Over the last few years, if you’re Internet-savvy, you may be aware of blockchains. If you do, you probably know it as the technology that underpins Bitcoin. If you know more than that, you’re in a very small group of people who actually understand what it does and how it’s capable of so much more.
Let’s take a step back. For those who don’t know, Bitcoin is a “cryptocurrency” which is a currency that uses cryptography to handle transactions. Bitcoin is not backed by any central government as most currencies are today (the dollar is backed by the Federal Reserve and so on) and thus, is not subject to the purview of government. It is in this vein that many people have perceptions of Bitcoin being used for illicit activities. And while it does afford a level of anonymity if one so chooses, its uses go far beyond that and the illicit usage is only going to represent an increasingly small percentage of Bitcoin’s users as Bitcoin and other cryptocurrencies become more prevalent.
The reason that Bitcoin can work without the backing of a central institution like the Bank of England is what is known as triple-entry accounting, made possible by the blockchain. In modern accounting, we use double-entry accounting, which means that for every debit, there has to be a credit somewhere else. This system has been in use since the 1400s and provides error-checking, but doesn’t stop people from falsifying records (think of “cooking the books” a la Enron). The “third entry” in triple-entry accounting is a cryptographically-secure public record of every transaction so that these transactions can be verified. This is the blockchain. When you make a transaction using Bitcoin, a record is made in the blockchain and now everyone knows that one wallet paid out some Bitcoins to another wallet and so everyone agrees how many Bitcoins are in each wallet.
This principle of publicly-verifiable transactions is most obviously applied to trade and transactions, but it can go so much further. And it will.
How about construction contracts? Smart contracts are starting to gain traction in the industry, where the contract defines the terms of what a contractor must do to get paid. These can be used to record transactions of the contractor buying raw materials (and getting paid for them), storing the materials, marking them as installed, marking them as tested etc. and the client being able to approve and verify everything that happens, with the appropriate transfer of funds happening instantaneously.
A recent article that I read, which spurred me to write this article, gives the example of voting. Blockchains will allow for Internet voting while ensuring that fraud is nearly impossible and providing a publicly-verifiable result that can be scrutinised and analysed.
In the article above, the author makes a claim that the blockchain is the most important invention in the last 500 years ( with the printing press being held in higher esteem). That’s a bit of a bold claim and I’m not one to make superlative judgments, however, I do think that people haven’t quite realised the importance of blockchains yet and it will upend how modern society functions.
Most governments, financial institutions and many other industries are starting to take note, researching and understanding blockchains, if not innovating on it and actively embracing it. It’s worth taking some time to start to learn about blockchains and how it works to see how it’s going to start changing the way that society functions.