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Why do we need blockchain?
Every day billions of dealings are made. Our world is driven by transactions. Every time an asset exchanges hand a deal is made. Your expense is someone else income. And to transact, at least two parties and trust are needed.
Trust is fundamental for transactions. Because if I don’t know, like, or trust you, it would be very difficult to transact with you. But it is not just for dealings, everything is based on trust. And to establish trust we usually rely on middlemen.
To manage and establish trust in an economy, middlemen act as intermediaries between the trust gaps. Intermediaries can be banks, brokers, lawyers, governments, or corporations. With these intermediaries, you don’t necessarily have to trust the other party to do business.
These intermediaries give the confidence that the transaction will take place and once a contract has been established everybody has to abide by the terms. We rely on middlemen to manage the relationship between two parties because it is the best and only solution we have.
But the way middlemen operates has some flaws. When we turn to intermediaries, we don’t really know who we are dealing with because they have employees and associates performing central roles in transactions.
Their role is to perform important business functions like record keeping, clearing, validating, managing transactions, settling actions, and providing visibility through asset tracking. This way each party can transact money and assets safely.
We rely on them because it has always been like that and we know that we won’t lose money because there are opportunities for recourse if something goes wrong. But the real problem is that the way intermediaries operate is centralized.
Intermediaries record every transactions in their database or ledger. If you are dealing with a bank everything becomes a number in their ledger that makes up their balance sheet.
Now since everything records are centralized in their database, they can still be changed, tampered, altered, or even delete. Moreover, centralized intermediaries have power and authority. But they can also be hacked, corrupt, or even failed.
Central intermediaries invest heavily in human capital to handle the work. Since tasks are carried out by employees in the background, transactions can be slow and prone to human errors.
Now intermediaries are not handling and settling just one dealing for a particular entity but a lot of other parties rely on them. Since a lot of people rely on them, transactions can be slow and can even take weeks complete.
There are also arrangements, negotiations, conflicts, legal works, and documentation to do as well. While processes are slowed down, settlement time increases as well as costs.
For every transaction, you need to pay and in some cases, there is also interest. International proceedings are even slower and more costly. There are also currency exchanges to take into account.
What is even worst is that there is no transparency in their work. Everything is stored in their server, ledger, or database which you can’t access and hence you don’t know what they are doing with your data.
And in times of crisis, you don’t know which ledger or bank to trust because they can fail or even go bankrupt. Also, important decisions that concern millions worth of assets or even millions of people are taken behind closed doors by a few out-of-reach privileged people.
Furthermore, scandals and corruption can surface months if not years after the facts. What’s even worst is that more than 1.7 billion people don’t have access to basic banking services and are therefore excluded from the economy.
The financial sector and the way middlemen operate are not evolving and they use age-long processes. But technological advancement has made huge leaps during the past couple of decades.
Devices are becoming, smaller, cheaper, and more powerful. Technology has become so accessible that even a percentage of the 1.7 billion who don’t have bank account has a mobile phone.
Now with digitalization, the business world is getting more complex, and establishing trust is getting even more complex. Hence to lower uncertainty, some entities are turning to digital platforms to decentralize trust. Some people are turning to blockchain to close the trust gaps.
What is blockchain?
Blockchain is a distributed ledger technology that enables a new level of trust and transparency in transactions. It is a public, transparent, and secure database that can be used to track the history of transactions.
Agreements are verified and recorded in chronological order. Everybody in the network has a copy of the ledger which makes it difficult for anyone to change or tamper with the data.
The distributed ledger maintains a continuously growing list of records called blocks. Each block contains a cryptographic hash of the previous block, a timestamp, and settlement data.
The blockchain is constantly growing as “completed” blocks are added to it with a new set of recordings. Each node contains a copy of the blockchain. The technology creates an open-source network that anyone can inspect.
Importance of blockchain
Blockchain sought to revolutionize the way trust is established in our everyday lives. Instead of trusting intermediaries to keep our data safe and manage transactions, blockchain decentralized the system with codes from a network of computers.
This decentralized approach aims at removing the age-long way trust is implemented. It removes middlemen and allows direct peer-to-peer agreements between two parties. It also introduces a new way to store value.
At the heart of the blockchain existed a protocol called smart contracts. A smart contract is a piece of code that defines terms and rules set by the party doing business.
The smart contracts establish who is allowed to do what, when to do it, and how to do it. The piece of code runs on the distributed peer-to-peer network and automatically enforced the necessary actions.
