Blockchain technology is making a strong impact in the finance industry due to the fact that it enables decentralization and direct peer-to-peer transactions. Removing the financial intermediary, i.e. the bank, can increase convenience, efficiency, and security. Direct peer-to-peer transactions can be settled instantly compared with interbank transfers that traditionally take several days. Transaction fees can be lowered, which is particularly useful when sending international remittances. Transactions are also more secure, being verified by multiple parties. As a result, blockchain technology is gaining the attention of financial institutions, investors, as well as firms interested in digital innovation and security.
Blockchain is a novel technology in part because it solves the double spending problem, which is where digital tokens are copied and spent more than once. It prevents a transaction record from being altered by storing it within a chain of cryptographically secured blocks, and distributing a full copy of the blockchain to each member of the network. This happens each time a record is changed or added. If a record does not agree with the other copies that exist in the network, it is rejected. This means that records are basically immutable; they can’t be modified or manipulated at a later date. Traditionally this problem has been solved by sending payments through the banking system. However, what happens when banks manipulate financial records or simply collapse? Blockchain technology offers to remove this point of failure.
Most people who hear about blockchain automatically think of bitcoin. The strides in market value that the digital currency has made over the years have attracted global interest. In 2011, one bitcoin cost around $1 whereas today it will set you back about $44,000.
There is however more to blockchain technology than being a vehicle for investment and speculation. Mediachain, an application that runs on blockchain technology, uses smart contracts to automate payments to musicians. This is valuable because removing the intermediary reduces transaction costs and allows more money to reach the artist. Mediachain also saves time as it uses blockchain technology to solve problems with attribution and avoid copyright disputes. In 2017, Spotify acquired Mediachain so that it could provide this payment facility to its musicians and reduce the administrative task of dealing with payment claims. Another application of blockchain technology is in the realm of the Internet of Things. Electronic household devices such as smartwatches and virtual assistants store data that can be targeted by hackers. HYPR, a company that aims to create a passwordless world, is using blockchain technology to authenticate and verify users.
There are several reasons to keep your eye on blockchain. The technology is constantly evolving and enabling new applications relevant to everyday life, as we saw with the examples of HYPR and MediaChain. The rise of non-fungible tokens allows for the ownership of original digital media, which is not just about expensive pictures of bored apes. For example, NFTs will transform legal services and global commerce by allowing contracts to be signed, stored, and certified electronically. Another shift is the nascent trend of countries adopting bitcoin as legal tender. El Salvador is the first to do so, and this decision has attracted heavy condemnation from the United States and the IMF. Russia could be next. Since it has been partially banned from the SWIFT system, Russia is considering accepting bitcoin for its oil and gas exports. Blockchain will also affect the job market by creating new demand for people with coding skills. Due to a global shortage of software developers, you can take an online blockchain development course, build a portfolio of blockchain solutions, and likely secure employment.
Despite its promise, there remain several barriers that are slowing the adoption of blockchain technology. For non-technical experts, the technology is still complicated to deploy. For blockchain networks that employ a ‘proof of work’ model, e.g. bitcoin, transaction speeds can be slow and energy consumption extremely high. Since a cryptographic puzzle has to be solved before a new record is added to the network, this slows things down and consumes a lot of energy. It is estimated that bitcoin mining uses more electricity than several countries annually. This is likely to pose issues for companies operating in nations that face energy supply shortages. Another road bump is that blockchain processes are precise and rigid. If unforeseen circumstances require parties to be flexible and exercise judgement, then blockchain programs may not be suitable. Blockchain will consider only what is coded with no exceptions. This is likely to be a challenge and may limit the use of smart contracts to highly standardised transactions.
Although blockchain is viewed as being highly secure, there are some known security risks. For example, in 2016 a group of developers created DAO, a decentralized autonomous organization, which was designed to be a decentralised venture capital fund making decisions according to an automated system. Hackers with a deep understanding of the code managed to steal 3.6 million Ether, which at the time was worth about $50 million. Blockchain systems could also be compromised in multiple other ways. For example, employees who run the network could be hacked, or the network could suffer a router attack or a 51% attack (where a group of miners controlling more than 50% of the network’s computing power take control of the network and are able to reverse transactions or prevent new transactions from going through).
The bottom line
Blockchain is a rapidly developing technology and, as with other technologies, it comes with pros and cons. Although usually associated with bitcoin, there are many other applications including in the music, legal, and security sectors. Although blockchain often faces an uncertain regulatory status and suffers from known security risks, the world continues to apply the technology in new and unexpected ways. As the technology is still in its infancy, it is worth watching this space to keep abreast of rapid developments in the blockchain space.
Rhulani (Ruce) Ndlala is an accounting student at the University of Cape Town, and former President of the UCT Consulting Club.
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