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6-WEEK ONLINE CERTIFICATE PROGRAM
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Blockchain technology has taken the world by storm. Yet, while many people have at least heard the term, most are still confused about what blockchain is and how it might impact the world in which we live. At the most superficial level of analysis, blockchain is simply a new way of storing and accessing ledgers or information databases.
In the 14th century, the Medici family popularized double-entry bookkeeping, which revolutionized the way records are kept and is still in use today. Blockchain is a similarly revolutionary invention because it adds a third-dimensional “entry”: it adds decentralization to the existing credit and debit entries.. While there are still two columns to each ledger — credit and debit — these columns are stored on a potentially endless number of nodes, which makes them widely accessible and incorruptible. These ledgers are the “blocks” and the nodes on which they’re stored are the connected “chains” that they live on — creating the blockchain.
Technically speaking, blockchain is a decentralized, immutable ledger that records transactions and tracks the ownership of assets. These assets can be physical (like real estate) or digital (like bitcoin or non-fungible tokens). Nearly anything can be tracked via blockchain technology, which reduces lag time, risk, and inefficiencies.
Since blockchain is a digital phenomenon, it depends on computer hardware to execute its functions. This software tracks data and stores it in blocks of data sets, which are then chained together in chronological order.
When applied to the most popular use case (cryptocurrencies), computers validate the ownership and movement of cryptocurrencies from one user to another. This permanent record is stored in a decentralized manner across every node (computer) that runs the blockchain. When one asset owner wants to transfer that asset to another person, their proof of ownership is already memorialized on the blockchain. The transfer can be made and a new record of asset ownership is created for the new owner.
This decentralized ledger is what makes blockchain such an incredible piece of technology. For example, suppose that someone wanted to fraudulently lay claim to a certain quantity of a digital asset. This person must corrupt every single node to successfully “steal” that asset. This impenetrable security is due to two critical aspects of the technology — distributed ledger technology and immutable records. In addition, smart contacts have been added more recently to facilitate using the blockchain.
DLT refers to the quality of the ledger being freely accessible to all network participants. This is also known as “open source.” Anyone with the correct technology can view the ledger and even host its immutable record of transactions. These transactions are only recorded once, but they are recorded across every node. If one node became corrupted, the rest of the network would be able to verify the corruption in a consensus system.
Once a transaction is recorded on a block, it is memorialized and cannot be changed. No participant can change the record of transactions across all of the different nodes. At most, they could change the transaction across a handful of nodes. However, the rest of the nodes running the real decentralized ledger would realize the discrepancy and nullify the fraudulent record.
But what happens if there is an erroneous transaction? If there was an error in the transaction, the parties transacting would have to initiate a new transaction to reverse the error and both transactions would be visible.
Smart contracts are a set of if/then conditional statements that automatically execute once specific parameters are met. These smart contracts are stored on the blockchain and can automatically execute several different functions based on the fulfillment of specific criteria. For example, bonds can be sold, funds can be deposited, and insurance claims can be paid out.
There are three main types of blockchain networks. While the most well-known blockchain networks are public networks, there are important distinctions and use cases for the other networks. Bitcoin, for example, is a public network and is therefore permissionless. Private and permissioned networks are more restrictive than private networks. Consortium networks are private networks shared between entities.
Blockchain’s first use case, Bitcoin, is the most well-known example of a public blockchain network. These networks are permissionless, meaning that there is no central governing authority that can restrict access. Because of this lack of barriers, all transactions on the Bitcoin network are visible to the public. This, however, doesn’t mean that all transactions appear publicly with the owner’s legal name. Most, if not all, public blockchain networks are pseudonymous in nature, and the owners of the different assets appear as a public key with an apparently random alphanumeric sequence.
Private blockchain networks are similar to public blockchain networks in that they're still decentralized peer-to-peer networks. However, private blockchain networks are controlled by a single centralized organization. This organization's prerogative is to determine who is allowed to participate in the network, execute the consensus protocols, and access the ledger. Because there is more ability to control the platform, the consensus mechanisms are less robust than public blockchain networks, and typically these blockchain networks exist within companies with robust legal and employment structures that provide security architecture.
