- What is blockchain?
- How is blockchain revolutionary?
- Cryptocurrency, the new money
- ICOs, the new way of raising money
Blockchain is a software architecture which creates a chain of records. This is supported by member computers serving as nodes to maintain and verify the records adhering to common protocols of a network. The main features of this technology are decentralization of record keeping and autonomy or consensus from users. This effectively means that no single participant can manipulate the records without a consensus of the majority of network participants. The blockchain based start-ups have currently raised a cumulative investment of over $3.5 billion, much of which was invested in 2017. The adoption of this technology has also led to an alternative way of raising money; Initial Coin Offerings (ICOs) replacing crowdfunding, venture capital, etc.
Blockchain is an unprecedented combination of prevalent technologies; cryptography, P2P network and decentralized record keeping.
- Cryptography: The technology is used for encrypting the records
- Peer to Peer (P2P) network: All the users are connected via the same platform or software
- Decentralized record keeping: Every user has the same information on the network (provided they have downloaded the latest records from the network)
Hence, as a P2P network, blockchain thrives on the number of participants (nodes) and the computing power offered by nodes. Further, any participating node on the network can transact with another or add any record to the existing chain. Additionally, third parties can also participate in transactions by routing through other nodes acting as an exchange. However, all the new transactions or records should be verified by the participating nodes before these get added to the chain. Hence, an approval requires the computing power as all the transactions are hashed (recorded in alphanumeric syntax) involving a public address and a digital signature of the initiator.
Basic flow chart of blockchain-based transaction; case of Bitcoin
Source: Televisory’s Research
Hence, for the process of verification nodes pick up transactions hashing them together until the block size limit is reached (as per the protocol of the respective network). The magnitude of transaction size depends on the number of public addresses used and the digital signature. The nodes verify each hashed transaction from the originating public address, its affiliated private key and the digital signature. However, this involves heavy computing power at the end of nodes. A transaction or a new record is added to the chain if verified by other nodes.
The network only accepts the longest chain which has all the verified transactions. This longest chain is transferred to every node so that everyone has the same decentralized record.
The above mentioned is the general structure of the blockchain technology. Further, like any other technology, this can be customized to suit the objective.
Why blockchain is revolutionary?
We live in a digitized world where accumulation or authority over wide scale information in the form of data can instill power to an individual or an organization. This can be exemplified in the case of banks, which route many transactions and therefore, hold authority over determining the transaction costs. Similarly, government agencies such as land authorities hold the ownership of data for land banks, hence, there is a possibility of corruption by manipulation of data. Blockchain technology offers the decentralization of data, which effectively means no single authority can enforce or manipulate the data.
If property ownership was put on blockchain, every node on the network would have the record of transactions and ownership data, thus, eliminating corruption through manipulation. Hence, blockchain offers decentralization of power by the way of decentralization of data. However, this is just one major case showcasing a key advantage. Following are the additional advantages of this technology over the present ones:
Anonymity: Any node to a public blockchain would remain anonymous including an initiator of a transaction or record, until it does not reveal the identity associated to an encrypted public address.
Autonomy and security: The primary feature of blockchain technology is decentralization, which provides the autonomy to anonymous users collectively. The record for each transaction is emitted to each user through the network and thus, there is no central authority over the records. This increases the transparency and eliminates the risk of manipulation. In such a case if the data has to be manipulated, a major portion of the network power across the world (i.e. users with high computing power) would have to collude. Firstly, collusion among millions of people across the globe is not possible in a secretive manner. Secondly, such a case would again indicate autonomy and consensus among major stakeholders.
Real-time functioning: Blockchain is a P2P network technology based on the nodes which support this system. Hence, if the nodes are active, the network is live even if they are located across time-zones. This implies that any transaction or record is transmitted and executed in real-time. For instance, a transfer of ownership rights would be immediate. This is in contrast to the current process of manual record verification by a land authority like transaction between a buyer and a seller, changing the ownership in the registers, undertaking new paperwork and allied processes.
Very low transaction costs: Traditionally, centralized institutions have acted as custodians and intermediaries for the data and records, and transactions. These bodies charge a hefty commission for their services, there is a risk of delay and manipulation through hacking or deceit by the parties involved (like employees). However, this is set to change with the adoption of blockchain technology as there would be no central authority.
Addedly, the transactions will be possible by the way of blockchain-based cryptocurrencies (explained below in this blog).
Flexibility: Blockchain is the technology which can be tweaked to suit an objective. However, the key features are common across all the variants of public blockchain application; anonymity, real-time functioning and consensus.
