Blockchain is a revolutionary technology that can transform most areas of human activity: finance, logistics, trade, medicine, and many others.
Blockchain development company Boosty Labs experts explain what blockchain is, and how it can be of interest to investors.
What is blockchain technology
Blockchain is a distributed database and at the same time a system for recording information in chains of blocks that are linked to each other using unique identifiers in the form of cryptographic hashes (a cryptographic hash is a mathematical algorithm that maps data of arbitrary size into a fixed-size bitmap).
The key difference between a blockchain and conventional databases lies in the way information is stored: any new block is inextricably linked with the previous one and stores a certain number of operations (transactions) of each of the system participants.
Here are the main features of the functioning of the blockchain:
It is no longer possible to make changes to a block that has entered the system – it is protected by cryptographic techniques. This means that the blockchain transaction archive is reliable information about events in the past – this ensures that transactions in the blockchain network cannot be faked or destroyed.
Blockchain is a decentralized system. Decentralization implies a shift in decision-making from a single center to peripheral areas. Data is written into “blocks” that are distributed and validated among multiple participants or nodes. The information in the blockchain is distributed across all nodes of the network, which makes the system more stable, efficient and democratic.
A number of important advantages of the blockchain follow from these features:
- All network members have access to a real-time copy of the registry.
- Security and traceability. Once a block has received enough confirmations, transactions within it cannot be duplicated, corrupted, altered, or eliminated by any one user or node.
- Savings on intermediaries. Since the blockchain eliminates centralized control, there is no need for third-party checks or additional verification of information, which eliminates the cost of intermediaries (central agents).
The reliability of the entire system makes it possible to use it to improve the efficiency of many processes where the Internet or centralized systems failed or were simply extremely costly:
- Carrying out monetary transactions;
- Accounting for rights to assets;
- Exchange of information among individuals, corporations and even government agencies.
A Brief History, or Why Blockchain is Often Associated with Bitcoin
An anonymous person with the nickname Satoshi Nakamoto (the identity of a person or a group of people under this pseudonym has not yet been established) played a special role in the history of the creation of the technology – it was he who published an article-manifesto explaining the principles of the blockchain in 2008.
In early 2009, Nakamoto released the first version of the virtual wallet and launched the bitcoin network.Yes, bitcoin is the first application of the blockchain in practice. Only a few years later, other cryptocurrencies appeared on the basis of the blockchain and its modifications, and then other ways of effectively using this technology.
By the way, the term “cryptocurrency” itself was first heard in the media only in 2011, after Forbes published an article about bitcoin as a successful blockchain-based project. If in 2009 bitcoin was in demand only among enthusiasts, then two years later it became relatively widespread.
This led to the emergence of competitors that differed from bitcoin, for example, in the way of encryption or the mechanism (protocol) for verifying transactions. At the same time (in 2010-2011), the first cryptocurrency exchanges were launched, where it was possible to exchange coins for real currency.
The growing popularity of cryptocurrencies is associated not only with more advanced and efficient technology, but also with the desire of people to make money on speculation. This leads to high volatility of crypto assets, unreasonable pricing and other “harmful” consequences for a long-term investor.
Nevertheless, cryptocurrencies as the main field of application of blockchain technology have achieved impressive results and made a real “monetary revolution”. In 2021, the capitalization of Bitcoin exceeded $1 trillion.
Why blockchain is more than a cryptocurrency
Today, blockchain technology is not limited to just cryptocurrencies. It has become widespread in many areas: financial technologies, logistics, education, tourism, healthcare and many other areas.
Companies that decide to implement this technology receive certain business benefits. So, the blockchain helps them:
- Establish trust between the parties, which, accordingly, allows you to interact and exchange reliable data with each other;
- Eliminate data fragmentation by integrating them into a single system through a distributed registry shared on the network; access to this registry is restricted to parties with appropriate permissions;
- Ensure a high level of data security;
- Eliminate the need for the services of intermediaries (central counterparties);
- Guarantee the authenticity and integrity of the products sold to participants;
- Track and control the movement of goods and services in the supply chain.
Like any revolutionary technology, the blockchain goes through several stages of development – from the first research to widespread distribution. All this strongly resembles the evolution of the Internet.
According to Fortune Business Insights, the size of the blockchain technologies market in 2020 amounted to $3.1 billion, and in 2028 it will reach $104.2 billion (an average annual increase of 55.8%). The rapid adoption of blockchain technology in developed countries is expected to drive the development of the global blockchain market throughout the forecast period.