Consortium networks are private networks, but instead of one central institution, two or more entities take responsibility for the blockchain network. Consortium networks spread the duties of maintaining the network around. These sorts of networks work well in instances of vertical integration where there is a large amount of trust between different organizations and the members within them.
One of the main advantages of blockchain, as opposed to current technology and institutional practices, is the inclination towards transparency. Because blockchain is, by its nature, decentralized, all the transactions on a public network can be viewed. It is tantamount to being able to audit a massive financial institution like a bank or even the Federal Reserve to understand just what is on the balance sheet and exactly where each asset lives. There is no room for clever accounting sophistry or any way to fudge the numbers; the numbers are simply what they are.
This sort of transparency would be advantageous for consumers, producers, governments, and even the governed. Banks would have a better idea of whom they should extend loans to and customers would know which banks are on the brink of insolvency. Governments would also have to be directly accountable to their constituents for their spending, which could, in theory, bolster democratic practices and rein in debt.
Somewhat paradoxically, this transparency is also what makes the technology so trustworthy. All nodes can review incoming information and verify that the new information (who owns which asset) is commensurate with what already exists on the ledger. If it is, then a transaction can be quickly approved and any node could take part in this validation. If one node were to get corrupted, all the other nodes that have access to the same ledger would recognize that node as corrupt. The corrupt transaction would therefore be nullified.
Many blockchain neophytes may use Bitcoin and blockchain interchangeably; however, this is an error in terminology. Blockchain is the technology that undergirds Bitcoin and allows Bitcoin to exist. Bitcoin is the first use case of blockchain. It is hosted by a system of decentralized nodes that may maintain the blockchain anywhere that there’s a power source and an internet connection. There is also a difference between Bitcoin and bitcoin. The proper noun refers to the idea and blockchain network that allows the individual currency units to exist. The common noun refers to the individual pieces of currency that make up the Bitcoin network.
The unique thing about Bitcoin is that the money and the decentralized ledger are basically one in the same. Everywhere a bitcoin (or portion of a bitcoin) goes, the record of its transaction follows out of necessity — the value is in the ledger.
Bitcoin is also pseudo-anonymous while other blockchain applications may require PII. Participants and investors have two different keys: a public key and a private key, which masks a user’s identity. These keys are used to make transactions and access the account that holds the bitcoin. Public keys can be understood as the address to which or from which bitcoin can be sent and is publicly known. Even though transactions can be viewed publicly, there is no inherent link to a person’s legal identity. The private key provides access to the account where the crypto funds are stored. Anyone who has access to this key has access to the account funds, so it should be guarded with the same care as a bank account password.
Because the blockchain exists in code, it has the potential to transform any industry that heavily relies on the use of computers. Some of the sectors are obvious, like banking and insurance. However, other sectors like real estate and health care aren’t quite as obvious.
Industries like insurance can benefit from increased efficiency in paying claims. An insurance policy can be memorialized onto the blockchain in a smart contract. In the event of a loss, the insured can make a claim and be automatically indemnified by a self-executing contract. This would save insurance companies hours when needing to pay a claim and increase customer satisfaction by not having to wait as long for indemnification.
It’s hard to imagine an industry with more to gain from blockchain technology than finance. Deposits can only be made during business hours, and even then, it can take a few days for the funds to appear in an account. Bearing in mind that blockchain is essentially a massive unified ledger, these deposits could be made at any time of the day, and the funds could be available nearly instantly.
The loan authorization process could be similarly truncated. All relevant credit information, such as credit score, debt to income, financial solvency, etc., could be immediately available and underwritten automatically.
Primary health care providers can store patient information on the blockchain for increased security and availability. For example, when a diagnosis is made or a medication is prescribed, these events can be memorialized on the blockchain. Health insurance companies can also access medical records to help determine premiums and copays. These records would be kept secure with a private key that only a select number of parties would have need-to-know access to.
Government offices and bureaus have gotten better with service in recent years but are still woefully inefficient and often challenging to deal with. Property records are currently kept with physical deeds where they are manually accounted for and recorded. This process is frustrating and is also vulnerable to human filing errors, document loss, and destruction.
