With all the hype surrounding Bitcoin in recent years due to price fluctuations, it’s been hard to ignore. You hear about it on business news, you read about it on your Twitter feed, and then you hear the word “blockchain”.
Blockchain is essentially the technological architecture that supports Bitcoin, but it holds far more potential than just that. Many people deem the mastermind behind this term to be Satoshi Nakomoto, the anonymous creator of Bitcoin. However, if you look into the original white paper the words “block” and “chain” are never conjoined but used separately, then later popularized. By the time you finish reading this, you’ll be able to
- Understand in simple terms what blockchain is.
- Articulate the different use cases for a blockchain so you can sound intelligent in front of your colleagues
- Know how to properly invest in this emerging field of technology if you deem it worthy.
Many people would like to think that blockchain tech, otherwise known as DLT (Distributed Ledger Technology), is extremely complex and only a select elite can understand what it is. Thankfully, that is not the case. In simple terms, a blockchain is an immutable, distributed database that provides the opportunity to dis-intermediate third-parties.
That sounds a bit too good to be true, so how does this all work? The process involves computational code, cryptography, and hashing, none of which are new. Cryptography is as old as computing itself and hashing is a technique that has been around since the 60’s. None of this is unseen, but rather these techniques have now been combined in a way we’ve never seen before which allows us to think that this is revolutionary.
Before I break down the process in an example, I’m going to briefly explain what code, cryptography, and hashing are. If you feel you’ve got a good enough understanding of what they are already then feel free to skip past these explanations.
- Code: a set of instructions that forms a computer program that is then executed by a computer. Example: You write a java program that outputs “Hello World!”. Code, like most things, has many levels to it so I’m going to only skim the surface to avoid getting too off track.
- Cryptography/Encryption: Cryptography is associated with the process of converting ordinary plain text into unintelligible text and vice-versa. Example: Sending a secure message to a friend/colleague over WhatsApp or Telegram.
- Hashing: Hashing is generating a value or values from a string of text using a mathematical function. Example: Authentication through cryptographic hash functions let you log in to a system without storing your password anywhere vulnerable.
Now that we’ve laid out an elementary understanding of these terms, let’s apply them in theory for how a blockchain would work. For this purpose, I’m going to use an example of a monetary transaction, but as you’ll read later on, this is only one of the many possible use cases.
Can You Give Me An Example?
A blockchain acts as a distributed ledger, which is why it is often also referred to as distributed ledger technology(DLT). Let’s say that there are five people in this libertarian scenario: Alice, Bob, Charlie, David, and Elizabeth. None of these people know each other, but this is fine because they all use a shared ledger which has no central authority, therefore the trust relies upon consensus.
Charlie sells widgets online and Bob wants to buy $50 worth of his lovely widgets. Bob sends $50 to Charlie and this is then recorded on the public ledger that is shared by all of them. They see that this transaction has taken place and they all agree on the amount Bob paid. So where does all the fancy technology come into play?
Alice, Bob, Charlie, David, and Elizabeth all have both private and public keys which together constitute their digital identity. The transaction begins with Bob (who is in possession of his own private key, which allows him to access his digital wallet) entering the amount he would like to send to Charlie (in this case, $50), then he enters Charlie’s public key and the transaction begins to take place. A block of data containing a unique hash for this transaction along with a timestamp of when it took place and the amount($) of the transaction, and any other relevant information the transaction produced. This digital transaction is then presented to Alice, Bob, Charlie, David, and Elizabeth and they all agree that it took place and so they record it automatically on the shared ledger.
Then a similar transaction takes place, but this one is between David and Elizabeth. David purchases $25 of widgets from Elizabeth and the same process occurs (amount is entered, sent to the public key, unique transaction hash is created) the block of data is then connected to the previous block to provide a super audit trail. Block attached to block, hence the term blockchain.
Not So Complicated Afterall…
That was a simple example where they were using FIAT currency rather than a cryptocurrency. It is important to be able to make the distinction between cryptocurrencies that operate on top of a blockchain, and a blockchain or DLT in general. If DLT is to be taken seriously, then it is important to distance it from cryptocurrencies. Yes, cryptocurrencies popularized this technology and proved its capabilities in a harsh environment, but real-world applications do not require a cryptocurrency to reap the benefits DLT has to offer. There is room for the DLT space and cryptocurrency to co-exist and even intertwine at points, but regulation is in dire need if cryptocurrencies are to ever be taken seriously by the masses.