Against the background of growing interest in the implementation of technology, ARK Investment Management identified in its Big Ideas 2022 review three areas for the development of the blockchain – cryptocurrencies, decentralized finance, or DeFi, and decentralized Internet, or Web3.
Blockchain Applications
Let's analyze the main areas of blockchain application.
Decentralized Finance (DeFi)
Decentralized finance (DeFi) is financial instruments and services implemented on the basis of distributed registries (on the blockchain). Such products make it possible to replace the services of traditional banks and financial companies and thereby ensure greater availability of financial services (they solve the problem of underbanking).
Key Benefits of DeFi:
- Lower fees compared to those charged by traditional market participants, such as depositories, for their services;
- High level of transparency;
- Faster delivery of financial services.
The infrastructure for DeFi and its regulation is still under development and discussion. This hinders the development of technology and related projects. However, important shifts in DeFi regulation have already been implemented in many countries, such as Germany and Japan.
Banks are showing particular interest in DeFi, blockchain allows them to improve many processes – to make them safer, more reliable and more transparent.
Money transfers, settlements in securities transactions, letters of credit, compliance procedures, routine work of back offices – all these operations can now be carried out using this technology. In addition, blockchain is actively used by exchanges, brokers, asset managers and many other financial institutions.
What does DeFi give? Accenture analysts believe that the introduction of blockchain in the banking industry will almost halve the costs of banks and make most operations more efficient and reliable. At the same time, it is important to remember that the results of the introduction of technology are of a continuous nature and appear only after some time.
For example, according to Big Four analysts, companies that invested in the implementation of the blockchain in 2020-2021 will only feel the effect in 2025-2030.
However, blockchain technology has other uses outside of the financial industry.
Digital assets and NTFs are revolutionizing the internet
NFT (non-fungible token) is an entry in a ledger within a blockchain. Some tokens can be fungible (for example, one bitcoin can be replaced by another bitcoin, they are equal in properties and value), while others are not.
The non-fungible token format, or NFT, was created to bring unique items to the blockchain. In other words, NFT is an asset that is unique and cannot be replaced by another token.
Therefore, people can use this technology to secure ownership of unique items. NFTs are now taking over the world of digital art and collectibles everywhere. Some even tokenize real estate.
Each NFT can only have one official owner at a time and is protected by the Ethereum blockchain: no one can change the ownership record or copy/paste a new NFT into an existing one. According to experts, theoretically, the scope of NFT is huge and can include everything that is unique and requires proof of ownership.
Supply chain optimization
Another important area of application for distributed ledgers is logistics. When using blockchain technology, participants in the supply chain can enter all the necessary data about their actions into the system.
Thus, all information becomes available to all participants in real time, which allows more efficient monitoring of processes and timely detection of errors.
For example, when the seller forms an order and sends it to the supplier, this is not reflected in the financial statements in any way, because the exchange has not yet taken place.
At the same time, an order token is already generated in the registry, which will then be confirmed by the supplier, which will also be reflected in the system and will allow organizing interaction with the bank, for example, as part of factoring.
The introduction of the blockchain allows you to see the entire sequence of actions of each of the participants, which solves many problems with coordination. So, fast access to data using blockchain technology gives the company the opportunity to:
- Ensure greater transparency of the process;
- Reduce losses associated with the supply of low-quality products;
- Reduce administrative costs.
The technology is still too new to be widely adopted, but FedEx, DeBeers and Walmart, for example, are already actively testing it.
Health tracking
To date, there is no single database that would contain all the information about human health. This creates a lot of inconvenience: if a medical card is lost, some important data may be irretrievably lost, and when moving or changing clinics, the patient has to collect all his medical data on his own. Blockchain can solve these problems and provide users with a number of benefits.
- Blockchain allows you to create an electronic card that can be supplemented by every doctor, regardless of the place of work. Access to all medical records about a person can be obtained by his unique ID.
- Human health data is very sensitive information, the storage of which can be entrusted to blockchain technology with its reliable and secure structure. At the same time, each person will be able to independently manage their data and decide with whom and when to share it.
Smart contracts
Blockchain technology allows you to bring the process of concluding transactions to a new level. A transaction can be completed by executing a certain algorithm, written in the form of sequential “if…then” conditions.
