Blockchain (also called Distributed Ledger Technology) provides a time-stamped, universal ledger of immutable records for data that is managed by a cluster of computers rather than being owned by a single entity. Each of these blocks of data is secured and bound to each other using cryptographic principles (blocks chained together = block+chain). The cryptographic principles that secure and bind the blocks are what form the chain. Blockchain technology allows for a secure, auditable, and transparent chain of records. The long-term potential of the blockchain industry for Washington is vast, as it is expected to reach $3.1 trillion in business value by 2030 globally, with North America accounting for as much as a third of the market.
Blockchain technology offers a way for untrusted parties to reach agreement (consensus) on a common digital history. A common digital history is important because digital assets and transactions are in theory easily faked and/or duplicated. Blockchain technology solves this problem without using a trusted intermediary1. To explain how this works, let’s look at two examples of a digital transaction between two parties – one using blockchain technology and one not.
Let’s assume that Person A has $10 in their bank account and they send $5 to Person B. Both Person A and Person B have $5 now. However, what if Person B lies and says they never received the $5?
That’s where a trusted third-party comes in. It is up to the middleman (in this case likely a bank) to record the transaction and act as a trusted third-party. Person A can now go to the bank and prove, through their ledger and transaction history, that they did indeed pay Person B. This system works well when we are able to trust the third-party, but we cannot always trust the third-party – fraud, embezzlement, and hacking are all real concerns that threaten to disrupt trust.
With blockchain, we no longer need to rely on a trusted third-party but instead, we can use an entire network to validate transactions. This inherently builds in added layers of security and increased trust. Here’s how it works:
Based on an infographic from Word Economic Forum2
So, what happens if Person B says they didn’t receive $5 from Person A this time? Person A has proof of the transaction through a distributed ledger with multiple copies and validations of the transaction. They don’t need to trust a single third-party source because the entire network has records of the transaction.
- Trust – Because the transaction was validated by multiple parties, there is no need for a single trusted third-party. This removes the ability for that third-party to commit fraud.
- Transparency – Multiple parties have visibility into the transaction, and so the entire process is more transparent and thus there is less ability for one of the parties to lie or commit fraud.
- Accountability – Having a single agreed upon and distributed ledger that is validated by multiple independent sources creates an audit trail with increased security and trust.
While this example is focused on financial transactions, blockchain technology has the opportunity to disrupt many industries. Some examples include:
Read more about industries that blockchain technology could disrupt in this CB Insights report.
With the potential to disrupt numerous industries, it is no wonder that Gartner predicts blockchain will create $176B in business value by 2025 and over $3T by 20303.
Image from fourquadrant4
- “What Is Blockchain Technology?” CB Insights Research, 11 Sept. 2018, www.cbinsights.com/research/what-is-blockchain-technology/.
- Wild, Jane, et al. “Technology: Banks Seek the Key to Blockchain.” Financial Times, Financial Times, 1 Nov. 2015, www.ft.com/content/eb1f8256-7b4b-11e5-a1fe-567b37f80b64.
- “Gartner Says Global IT Spending to Reach $3.7 Trillion in 2018.” Gartner, www.gartner.com/en/newsroom/press-releases/2017-10-03-gartner-says-global-it-spending-to-reach-3-trillion-in-2018.
- “Gartner IT Spending Forecast – Four Quadrant Go to Market Strategies.” Marketing Strategies That Drive Go-to-Market Plans – Four Quadrant, 14 May 2018, www.fourquadrant.com/gartner-it-spending-forecast/.