Aside from payments, DLT offers many other use cases, some of which are far easier than payments. DLT paves the way for us to change the way we currently keep records. In the developed world we own a lot of things, but we can’t simply pull from a shared database to see who owns what. Things like home ownership, vehicle registration, medical records, and even personal identity are all personal things we should have easy access to while ensuring their secure storage. This is a massive opportunity for DLT.
For example, let’s say every time a home is purchased the record of that purchase is then timestamped, documented, and stored in an immutable, distributed database. Then, when ownership status must be proven, you can simply pull the data block from the database and see when the home was purchased and by whom. This would also allow for the history trail of home ownership to be easily available to future buyers, along with other additional information (price of purchase, past foreclosures, type of mortgage). It is likely we will be much more open about our data if it is only identifiable in the form of a cryptographic hash allowing for anonymity, which theoretically would open the door for more people to use DLT to share data and improve efficiency in all sorts of different scenarios.
Identity will probably be one of the best use cases for DLT in both the developed world as well as emerging economies. The world bank estimates there are roughly 1.1 billion people without any form of authentic identification. This is potentially extremely troublesome, but produces a scenario where DLT may be able to offer a solution.
DLT or “blockchain” was originally conceived mainly to show proof of ownership, which makes it the perfect tool for authenticating personal identification. Whenever you apply for an online service, a bank account, or even when ordering a drink at a bar, you’re asked to produce some form of identification. If you were to have a digital form of identification that you can present on your smartphone through a two factor authentication(Needing to do face scan or thumbprint scan) which then pings a distributed database full of unique personal identification information, which returns your unique information, this would solve the problem of identification in the developed world. This would especially ease the process where you need to show two forms of identification. It’s important to note that if your identity is cryptographically protected in an immutable and distributed database, the possibility of fraud is drastically reduced, especially compared to SSN numbers, many of which are now floating around thanks to the carelessness of Equifax(EFX).
DLT offers similar benefits of identification to emerging economies. This would allow emerging economies to leapfrog old approaches on maintaining and distributing identification to their citizens. Countries including: Belgium, Bulgaria, Chile, Germany, Estonia, and Spain already offer some form of electronic identification, but out of all of those, Estonia is readily perusing blockchain based government issued identity.
Okay, we get it…
DLT offers countless ways to improve process efficiency for fields other than just financial services and identification. Some other areas are compliance, data management, energy, e-voting, licensing rights, supply chain management, etc. The number of possible use cases for DLT may also prove to be a downfall of the technology. If hype drowns out realistic use cases, then capital risks flowing into to startups promising to revolutionize the world with wacky, far-fetched ideas, rather than having it go to legitimate companies looking to apply this technology to realistic use cases.
Who is winning the race?
Now that we’ve established a solid understanding as to what this technology actually is and what it’s capable of, let’s explore public companies working in the space. Since the DLT space allows for various usages, to no one’s surprise, the DLT space has become very crowded. This saturated market for emerging tech may draw comparisons to the dot-com hype, but this is technology that has already been tested in an unregulated environment and proved to be quite resilient to a certain level of realistic hype is fully deserved. There is no shortage of ideas for what DLT can be used for, so the main struggle for companies seems to be whether they are to create their own platform, or use an existing one such as Hyperledger or Ethereum, both suitable platforms for a variety of businesses.
Hyperledger is, although not a company, an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing and Technology. Hyperledger hosts a number of existing frameworks for DLT projects. Companies such as Accenture(ACN), Alphapoint(APPO), Hitachi( HTHIY), IBM(IBM), VMWare(VMW), are engaged with at least one of their existing frameworks. The projects these companies are using the frameworks vary for obvious reasons, but IBM(IBM) seems to be one of the most immersed companies in the space.
Don’t Forget About Ethereum…
Aside from Hyperledger, Ethereum also offers a platform to host blockchain-based applications. Ethereum is completely decentralized and offers an enormous globally supported infrastructure for their platform. Ethereum’s pinnacle are the smart contracts that execute in accordance with their pre-programmed guidelines. Smart Contracts are basically the implementation of contract terms as executable computer code, which in turn allow for credible transactions to take place without a central third party. Smart contracts are programmed through Solidity, a contract-oriented programming language for writing smart contracts. Ethereum is a complex and sophisticated project that I don’t want to dive any deeper into for this article because it’s far too time-intensive. I do strongly suggest you read more about Ethereum on Coindesk, as it’s a very exciting project.