Blockchain changing the status quo
The blockchain technology was originally presented through a whitepaper by a person under the pseudonym Satoshi Nakamoto (whose identity is still unknown) in 2008. The person applied this technology to form world’s first cryptocurrency and its network; Bitcoin. This technology was not noticed for a while. However, the unmatched technology was eventually acknowledged and several start-ups applied this to different concepts over time. Presently, even governments of different nations have announced their plans to adopt the blockchain.
Televisory has classified the ongoing developments into major heads. However, this should be understood in harmony.
Cryptocurrencies and tokens, changing the way we transact
Bitcoin, which was launched in 2009 and offer flexibility to remit any amount of value globally with a fraction of the existing cost. Buyers of this highly divisible coin should have balance in their software wallet, which they can transfer to anyone across the world with a similar wallet. A receiver can convert this into fiat money from financial institutions. However, Bitcoin (and similar cryptocurrencies) are increasingly being accepted by merchants. Thus, the need for support by financial institutions is set to diminish over time.
Bitcoin itself serves an underlying purpose for transfer of money globally. Although, other start-ups are also aspiring to develop more solutions. Further, users of blockchain technology have introduced various solutions across many industries and chose Initial Coin Offering (ICOs) (explained beneath in this blog) as a source of funding. They have launched separate tokens to support the functioning of their network. At present, there are about 1,800 cryptocurrencies and tokens backed by different blockchain start-ups. These can be traded and are highly divisible. The total market cap of cryptocurrencies is more than USD 171 billion (as of 27th Oct 2017).
Cryptocurrencies (like Bitcoin, Litecoin, etc.) were launched for the purpose of money transfer and can be used with merchants accepting these denominations. On the other hand, tokens can only be used on a particular network. For example, Basic Attention Token (BAT) can only be used on BAT platform. Tokens have no intrinsic value for the people, which are non-users of a network. However, presently traders use them for speculation on their future demand within a network.
Applications and networks developed by start-ups
The blockchain is being increasingly adopted and several start-ups are developing solutions and streamlining processes. There are more than 1,100 start-ups which have proposed various solutions based on this technology. Cryptocurrencies and tokens have become an integral part of these start-ups, with each creating its own version to sustain transactions in a system. Though, the whole gamut of these organisations cannot be covered in this blog. Thus, few of the prominent solution providers are mentioned below:
Ethereum Foundation, building platform for digitized smart contract and decentralized applications
This organization has developed a blockchain-based platform where other developers can customize their blockchain codes to meet their requirements. Ethereum network draws computing support from its worldwide members and diverts it for the support of applications based on its platform. It aspires to provide payment solutions as well as the implementation of smart contracts (condition based digital contracts). These smart contracts will self-execute if the underlying conditions are met; without any delay, a possibility of manual error and counterparty risk. For instance, recently AXA announced the use of Ethereum platform to develop smart contracts for flight delay insurance, which would automatically compensate users in case of a flight delay. Ethereum platform has launched a token; Ether (ETH) to support the transactions within the applications built on the platform. An individual, who is party to a contract will need Ether to function. In the above example, AXA would need to hold Ether to compensate the users and the nodes maintaining and executing these smart contracts would be compensated in the same tokens.
Another solution provided by Ethereum is Decentralized Applications (DAPPs). DAPPs are the applications which can run on the computing power provided by the network nodes. Thus, eliminating the need to own resources such as Golem, which is a project that aims at using the processing power of its nodes and use it for speeding up many use cases like computer graphic rendering, big data analysis, machine learning, etc. Golem would create a pool of resources, mainly processing power contributed by its nodes established anywhere in the world. Nodes would be rewarded with Golem tokens (GNT).
Ripple, the network for improving the efficiency of banks in processing transactions
Bitcoin was the first cryptocurrency to be launched, however, it operates outside the purview of government control and regulations. Ripple envisages to create a network of financial institutions to streamline the processes, but within the framework of regulations. Currently, all the banks are connected through the SWIFT networks solely for communication purposes and on the basis of this financial institutions debit or credit their NOSTRO and VOSTRO accounts. This network is based on 6 nodes (parties); the payer, payer’s bank, correspondent of payer’s bank, correspondent of receiver’s bank, receiver’s bank and finally, the receiver. The involvement of these parties leads to a delay in processing. Ripple identified this gap and plan to create a network of banks or financial institutions, which would reduce the time and fee to transfer the money across the globe. It conceives to connect financial institutions on the same network for real-time execution and settlements. This would remove the intermediaries like correspondents for banks, thus, offering low costs at high speed.
Ripple would use its token; XRP for such transactions in its network. This cryptocurrency can be used by the banks integrally to improve the payment process. All the commercial banks, financial institutions and central banks would act as nodes to this blockchain.
