Researchers who study evolution and the history of human behavior believe that human beings always had the basic desire to live in a society, rather than living as individuals. Over the years, humans established institutions such as the judiciary, banks, marketplaces, corporates, and governments to enable value exchange for a better lifestyle and society. Technology has always been the trusted aide along the journey, helping improve these institutional practices adding convenience, value, and security to human life.
The invention of computers and the internet further transformed the society and its needs substituting manual processes with automated systems with remarkable success. However, most of the technology we use today heavily depends on two key aspects:
- Central databases owned by an institution or a powerful body
- A third-party middleman or a regulator or a broker to establish trust.
This dependency gives rise to quite a few serious problems that we need to address urgently. Centralized databases are a huge security threat to people as individuals as well as groups. Moreover, the volume of digital transactions is increasing exponentially, and data management is becoming more and more difficult. In the recent years, there is a lot of research on challenges related to the central database. One of the recent research paper by Capgemini Smart Contracts in Financial Services: Getting from Hype to Reality elaborately analyzes the demerits of central databases and middlemen in banking and financial services.
In a nutshell, the challenges that need immediate attention are:
- Central databases are becoming increasingly large and, hence, difficult to extract information from, manage, and maintain
- Central databases become the target of cybersecurity crimes
- When a transaction happens between two parties, there is a third party involved (banks, regulators, brokers, etc.) with access to the data and share in the profit
- Several central databases owned by different parties. An end-to-end process involves several central databases but there is potential disparity which leads to disputes. Resolving disputes and establishing trust is increasingly difficult.
- I want to own my data. But my data is owned by someone else, who may potentially tweak, steal, or even sell my data.
But how do we overcome these obstacles and limitations to truly benefit from technology and effectively utilize its vast scope?
Blockchain is considered one of the “most important IT inventions of our age,” and it was first defined when the cryptocurrency Bitcoin was introduced in 2008. As the dust around the new digital currency settled, everyone started noticing the technology running the show and the discussion around this incorruptible digital ledger has not stopped since then.
Foundation of the fabric
Blockchain technology uses distributed ledger technology (DLT) and runs on peer-to-peer networks. Each transaction is time-stamped, encrypted and packaged inside blocks, and hence immutable. Each block is linked to the previous one through linked lists and a copy of the blockchain is stored with both the parties involved in the transaction. Blockchain technology is built on six important pillars:
- Immutability: Once the ledger is updated with data, the information becomes unmodifiable. Each block is connected to the other blocks using linked list. This makes it almost impossible to change any data pertaining to any completed transaction.
- De-centralized database: Data is not stored in a central location. The blocks are distributed and stored in each of the stakeholder’s machine in the form of blocks.
- Cryptography: The new technology secures data using cryptography that nobody can break.
- Transparency: The ledger can be shared and verified by anyone who has access. This transparency is the basis for the trust established.
- One Truth: There is only one truth, and in the world of blockchain technology, it can be extracted using consensus algorithms, and established by anybody.
- Smart Contract: Blockchain technology allows implementation of smart contracts, which are more secure than their traditional counterparts.
Though the arguments for blockchain technology are loud and compelling, a cautious approach is recommended. We must not forget that the technology is only in its nascent stage and needs some serious work before proper implementation. “Looks like all these areas are very weak. There is a lot of hype around it. The technology is not proven yet. Still, people are talking about it at a very high level. But implementation is not very matured,” notes global analyst firm Forrester. “Will the technology live up to the expectation”, wonders Gartner. Others ask will blockchain outlive the hype around it?
The fact is that the technology must prove itself on technical grounds to earn credibility among the user community. Analysts believe that it will take us another 15 to 20 years to get there at scale. When that happens, human beings will have a better life devoid of middlemen, central databases, and disputes; and technology will make our lives safer and dispute free.
- Smart Contracts in Financial Services: Getting from Hype to Reality by Capgemini Consulting—October 11, 2016
- Is Blockchain the most important IT invention of our age? By John Naughton—January 24, 2016
- Blockchain is this year’s buzzword – but can it outlive the hype? By Mattha Busby—January 30, 2018