The TRA Blockchain Explainer + Reading List

by Mark Iles, Tech Research Asia Executive Consultant

Developments in the FinTech world have taken centre stage in both technology, financial and mainstream press over the last 12 months. Notably the rapid progress and adoption of mobile payments and changing financial services landscape as banks scramble to partner with technology providers or try to go their own way fearing long term competitive threats from tech giants.

Developments in mobile payments are transforming the payments landscapes for consumers but little has changed with regard to the overall structure of how payments are processed via a central authority or the currencies used.

This is where Bitcoin and blockchain take centre stage and where the potential for disruption lies. The two terms are used almost interchangeably, yet they are different constructs with different potential applications so lets’ start by defining what each does and what the use cases are (or could be in the case of blockchain).

Bitcoin is a digital currency that is sometimes called BTC. It is sometimes called a crypto currency and at other times is treated as a commodity by some regulators. Bitcoin was designed to enable people to send money over the internet easily and without using a financial institution or other intermediary. This allows the participants to avoid the fees normally associated with those types of transactions.

It is possible to live day-day using Bitcoins (google it - some of the coverage is quite amusing), however, unless you live in California and have a penchant for Hipster restaurants and farmers markets you might go hungry or at a minimum have to give up coffee. The priJane issues with Bitcoin are still low acceptance with few mainstream retailers accepting bitcoins and even fewer service companies so a little tricky to pay for your mobile plan and Foxtel subscription. Wild fluctuations in the exchange rate of Bitcoin don’t do much to drive widespread adoption either:

AUD to Bitcoin exchange rate last 2 years: Bitcoin Valuation

So, there are challenges to adoption but how does it work?

To enable Bitcoin transactions, you need a way to establish trust between the participants such that each party can have confidence it will be completed. This is where blockchain comes in.

Blockchain works by creating a secure, digital ledger of transactions that is distributed amongst a network of computers. Multiple, individual participants can add to the ledger without going through a central authority. Let’s take a look at an example of how a typical transaction occurs:

Jane wants to transfer $100 to John using Bitcoins. To do this she first needs to have set-up an account using one of the many digital wallet applications available to buy and trade Bitcoins. She then needs to purchase at least $100 of bitcoins (at the prevailing exchange rate) which will be held in her account with her own unique ID. In order to send money to John she needs to know the unique digital ID for John which he has to provide to her. Jane can now initiate the transfer, which is done via the same digital wallet application and is sent as a request to the bitcoin network for validation.

Now this is where Bitcoin gets interesting, because there is no central authority of course. So how does a transaction get approved? The bitcoin network deals with this by collecting all of the transactions made during a period into a group, called a block. Once a block has been created members of the bitcoin network called “Miners” work to confirm the transactions in the block, a process called Bitcoin mining.

This is the secret sauce of Bitcoin as it is how transactions get added to Bitcoin's public, distributed ledger; i.e. how transfers or payments are settled. Bitcoin mining is highly technical, requiring serious computational power and multiple Miners will compete to validate a block of transactions (and are compensated in Bitcoins for their efforts).

So, back to our example, Jane’s transaction will be bundled with other transactions occurring at the same or similar time into a block. One or more Miners will then compete to validate the block and when this is done the coins will be transferred from Jane to John.

Whenever a new block of transactions is created, it is added to the blockchain, creating an increasingly long list of all the transactions that ever took place on the Bitcoin network. A constantly updated copy of the block is distributed to everyone who participates, so that they know what is going on and to avoid a single point of failure. Hence, the blockchain serves to confirm transactions to the rest of the network as having taken place. Members of the network can also use the blockchain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere, making it extremely difficult to cheat the system.

It is this core mechanism that ensures integrity and trust (or removal of the need for actual trust) between disparate parties without the need for a central authority that has broader opportunities in commercial and government sectors. When you start thinking about blockchain as an independent way to let organisations create and validate any type of transaction electronically in next to real time without intermediaries the opportunities are abundant. Below are six brief example use cases for blockchain technology:

Supply Chain: Blockchain’s built in capabilities; decentralised architecture, cryptography, and digital signatures provide a platform that can be leveraged as we move to an industry 4.0 economy where trustless value chains will become more prevalent. A simple example would be for a food manufacturer to use blockchain technology throughout their supply chain and provide access to consumers so they can see where the ingredients came from for the items they produce.

Smart Contract Management: One of Blockchain’s most hyped use cases is smart contracts. The easiest way to think about this is the evolution to contracts that are self-executing. Blockchain technology can be leveraged by application developers to build a new breed of contracts that are self-enforcing and self-executing – intelligent contracts. One example might be a credit agreement undertaken by a consumer to purchase a vehicle. With a smart contract if a payment is missed by the consumer the smart contract could automatically prevent the vehicle from being driven.

Intellectual Property: The storage capabilities also mean it can easily be applied to asset registers, for government or commercial organisations and similarly intellectual property – everything from patents to music and art can be registered and stored using blockchain preventing misuse and piracy.

Auditing: Blockchain is also a natural fit for any type of audited activity. The challenge with auditing activities is how to determine who records the required information and how it can be agreed between multiple parties. Using blockchain means multiple parties can submit information that forms part of an overall audit trail and no one person or organisation has sole control over the information submitted or the ability to change it once it has been submitted and verified.

Identity Management: Blockchain could be used to allow consumers the ability to create comprehensive profiles of themselves, which they would own. They could then choose who they provided access to; e.g. banks requesting verification details for loans such as employer and salary information, confirmation of address and identity. This could bring about a huge change in areas like consumer loans with customers being able to shop around without needing to submit the same information to multiple organisations and have better control over their private information.

Health: Blockchain is also a natural fit for the health industry. Many countries have spent hundreds of millions of dollars trying to establish Electronic Medical Record systems for their citizens with mixed success. Blockchain provides a secure, distributed and global mechanism to support electronic health records and easily provide access as required or granted by individuals.

Virtually any activity provided by a 3rd party agency now could be handled by blockchain. This could allow businesses and governments to free up valuable resources from co-ordination and administrative activities. Based on the plethora of VC-funded companies springing up to develop applications for blockchain it is clear the technology is due to make an impact.

Keeping in mind that the above is really just an entry level explainer to Blockchain and hopefully a kickstart into thinking about what it can do for your organisation. There are many intricacies, debates, and nuances to blockchain that you will need to understand and contend with as you explore and discover more. Below is a list of resources to help get you started:

Wall Street Journal CIO Explainer

Washington Post - Bitcoin introduction

Brave New Coin: Blockchain use cases

Fortune: Why blockchains will change the world

Coindesk: Blockchain vs Bitcoin

Deloitte: Exploring Explore Bitcoin, Blockchain and Distributed Ledgers

CB Insights: Who’s investing in Bitcoin and Blockchain

IBM Blockchain as a service

KWM: Smart Contracts the Basics

AFR: Blockchain and Smart Contracts

The Ethereum Foundation and the FAQs for its implementation.

Hyperledger

Microsoft Blockchain as a service

R3 - the firm backed by many of the world's largest financial institutes to build blockchain solutions

Japan Blockchain Association (In Japanese)

Blockchain Association New Zealand

Thai Digital Currency and Blockchain Technology Association

Ripple - an early mover in Blockchain