Enterprise Ethereum Alliance (EEA)
As stated on their website: “The Enterprise Ethereum Alliance connects Fortune 500 enterprises, startups, academics, and technology vendors with Ethereum subject matter experts. Together, we will learn from and build upon the only smart contract supporting blockchain currently running in real-world production – Ethereum – to define enterprise-grade software capable of handling the most complex, highly demanding applications at the speed of business.”
The Enterprise Ethereeum Alliance hosts well over a hundred members, such as: CME Group(CME), Microsoft(MSFT), Intel(INTC), JPMorgan Chase(JPM), Accenture(ACN), BNY Mellon(BK) , and Mastercard(MA), only to name a few. Now how many of these companies are actively engaged with Ethereum with the intention of using their platform to improve their business is up in the air, but showing interest in this industry is enough to get us talking and reading about them, so fair play to them.
Note: I’ve included a chart for each of the companies listed below that plots both their stock performance as well as the price of BTC in terms of percentage gains. I’ve chosen BTC because the mass influence it has in the crypto space, making up a significant chunk of the overall market capitalization of the market. The Bitcoin blockchain is also what has gotten so many people enthusiastic about the possibilities of what distributed ledger technology could offer in other use cases.
Big Blue Goes Blockchain?
IBM has been on a major re-branding exhibition as they try to pivot away from being the once great tech incumbent, to second-class-citizen. They offer services in cyber-security, cloud infrastructure, analytics, AI(Watson), and most relevantly, blockchain. IBM has built a platform with Hyperledger to provide “standardized and enterprise-grade distributed ledger blockchain frameworks and code bases to produce tangible business results.”
IBM is moving quickly to obtain as much enterprise-level market share as possible while barriers to entry remain relatively low. There is certainly a market for them to snatch up as blockchain solution spending looks to top $2.1 billion in 2018 as businesses are eager to get with the trend before they miss the train. Hosting enterprise level DLT frameworks feeds right into their already existing cloud computing/IT infrastructure which generates them an average of around $5 billion each quarter. However, IBM isn’t the only big tech company on the block looking to snatch up the unclaimed market share of this emerging industry.
Dimon Doubts Crypto, But Supports Blockchain…
JP Morgan Chase(JPM) has created Quorum, their own enterprise-ready distributed ledger and smart contract platform. Quorum is an enterprise-focused version of Ethereum that is claimed to be able to develop and evolve alongside Ethereum. Quorum only slightly modifies Ethereum’s core so Quorum is able to incorporate the majority of Ethereum updates quickly and seamlessly. In March, JPM floated the idea of spinning off Quorum as an independent entity in the hope it may increase the platform’s appeal. Quorum seems to be similar to Hyperledger, as they are both open source and free to use. Because this project is open source, it seems likely that JPM is using this as a research expense to get ahead in the market, while also generating buzz around them for having their own blockchain project.
Microsoft Getting Skin In The Game…
Microsoft has two main products for their blockchain platform. The first is the Workbench platform, which provides an interface that allows business users to construct solutions that suit their needs. It provides prebuilt networks and infrastructure. The second product is the Coco Framework, which allows companies to use blockchain while keeping their data private. This is important, as it allows companies to retain the confidentiality of their dealings with various suppliers and customers.
Mircrosoft(MSFT) holds the potential to be a large scale player in the DLT space as they not only offer a workbench platform along with open source framework, but they also host a massive cloud infrastructure that could house countless blockchain projects. MSFT already has some large scale clients using their blockchain workbench platform such as 3M(MMM), Bank Hapoalim, and Nestle, only to name a few. Microsoft(MSFT) has also recently announced a partnership with EY to be used for rights and royalties processing by Microsoft’s game publishers, will eventually have a much wider purpose.
Alexa, order a blockchain…
With Amazon Web Services already being widely adopted and used in the business world, it would make sense for Amazon(AMZN) to begin hosting blockchain projects. The cloud computing giant will team with a new start-up, Kaleido, which emerged out of blockchain incubator called Consensys
“Introducing Kaleido to AWS customers is going to help customers move faster and not worry about managing blockchain themselves,”
As it currently stands, Microsoft(MSFT) looks to have the competitive edge over Amazon(AMZN) for their blockchain workbench, but that can of course change as more SMEs look to engage with this new technology.
