How Is the Blockchain Technology Making the World Better?
According to a study by Transparency Market Research (TMR), Blockchain Technology will create a wave of change in the way Monetary Transactions are conducted. The report states that the blockchain platform will be popularly used in the near future as it is a simpler way of recording and tracking transactions in a given distributed ledger.
When you think about blockchain, what probably comes to mind is the bitcoin price, its network and cryptocurrencies. But did you know that this technology is also applicable to other industries other than finance? This is possible because of the mechanism of trust this technology creates. To understand how useful blockchain is, it’s important we know the types of trust mechanisms that exist in any business process or transaction.
Without trust, no transactions can occur.
A Transaction is a transfer of value, an exchange of something valuable for another valuable, such as goods, commodities, digital assets, services, funds, time, effort, skill, data, etc. Trust, on the other hand, is the assured reliance on the character, ability, strength, or truth of someone or something to deliver the value. For an exchange of value to happen, trust has to exist between the parties involved. This is because it affects decisions on whether the parties will engage or won’t.
In a book called Blockchain and the New Architecture of Trust, the author Kevin Werbach describes 4 types of trust that exist:
This is the type of trust that arises when two people or groups come together to initiate transactions. It is usually face-to-face or through an online peer to peer networks such as WhatsApp, Wechat, etc. This is usually common in domestic home-based sales where people meet online and later in-person to trade.
This is the kind of trust which the citizens of a country place in their state. Parties of transactions are able to transact with each because of trust they have that their state has the power to enforce any contracts they enter into and even resolve any disagreements that may arise among them.
This trust exists when an intermediary or third party has to intervene in a transaction between two parties of a transaction. An example of this is, both Person 1 and Person 2 would like to transact so they decide to open an account with a third party that they each trust, such as PayPal.
In this case, PayPal is a Trusted central authority that keeps a ledger of all account balances and transactions of both person 1 & 2. When Person 1 wants to send $10 to Person 2, the tells PayPal, which in turn deducts the amount from her account and adds it to Bob’s. The transaction reconciles to zero in Person 1’s PayPal account.
This means that Person 1 cannot spend that same $10 anymore, and Person 2 trusts PayPal to ensure Person 1 is not spending the same $10 again (double-spending).
Intermediaries like Paypal, banks, and governments facilitate the transaction of goods & services by creating trust & certainty. Their service, however, is susceptible to risks such as fraudulent activity and Political interference. In the above example, if Paypal was politically pressured by the government to not work with either person 1 or 2, Paypal can abort, suspend or reverse the transaction between person 1 & 2.
Despite rules and regulations instituted, trusted third parties are still inherently structured as single-points-of-failure. In other words, if a bank for any reason fails to operate it can bring an entire operation in the business ecosystem, to a halt.
But what if there was a way of making a transaction that didn’t require the use of a single trusted intermediary but several of them working in consensus? Imagine direct business to business or peer to peer transactions. No banks, no government, no intermediaries of any kind. This what blockchain could potentially achieve.
This is the type of trust arising from the solution that blockchain technology provides to the problem of a single mediator having to facilitate a transaction between two parties. With Blockchain each node of the ecosystem participates in the review and confirmation of the transaction data before that data is validated and stored.
The need for a single trustworthy intermediary to do this is therefore eliminated. This sort of like having not just one, but multiple trusted third parties each attesting to the transaction between person 1 & person 2.
Blockchain enables the sort of trust where Person 1 does not have to know person 2. However, each of them trusts that the multiple distributed nodes on the transaction ecosystem are cryptographically programmed to ensure that either party in this transaction is legitimate.
Who would you trust? A human legal system or a cryptographically coded computer-network system?
What makes blockchain networks a trustworthy tool to mediate a transaction between two parties, is the fact that the actual work of processing transaction data, is distributed and cryptographically secured at several points throughout the entire blockchain network.
Rather than having to physically record or store transaction data in one place, the entire transaction data between Person 1 & 2 is stored and available (in real-time) at multiple locations in the entire ecosystem. As transactions take place between parties, a record of them is captured, propagated throughout the entire computer network, and with the help of advanced computational algorithms, it is locked in a digital ledger at every node (computer) on this network.
Since this ledger is available at multiple points on the network and is simultaneously updated, indelibly locked, stored and synced at all nodes in real-time, it makes it very difficult for malicious parties on the network to falsify this distributed ledger in their interest.
Blockchain also solves the problem of there having to be a single-point-of-failure in a process. If one node in the transaction ecosystem lags or fails to process a transaction (due to reasons like political censorship), the transaction will not be halted because it will be processed by other nodes on the network. So instead of relying on a single node, in this case, all the nodes on the network can be trusted to complete the job (process the transaction) in case one or two of them fail.
This quality of Blockchain systems eliminates many of the inefficiencies that plague the human-based, intermediary transaction channels. And it makes blockchain a more secure and reliable medium for handling, not just transactions but all forms of data.
For this reason, all industries where a trusted-third-party is traditionally required to process a transaction and data, are progressively being disrupted by Blockchain-based solutions.