On the other hand, blockchain technology can assign a decentralized, immutable, digital record to a piece of property. This would make property ownership verification as simple as auditing the blockchain ledger. A person’s ownership of property would be recorded in a way that is easily accessible and wholly immutable.
The sale and purchase of the property can even be integrated with a smart contract that would execute the transfer of funds and the title at the same time. This would ensure a nearly trustless experience that may obviate the immediate need for attorneys, real estate agents, and mortgage lenders.
Blockchain has the potential to make transactions and important documents significantly easier to manage. Blockchain cuts down on the time and effort required while also making transactions and asset management far more secure. Access to banking and financial services can also be more accessible to more people and help to “bank” the “unbanked” populations.
Depending on the blockchain program in question, a new “block” of information is created approximately every 10 minutes. Money wires can take days to land in an account or even longer if the transfer is international. Blockchain could, in theory, lower that threshold to a maximum of 10 minutes, which is tantamount to instant availability.
Because blockchain is essentially a ledger that is decentralized and immutable, the cost of transactions could also be significantly lowered. If all banks shared access to the same ledger, fund availability would be immediately evident, as would the destination and origin accounts. The need for payment processors (along with their fees) could cease to exist since there would be no need for a third party to verify funds.
Security would mainly arise from the immutability of prior records. Only those people and institutions who have access to the private keys could access and modify documents. Thousands of distributed computers maintain a copy of the entire ledger and independently validate transactions. The blockchain’s consensus structure will automatically nullify any fraudulent anomaly.
Blockchain has the potential to make banking services available to everyone who owns a smartphone. Many people, especially in developing countries, don’t have access to bank accounts. Countries like Cambodia have recently introduced central bank digital currencies (CBDCs) at least in part to make banking services available to unbanked populations. CBDCs would make banking services available to anyone who owns a smartphone, therefore lowering entry barriers.
For all of its advantages, blockchain also comes with some significant disadvantages that individuals, companies, and governments must consider. The technology is still nascent and can be clunky and inefficient to implement. The hardware that runs blockchain is also expensive and environmentally taxing. However, many of these kinks will likely be buffed out as we continue using blockchain technology.
Proof of work is a system that offers a high amount of security, but it is also incredibly inefficient. Each block on the blockchain can hold only a relatively small amount of data. Bitcoin blocks hold 1MB and it takes about 10 minutes to add a new block to the chain. The processing speed is then approximately 100 Kb per minute, which is ironically small and slow. There are many efforts to develop solutions to this problem, but it’s still unclear what the best solution will be.
Because blockchain technology runs on distributed systems, the hardware needed to run a blockchain is equivalent to a room full of servers. This cost is often distributed among a large number of individuals in the case of public blockchains. However, private network infrastructure can be prohibitively expensive. For example, hardware for bitcoin mining (maintaining the Bitcoin blockchain) can reach well into the four-digit figure range and can take many months or even years before the investment is fully recuperated.
Proof of work protocols are quite taxing on energy systems, which are mostly powered with fossil fuels. In his recent executive order on blockchain technology, President Biden made a point to highlight the carbon footprint created by blockchain networks. While some have opted to run their mining operations on solar and hydro energy, bitcoin mining accounts for 0.5 percent of the world’s annual electricity consumption. Efforts to curtail energy consumption and move to renewable energy are currently underway.
The outlook for blockchain technology is indeed looking bright. Many of the biggest industries appear to be ripe for innovation, ultimately benefiting both the companies and the end consumer.
Businesses will likely continue to R & D blockchain technology as it becomes cheaper and easier to implement. Customers will continue to benefit from companies’ early adoption of blockchain technology.
Governments are also looking toward the future of blockchain and cryptocurrencies. Many CBDCs are doing beta-testing in their own countries alongside traditional paper fiat. Countries like China, Cambodia, and Nigeria are all leading the charge with this development; the U.S. is starting to explore it as well. Of course, the farther out one looks at the future of blockchain, the more blurry the details become. However, what we can say with certainty is that this technology is being treated with a degree of seriousness not seen since the internet’s adoption.
Wharton Executive Education has been equipping leaders in business for over 100 years. Our industry-leading Economics of Blockchain and Digital Assets course is now available to qualified individuals and business leaders. To apply now or for more information, please visit our information page to start learning more about blockchain technology.
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