Blockchain to the Rescue for Facebook…
After suffering an extreme amount of backlash over the Cambridge Analytica debacle, Facebook(FB) has been looking for a way to better secure their user’s data. In a restructuring effort, Facebook(FB) has placed some of their top executives on various projects that are exploring the pros and cons of decentralization, cryptocurrencies, and blockchain(DLT). Whether Facebook(FB) will look to create a DLT product is unlikely, but they are likely searching for a way to leverage the technology to enhance user’s data security. The project is being headed by David Marcus, former head of Facebook’s Messenger.
A for Alphabet, B for Blockchain…
Alphabet(GOOGL) already has sufficient cloud infrastructure, competitive with the likes of Microsoft(MSFT), Amazon Web Services(AMZN), and IBM, so it would make sense for them to enter into the distributed ledger arena. Alphabet is developing its own distributed digital ledger that third parties can use to post and verify transactions. It is also stated that they plan to offer a white label system that other companies can run on their servers. With the terabytes upon terabytes of data that Google(GOOGL) stores, it would make sense to implement this smart ledger technology into their already existing systems to better protect future data. According to CB Insights, Alphabet has been among the largest investors of blockchain technology within the last five years. Alphabet’s venture arm, Google Ventures, is invested in Storj, LedgerX, Veem, Gyft, and Ripple. It is likely they’ll use M&A techniques for obtaining talent to make sure they aren’t caught lagging behind the competition.
Overstock.com sees opportunity…
Surprisingly, Overstock.com(OSTK) is the third-most-active corporate blockchain investor, falling behind only SBI Holdings(EWJ) and Google Ventures(GOOGL). Their CEO, Patrick Byrne, has been an outspoken advocate of Bitcoin for some years now. He has put his money where his mouth is by allowing for customers to pay with Bitcoin on Overstock’s(OSTK) website, along with a variety of other cryptocurrencies. Overstock(OSTK) has been piling money into blockchain based companies, and this is a large hint at what the future of the company holds in store. It is reported that Patrick Bryne is exploring a sale of the company to instead pursue a blockchain based venture focused on global real estate registry. Bryne owns 40% of the company, so this would give him plenty of capital to fund his new venture.
It is hard to not notice the massive spike of Overstock in close coorelation with the price of Bitcoin. This comes as a small suprise since their CEO, Patrick Bryne, is such an outspoken crypto advocate. The acceptance of BTC as a form of payment likely excited investors as they saw an opportunity to get a piece of the pie wihtout owning BTC itself.
Out of most of the consulting firms, Accenture(ACN) is the most involved in the distributed ledger industry. It is likely that their quick action along with strategic partnerships and collaborations with Digital Asset, R3, Ripple, Enterprise Ethereum Alliance, and Hyperledger. Accenture(ACN) offers Strategy assessment consulting, solution design build & implementation, boot camps, etc. that they’ll profit from. Accenture(ACN) also hosts a research lab in Sophia Antipolis, France which is intended to help them stay ahead of the technological curve.
Square(SQ) is not directly involved with any blockchain development, and if they are they’ve not yet disclosed it to the public. It would not be far-fetched to believe they are based on CEO Jack Dorsey’s open bullishness of Bitcoin.
“The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin,” – Jack Dorsey, CEO of Square.
While I personally disagree with Dorsey on this statement, his excitement surrounding the digital currency has crept into Square’s(SQ) business model, now allowing customers to legally buy and sell Bitcoin through their Cash app. Distributed ledgers promise to bring transparency to all sorts of transactions, so this move may be foreshadowing how Dorsey plans to implement the technology underpinning bitcoin on to Square’s payment processing platform.
Buzzword Turned AcronymMany of these companies listed are in a competing service area broadly known as BaaS (Blockchain as a Service). Given the high demand for data security, BaaS will likely take off as a successful service as incumbent tech companies look to leverage the various Hyperledger frameworks to their advantage. BaaS is likely to be the first wave of this technology at the enterprise level. The companies that stand to benefit the most from this particular service will be the large cloud providers who can now offer BaaS to their already existing clientele.
Below is a screenshot of all the companies previously mentioned plotted together, along with the price of BTC.
Note: The performance is not necessarily correlated with their developments in the blockchain space, this is simply just for general reference.
What Lies Ahead?
Blockchain technology has only just emerged, but we now know that it’s fundamentally just a combination of already existing technology to help make data more secure and even immutable. If this technology conti
However, to be clear, I do not believe this is a technology that will revolutionize anything, but rather improve our already existing flow of functions. Data immutability and transparency will both be made possible by this new technology if development and enthusiasm remain present, which will help many industries progress.