8 April 2016

What is blockchain technology?

Blockchain technology has become synonymous with its most widely used application, the Bitcoin Blockchain. There are however, a number of other Blockchains out there, some which are competitors of each other and others that are more complementary. Bitcoin was the first successful implementation of the technology and is generally related to digital currency. However, like most available Blockchains (Ripple, Litecoin, Hyperledger) it is now being used for varying applications beyond digital currency.

Why is it called Blockchain?

The technology is called Blockchain because of how the data is stored. On any Blockchain, the data is stored in a chronological chain of containers or “blocks”, where each “block” contains a record of activity since the last block was added to the chain. This record of activity, or fingerprint from the previous block in the chain, means the chain maintains unique characteristics after each addition. How the underlying data is added to each container or block is also important. Blockchain uses a technique call Cryptographic Authentication, which is a type of asymmetric encryption that allows each user of the Blockchain to authenticate one another.

Permissioned vs. Permissionless Blockchains

Permissioned Blockchains require pre-vetted “permissioned” members to validate the transactions and create the chain. Permissioned members might be a set of institutions known to each other (e.g. a group of banks or insurance companies). The data secured in the Blockchain comes from the activities of each member (i.e. data created from their activities, in the case of a bank this might be transactional data recorded from customers).There are two types of Blockchains, permissioned and permissionless. We can distinguish both by how the blocks or containers are constructed to form the chain.

Permissionless Blockchains, is where there are no restrictions on who is responsible for processing the transactions i.e. creating the Blockchain. Permissionless Blockchains are completely open. Anyone can become a node in the network and anyone can send their transactions to be verified by

the network. The Bitcoin Blockchain was originally designed exclusively with permissionless parameters although through iterations the lines have been blurred in this regard.

The Advantages of Blockchain technology

At a very high level Blockchain can facilitate the efficient and secure transfer of ownership of digital assets from one party to another over the internet. The technology enables a distributed consensus, creating a time stamped record of events in the digital world, which once entered, can never be erased. In other words, Blockchain can only be updated by consensus of a majority of the participants in the system, bringing a significant level of security, accountability and robustness to any of the applications the technology is applied to.

From an investment perspective Blockchain remains in the spotlight as a potentially disruptive technology. There were still however, only 74 funding rounds into Blockchain related companies during 2015, a combined worth of $474m. Blockchain remains a nascent technology with much potential still to be realised.

This above is an initial introduction to Blockchain and the first instalment of a three-piece post on the technology and its relevance to the investment and technology community.

Andrew Smyth