Blockchain

Hype or the future?

19 Jan 2023

Blockchain technology can legitimately be described as one of the most interesting innovations in the financial world in recent years. Again and again, one reads and hears something about the blockchain in the media, not least through cryptocurrencies, which are based on this technology.

On the surface, the blockchain is nothing more than a database or a digital account book and thus seemingly nothing new. After all, digital account books have been around for decades in the form of established online banking. Database systems have been around even longer. So what is it about blockchain that makes it so innovative? Let's take a closer look at this in the following.

BASIC IDEA OF THE BLOCKCHAIN

The original idea of blockchain technology can be read in the Bitcoin white paper. In it, the anonymous inventor of Bitcoin with the pseudonym Satoshi Nakamoto lists the serious problems in dealing with financial assets. He sees the core problem in the centralization of banking. The money flows of the capital entrusted to a bank are not traceable, and thus an abuse of trust in dealing with monetary values is conceivable.

Blockchain technology was developed to prevent this abuse of trust on a systemic level. It enables the decentralized processing of financial transactions without an intermediary bank, which could potentially reject a financial transfer for inexplicable reasons. This new technology makes abuse of trust more difficult because all bookings are transparently disclosed and can be viewed.

TECHNICAL FUNCTIONING OF THE BLOCKCHAIN

Blockchain technology initially makes it possible to store data of all kinds in a distributed database. The special thing about it is that a data record - commonly referred to as a block - is inseparably linked to the preceding one and is based on it in terms of data technology. This means that if you wanted to try to change a data record, you would also have to change the preceding and also the following blocks so that the concatenation fits again. However, the cryptography used makes this impossible. After the start of a new blockchain, the very first data record is called the creation block or, in technical circles, the genesis block. For example, the Genesis Block of the Bitcoin blockchain contains the following sentence, which is meaningless in terms of bookkeeping but nonetheless meaningful: "The Times January 3, 2009: British finance minister close to second bailout for banks."

Don and Alex Tapscott wrote the following in their 2016 publication, Blockchain Revolution: "The blockchain is an incorruptible ledger of accounts that can record not only financial transactions, but values of all kinds." And indeed, in addition to coins and tokens from the world of cryptocurrencies, pictorial virtual objects in the form of NFTs (Non Fungible Tokens) are also being mapped today.

BLOCKCHAIN INTELLIGENCE WITH SMART CONTRACTS.

Now, secure and transparent data storage is not the only special feature that a blockchain has to offer. There are also so-called smart contracts, which can also be stored in the blockchain in the form of simple program sequences and are always executed as soon as defined conditions are met. In practice, for example, a legally valid contract can be executed automatically. All persons involved in this contract then have immediate certainty of the outcome without the need to involve an intermediary. Furthermore, a workflow can also be triggered as soon as the conditions for it are met.

ANONYMOUS, DECENTRALIZED AND TRANSPARENT - THE BLOCKCHAIN PHILOSOPHY

Control over financial assets and information is stored decentrally in distributed databases. This means that all information that would otherwise be locked away at the banks (and could therefore also be misused internally) is made openly accessible to everyone.

Of course, this does not mean that person A can view the digital balance of person B at any time. This is where the anonymous storage of account data in the blockchain comes in. Every user of a blockchain has an address consisting of a long sequence of digits and letters. It is true that anyone can now view any blockchain ID with the respective account balance and track account movements. However, the blockchain address cannot be assigned to any real person (roughly comparable to the famous Swiss numbered accounts from earlier times). The use of the blockchain is therefore usually anonymous. Bitcoin fans have always had fun watching the ten "whales" with the largest balances worth billions and their purchases or sales without knowing which persons or institutions are behind them.

The anonymity of a blockchain user is only removed as soon as the publicly visible address can be assigned to a person (similar to an IBAN), for example when a transfer is to be executed. In this case, all further bookings can be assigned to the person and viewed from the public address. Here, anonymity gives way to a weakened pseudonymity. For this reason, some crypto exchanges assign their customers a new Bitcoin address after each transaction in order to maintain the anonymity of their customers.

Another significant feature of the blockchain is its decentralization. The information about account movements and account balances is not stored centrally (such as previously on a bank's server). The blockchain is stored in a distributed computer network, with each of these servers holding the entire blockchain, which is continuously synchronized with all other servers. This enables worldwide transactions within a very short time.

BENEFITS OF THE BLOCKCHAIN FOR COMPANIES

Bitcoin was just the beginning: blockchain technology today offers the potential to revolutionize entire industries. With the smart contracts of a blockchain described above, companies can make business processes and workflows much more secure, faster and more transparent and thus benefit from cost savings. All information in the blockchain is documented in a tamper-proof manner and can be viewed openly. In this way, the blockchain closes trust gaps without the need to involve trusted entities.

Whether it's Industry 4.0, the Internet of Things or business intelligence, data is the new gold for companies and their processes. This makes it all the more important to protect this data from attacks and threats. Blockchain technology, for example, can help ensure that sensitive data of all kinds is well protected and can be stored and processed in a decentralized manner. The financial industry and cryptocurrencies have already been showing for years how well this works.

CONCLUSION

The blockchain makes it possible to handle data and information flows faster and more reliably. The anonymity and decentralization of data storage do the rest for security. Even though this technology is far advanced in its development, we are still at the very beginning. The sometimes still difficult integration of a blockchain into existing systems and the limited scalability are currently still problems, but they will be solved in the foreseeable future. Thus, the operators of several cryptocurrencies are already intensively researching further developments of the blockchain.