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Blockchain Technology

by Daniil Saiko | September 23, 2016

Blockchain has become a hot topic in the financial services space, as well as overall technology community. In our first installation of our tech series, it seems appropriate to start with a discussion of where to start with blockchain as a whole. Rather than discussing the nitty gritty of it, we’ll focus on why you should or should not be implementing the use of blockchain.

What is blockchain?

Blockchain is a distributed database technology that creates a public ledger of transactions. Its’ application potential is great specifically in the financial services industry, as it can be combined with payments and smart contracts, and is a distributed database that claims to be highly resistant to tampering.  It is the technology that enables Bitcoin and most other cryptocurrencies.

If you have ever attended a meetup event or listened to a podcast about Bitcoin and blockchain, you start to get an impression that it could be the panacea for all of our problems. Do not confuse this with not supporting the idea of blockchain, I am instead attempting to provide a pragmatic look at the solutions. It is also worth spending time addressing the issues of when should you consider, and how can you enter the blockchain space?

When to use blockchain?

This is a tricky question. You should start now, if you can 15 minutes ago, or a week ago. However, this does not mean redirecting development resources or investing in some part of this at breakneck speeds. This may sound mundane but start with thorough research and gain an understanding. This is not a suggestion to download bitcoin and Ethereum[1]  and review the source code. If you would like to and have the technical expertise, go for it. But rather, learn about the blockchain system and learn what it is and what it is not.

This seems obvious, right? Why would anyone invest without conducting thorough research? Well, as every single bubble showed, especially the .NET bubble, unfortunately, that is not the case. Good money chasing bad projects can be detrimental to the community and could slow down the expansion of blockchain.

Deep technical knowledge is not mandatory, rather try to get a holistic understanding of the system. You must have a solid grasp of the main concepts, and this will set you on the right path. One of the fundamental concepts is that of “keys”. There is no need to be a cryptography expert to understand how private and public keys work. Think of public key as an email address and private key as the password. What you do need to know is, do not share your private key as the name implies. The fact that bitcoin uses a SHA-2 hashing algorithm, or understanding what an elliptical curve is, is not a deal breaker for your knowledge base. Knowing those algorithms are extremely hard to break, is a good start.

How to use blockchain?

Once you have a solid understanding of the system and its capabilities, you probably should ask yourself: Does blockchain solve a business or customer pain point? Or do you just want a headline out of it, showing your involvement in the “revolution”? Even if it is the latter, there may be no benefit of associating with a bad project or a project that is a bad fit.

Decision One: To Blockchain Or Not?

 

Blockchain Diagram 1

 

If you decide to use blockchain, take a look at the above decision tree to help you pinpoint why or if you need blockchain. I claim no right to this graphic, it was one of the gems from a presentation by NanoPay’s Laurence Cooke at a Toronto FinTech Meetup I  attended recently. Nevertheless, it is a very good decision model. Although the first question may seem trivial, the vast majority of businesses have some form of database, and it is still a question worth asking.

The following three questions focus on structure and accessibility of your database users. If your target user group are developers sitting in one or two offices, and that is all that is in the scope, SQL or even No-SQL solution could be much easier and cheaper to solve the problem at stake. This is especially true if they do not have hands on experience with blockchain applications. Frankly, there are not that many developers in this field, so more likely than not they will not be able to whip up a solution over a weekend. This does not mean they cannot learn, most developers are inherently curious and are problem solvers, but it will take time. Thus it could greatly stall your go to market date.

The final question is a key element behind blockchain, the main idea behind “peer to peer” concept. If you are not okay with a peer to peer structure with no third party, blockchain is not appropriate for this project. The third party means the likes of stock exchanges facilitating a transaction between a buyer and a seller of a stock. In a peer to peer exchange, in theory it could be completed without NYSE or NASDAQ, that is transferring ownership without agents and other players.

So you mulled over the architecture of your project and realized that yes, blockchain could be an excellent way to tackle your current issue. There are still a few important architectural decisions you should be making. The main choice is between private and public blockchain, as the third option is a hybrid and is more of a finer point of implementation.

 

Public blockchain

Anyone in the world can read and can send transactions. Nodes are not fixed.

Private blockchain

Write permissions are centralized, read can still be public. Nodes are set by one organization.

  • Bank’s internal ledger

Hybrid or consortium blockchain

The consensus decision is made by a group of the organization. Nodes are pre-set.

  • Group of financial institutions sharing one ledger

 

Decision Two: Public, Private or Hybrid?

 

Blockchain Diagram 2

 

A quick interpretation of the chart is this: if a product will be used by your end consumer or people outside the organization, public blockchain seems to be the most logical solution. There are great examples outside of financial projects, such as authenticity solution in luxury goods, think high-end wine and watches. However, if the consensus decision is made inside your organization or group of organizations, then you should consider using private blockchain. Although there are people who believe private blockchain is almost an oxymoron to the idea of blockchain, we always have to remember it is just a technology. If a particular application fits your organization better, use it!

In conclusion, although blockchain is in early stages of worldwide adoption, the system seems to flourish with unique projects. Companies like Modum have leveraged blockchain for drug safety, EarthCoin focus on indigenous groups and charity, and Ripple use blockchain to focus on payment networks.  The diversity of applications, especially in the non-financial sector is astounding as it is promising. One significant latent effect of the Internet is that the Internet enabled us to share and collaborate. Previously open source projects where virtually nonexistent (think Wikipedia VS Encyclopedia Britannica). This collaboration rather than just simple instant communication coupled with blockchain could be the key driver behind great products and solutions that could propel us forward as the Internet revolution did twenty years ago.

  [1] Ethereum is  a decentralized software platform upon which smart contracts and applications can be run and built.

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