockchain-related research and development in the near future. By the 2020s, blockchain-based systems used by leading enterprises will allow anyone to exchange a wide range of digitized or digitally represented assets and value with anyone else, according to PwC.
The blockchain technology opens a world of new, exciting possibilities and seems to be the next big thing in fintech and many other sectors – but is it? It is important to understand that we are now in the fetal stage of the blockchain technology, and several years will pass before its full potential becomes clear.