Just like all emerging technologies that are exciting and bring innovation and new opportunities across the globe, blockchain technology is also changing our life by adjusting the way we operate on a daily basis.
Here are 5 ways Blockchain is disruptively improving the world you and I live in
1) Blockchain makes crossborder payments less expensive and faster:
Most third world countries largely rely on income from remittances to fund national development. In Nepal for example, a country of about 29 million people, remittances account for 31.2% of the GDP and 10% of its population are migrants working abroad in the Middle East and other parts of the world.
Most of these people are however finding it expensive to send money back to their homes. Due to the inefficient centralized financial systems currently operating in the cross-border remittance space.
In a survey conducted in 2015 by McKinsey & Company on cross-border payments traditionally routed through the SWIFT inter-banking protocol, it was discovered that the average fee paid on top of the foreign-exchange spread, in order to send a single payment overseas, ranges between €20 and €60.
And that this transaction takes on average, about three to five working days to complete. It was also found that during this process it is difficult for senders and receivers to track their payments while the payment is in transit, which further creates uncertainty about both delivery timing and the final payment amount.
This is in sharp contrast to the convenience, lightning speed, and simplicity that blockchain-based cross border payment solutions like Ripple, Bitcoin, and Bitcoin cash provide. Blockchain technology’s ability to eliminate the middleman from most transaction processes is helping people who work outside of their home countries. It helps them send money back at home to support their families, in a much faster and less costly manner.
2) Blockchain technology is Reducing Fraud in institutions:
According to a PWC study, 45% of financial intermediaries such as stock exchanges and money transfer services suffer from economic crime annually. Many of the banking frameworks worldwide are supported by a centralized database that is susceptible to online attacks. In their design, such systems are single-point-of failures and are therefore inherently exposed to multiple attacks.
On the contrary, the decentralized structure of a blockchain network makes it resistant to manipulation by malicious attackers because transactions are not processed and stored at only one single database on the network, but at multiple databases throughout the network. This reduces fraudulent attempts by bad actors to falsify data. This makes the blockchain technology an ideal solution for eliminating fraud.
3) Institutional Due Diligence checks are easier with Blockchain technology:
Financial companies worldwide are trying hard to meet the ever-growing demands of regulators to implement AML and KYC controls. According to Modex, a blockchain database software company, “currently the average costs associated with KYC processes at a financial institution are high”. “$60M – $350M spending/bank and $600+ / KYC on average.” Basically this is revenue that has gone which could otherwise have been saved by the institution.
Due to the intermediary-based structure of most KYC processing systems, on-boarding new clients can be very time-consuming. Traditionally, a single KYC process typically requires about 5-100 documents submitted making it tedious and leads to poor customer experiences.
However, the decentralized structure of Blockchain technology provides a more streamlined method for financial institutions to access clean and up-to-date customer data. Data is captured and stored at multiple locations conveniently, in real-time. This results in greater operational efficiency by eliminating the labor-intensive data gathering, validation, and storage work that is traditionally used by these institutions.
4) Establishing rightful property ownership in Real Estate is faster:
Blockchain is being used by some countries to trace the historical transfers of property titles from the current owner back to the original owner. Prior to this, in most parts of the world, title records have generally been stored on a centralized data system, which has in most cases made them an easy target for manipulation by bad actors.
For example in 2011, a US Real Estate registry company, Mortgage Electronic Registration Systems Inc. (MERS) was sued by several counties across the US for falsifying and destroying the chain-of-title of several properties. If the MERS data system was a decentralized blockchain, such fraudulent incidents would have been avoided.
In countries like Singapore, smart contracts in blockchain systems are used to automatically transfer land ownership upon certain conditions being met by the parties involved. With fewer intermediaries involved in the property transfer process, real estate transactions are much quicker and more secure.
5) Food is much safer to consume now that it can be tracked from the farm to the dinner plate in real-time:
Blockchain applications are being used to collect data about the origin, safety, and authenticity of food, in real-time throughout the supply chain.
Trust in the food sold at most food stores has generally been at an all-time low. This is because the systems being used to determine if food is authentic, are archaic and inefficient. A large percentage of food consumed in the cities originates from farmers in rural areas and less developed countries where most business transactions are primarily paper-based.
Traders in these food markets mainly rely on paper receipts and documentation which can easily be lost or manipulated leading to food contamination. Incidents of food poisoning resulting from direct alteration of food ingredients and documentation are not uncommon in this industry.
In 2008 for example, 3 babies died, 158 other babies hospitalized in the UK, and more than 6400 babies in China fell sick, all as a result of consuming powdered milk, that contained an inedible substance called melamine. If the origins of the components of that powdered milk had properly been tracked at each stage of the value chain, and any alterations identified in real-time, such a scandal probably wouldn’t have happened.
This is the rationale behind the creation of Blockchain systems such as Vechain which is one of the solutions that have come up to address such challenges in the food processing industry. Blockchain technology is inherently immutable. So it is being used to capture data at the various stages of a product’s value chain and cryptographically locking it. Making it secure and tamper-proof.
Although Blockchain technology was initially created to facilitate payments, the inherent trust mechanism it creates in business processes has made it applicable in all other socio-economic scenarios where integrity is required.