The contract will be concluded only if each participant fulfills all the necessary requirements. This technology can be applied in various areas: sale and rental of real estate, settlements with contractors, and others.
A smart contract has several advantages.
- Precision, efficiency and speed. The contract comes into force from the moment the participants fulfill all the necessary contractual conditions. No paperwork.
- Transparency and reliability. The agreement is in the registry in encrypted form, which excludes the possibility of changing and distorting information by the participants in their favor.
- To conclude a transaction, you no longer need to resort to the services of intermediaries, such as notaries or registrars, which, in turn, saves not only money, but also time.
However, this way of making deals is not ideal. The immutability of the contract, of course, ensures its reliability, but at the same time deprives it of flexibility – it is quite difficult to make changes to the contract.
In addition, the development of a smart contract requires significant time and material costs. Therefore, smart contracts are an excellent solution for concluding typical transactions.
Cybersecurity
On the Internet, you can piece by piece collect a huge amount of information about a person, including confidential information. This means that attackers can take possession of it. Here is how blockchain is able to solve these problems:
- Safe structure. Blockchain allows you to protect the data and personal correspondence of Internet users from hacker attacks. No one will be able to get or transfer user data without his consent, because all blocks are interconnected
- Protection against DDoS attacks. The mechanism of DDoS attacks is to overload the point of obtaining information with Internet traffic. The blockchain structure is much more resistant to such attacks due to the lack of centralization. Hackers seeking to break into a system would have to disperse attack traffic across network nodes, reducing the likelihood of success.
Companies that create and maintain blockchain infrastructure
Key players in the blockchain market are working to create a wide range of solutions to increase productivity, increase trust and solve security problems.
The race for the most efficient and rapid implementation of technology is comparable to the implementation of space programs, which, on the one hand, are associated with remote commercial benefits, and on the other hand, provide a gap in the future from those who did not have time to adapt in time.
It is for this reason that traditional financial service providers such as Visa, Block (formerly Square), PayPal are developing their own blockchain projects.
All companies offering and using this technology can be divided into the following groups:
- Mining companies. This segment is formed by companies that mine cryptocurrencies as a result of solving the most complex mathematical problems at speed. By solving these problems, companies are expanding the blockchain and accumulating resources. The most famous representatives of this segment are Riot Blockchain and Hut 8 Mining Corp.
- Transactional companies carry out transactions, including the management of cryptocurrency exchanges, digital asset platforms, as well as wallets and payment gateways. Cryptocurrency exchanges are platforms for digital asset trading, conversion, and other services such as lending against digital assets.
Many traditional payment systems are actively using blockchain technology so that users can make transactions in cryptocurrencies (primarily in bitcoins) through their application. PayPal, which has over 300 million users, gave them this opportunity in 2020.
In the fall of the same year, Mastercard created a platform for testing digital currencies together with the developer ConsenSys, and in March 2021, Visa allowed the use of USD Coin (USDC) stablecoins for payments.
- Equipment manufacturers. The creation of infrastructure is associated with the production and distribution of equipment used in blockchain and digital asset transactions. The main capital investments of mining companies are aimed at acquiring technological equipment – specialized computers with elements that provide the necessary computing power. For example, Ebang International Holdings designs, develops integrated circuit chips, manufactures mining machines, and provides server space rental services. However, as the technology develops, we see a gradual transition from a consensus algorithm based on solving a complex mathematical problem (Proof of Work) to an algorithm based on the share of ownership of a digital asset (Proof of Stake). Therefore, the importance and role of mining and, accordingly, equipment manufacturers in the blockchain ecosystem will gradually decrease.
- Developers of applications and software. This segment is formed by companies that develop and distribute blockchain applications and software for various business areas. For example, in e-commerce, Cloud Chain Mall (Future FinTech Group) has created an online shopping mall, and the American online store Overstock.com was one of the first to allow Bitcoin payments through a partnership with Coinbase.
- Companies providing consulting services for blockchain implementation. We are talking about companies such as DSS or MicroStrategy that provide engineering and consulting services for the implementation and use of blockchain technologies and digital assets.
Conclusion
Blockchain over the past decade has gone from a niche technology for the creation and operation of cryptocurrencies to a worldwide innovation that has found application in almost all areas of human life.
It is no coincidence that some experts compare the evolution of the blockchain with the development of the Internet.