Other business cases developed by upcoming start-ups
Powerledger, the network connecting DERs for peer to peer electricity trading
Founded in 2016, this start-up aims to create a blockchain network of connected Distributed Energy Resources (DERs) for energy trading. This would enable the energy trading between the households in exchange of network tokens called POWR. This would eliminate the need for selling the excess electricity generated through DERs to power grids at prices fixed by authorities. Households are directly connected to each other and can trade based on their requirements. The flow of excess energy would be managed via Ethereum-based smart contracts. Moreover, other applications for energy trading in such a blockchain would also include trading off power for Electric Vehicles (EVs).
Neo, which was founded in 2015 has developed a blockchain platform like Ethereum for development of decentralized applications using smart contracts. However, applications can be developed using many programming languages (C#, Java, etc.) as compared to Solidity, a programming language specific to Ethereum. Neo is backed by China, which may look to regulate the space through influencing this cryptocurrency. Presently, Neo has less number of identifiable nodes, which severely reduces the autonomy of this platform token.
As mentioned earlier, there are a lot of applications developed by the companies, which cannot all be captured on this blog.
ICOs, changing the way money is raised
Traditionally, the money has been raised by the upcoming start-ups through venture capitalists, angel investors, crowdfunding, etc. However, this has changed with the increasing adoption of blockchain technology. Start-ups based on this technology have sought a new method to raise money, namely Initial Coin Offerings (ICOs). Start-ups having an application for the blockchain publish a whitepaper showcasing the roadmap and a team backing up the idea. Hence, with the publishing of a whitepaper, these start-ups also launched public offering for coins to raise funds. The management team members for such blockchain start-ups hold certain coins (as a reimbursement) before floating an offer to the public for a specific number of coins. Generally, the number of total coins for the support of a network is predefined in a network protocol. These coins would either be generated as a reward for the work done on a network by the nodes or are already created before the ICO, ready to be allocated as rewards.
First ICO was launched in the year 2013 for Mastercoin (now called Omni) raising over $7 million in funding since then about 250 ICOs have been launched cumulatively raising over $3.5 billion. Furthermore, roughly 203 ICOs have been launched in 2017 alone raising $3.2 billion. Secondly, around 20 to 22 ICOs were launched each month in the past quarter.
Growing concerns over ICOs
ICO sounds familiar with the word IPO (Initial Public Offering) such as to suggest the popular way of raising money. Although, ICOs are being increasingly used to raise funds, they are relatively much riskier as compared to traditional IPOs. ICO is an unregulated space, most of these blockchain-based start-ups are incorporated as non-profit organizations, which has kept them out of the regulatory hassles up to date. An issuer publishes a whitepaper for a blockchain-based solution, which a person intends to develop and launch an ICO. This is in stark contrast with requirements of corporate filing for IPOs, which need to fulfil mandatory conditions such as past history of operations and profitability, in addition to other regulations. This aspect has raised a lot of concern among investment regulatory authorities in various countries.
Although, various countries are now formulating regulations to check fraudulent ICOs; few of the major nations like China, Russia and South Korea have already banned ICOs. China has shut domestic cryptocurrency exchanges due to which the cryptocurrency market cap tanked more than 20% within a week in September 2017. Likewise, the US Securities and Exchange Commission (SEC) stated that it will treat ICOs as IPOs under the federal securities law and issuers need to abide by all the security regulations owing to this issuers have barred American investors from participating in recent ICOs. Further, due to arbitrary regulations, start-ups are moving to countries like Singapore, Japan, Switzerland, etc. where the administration is more welcoming and regulations are lax.
In conclusion, it can be stated that blockchain is a revolutionary technology, this was applied to currencies after its introduction in 2009. The underlying objective of the technology was to create a secure currency, which is seamless to transfer and accepted universally. In the process, this decentralized the control vested with governments by means of currencies and established an autonomous network with the advantages of anonymity, real-time functioning and a huge reduction in transaction costs. However, this technology is changing the world around us at a faster pace. In the past 9 years since its inception, the technology found its application majorly in the way we transact, the capital raising for businesses and more fundamentally for corporations conducting their businesses. Cryptocurrencies have been gaining acceptance across the world and ICOs have opened a channel for public funding, especially for blockchain-based start-ups. Thus, like any other new mass level transformation, there have been mixed responses of acceptance, support, praise, resistance, doubt and fear for the blockchain based concept. However, this concept is being increasingly adopted across businesses and it is set to change the status quo within industries.
Read on our Part 2 of this blog to explore more about the use cases and future of blockchain.