The predefined conditions run on ‘if’, ‘else’, and ‘then’ statements. This way transaction monitoring and auditing are enforced automatically. The smart contract is signed by your private key.
The private key is a strong cryptographic password that proves your online identity. You can use it as a digital signature on the blockchain. What blockchain aim at doing is to:
- Reduced fraud
- Blockchain is resistant to tampering and hacking. Since it is a distributed ledger, if someone wants to tamper with the information it will have to break into all the computing in the network simultaneously which makes it a more secure and reliable way to conduct transactions.
- Reduced processing time
- Blockchain transactions are processed quickly and without the need for intermediaries. Everything is done automatically by a computer on a peer-to-peer network which reduces the time it takes to complete a deal.
- Increased transparency
- Blockchain is transparent, which means everyone can see the information stored in the database since everybody has a copy of the ledger. This enhances trust and transparency between parties involved in an agreement.
- Reduced cost
- Blockchain technology is almost free of charge. Since processes are carried through direct peer-to-peer by computer code instead of intermediaries. Which reduces the cost of conducting transactions. There is no need to displace or any paperwork.
Uses of blockchain
Blockchain is a shared database that allows multiple parties to access and verify data in real-time. It came into existence through cryptocurrency but it has more far-reaching potential than that.
Blockchain technology is an innovative database technology that has many important applications. It can transform the way we do things, including the following:
1. Facilitate transaction
As an open global infrastructure, blockchain eliminates the need for intermediaries, which reduces transaction costs and allows faster transactions. For example, it could make it possible for individuals to buy insurance without a bank account.
A big benefit of blockchain technology is that it can decentralize the financial system. The idea behind decentralized financial systems is to eliminate central financial intermediaries and give people more control over their financial transactions.
In the real world, it’s hard to get a loan because you have to pass a lot of formalities, and it is even harder to start a banking business since large capital and contacts are needed.
Instead of relying on banks, decentralized applications make it easier to access digital loans and peer-to-peer lending. Everybody in this decentralized network can lend money.
If you have some money aside, you can lend it to someone that doesn’t have the privilege of receiving a bank loan. Thus you can earn some interest as a side hustle. It is a win-win situation for everybody.
This can be a major step toward decentralized finance (DeFi). One application of DeFi is lending cryptocurrency. Smart contracts sidestep the risks that are inherent in traditional lending. Lenders can recover their money if a borrower defaults.
DeFi can also allow a user to save cryptocurrency as a bank savings account and pay interest. These accounts might even payout on a daily, weekly, or monthly basis. These applications are also leading the way to a Decentralized Autonomous Organization (DAO).
Blockchain also allows users to transfer large sums of money faster and with lower fees than traditional methods, which benefits both the sender and recipient. Smart contracts can function as programmable equity.
Fraud and poor customer security are major problems in the banking sector, so the adoption of this technology could be a positive step for the sector. Tokenized securities cut out middlemen and reduce asset exchange fees.
The market size of blockchain in banking and financial services was valued at USD 1.46 billion in 2021 and it is projected to reach USD 22.46 billion by 2026.
2. Facilitate remittance
International remittance is the process where an immigrant worker tries to send money to his homeland. In 2020, remittances were a USD 700 billion industry. However, transfer through a central authority typically takes days to process.
For instance, a check deposited on Friday may not show up in your account until Monday. In contrast, remittance transaction takes 4 to 7 days to complete and there are a lot of costs involved.
Another problem is that bank has to verify a lot of paper and also currency rate has to be taken into account for international transactions. Not to mention that exchange rates can fall within hours.
A major benefit of blockchain technology is for KYC purposes (Know Your Customer). Banks spend hundreds of millions of dollars every year on KYC compliance. Blockchain KYC can help banks reduce costs since the customer only needs its digital signature to access services.
Decentralizing KYC compliance could cut costs by up to USD 160M and help reduce staffing by 10%. If used correctly, blockchain technology could even help banks reduce the number of workers they need to hire.
Now, while banks operate during business hours, the blockchain operates round the clock. Moreover, a transaction on distributed databases can be completed within minutes. And after several hours, it is considered secure.
Decentralized transactions are hugely beneficial for cross-border trades. Because of time zone differences, banks can’t process payments immediately. This can result in substantial delays. Since the distributed ledger is run by code, transactions are carried out immediately.
When it comes to investment and trade, the blockchain can provide more transparency, governance, fast transfers, lowered cost, and reduced risk of fraud and human error.
For instance, Banco Santander uses blockchain technology to reduce dependence on different banks for cross-border transactions. This way organizations or individuals can transfer money faster, more securely, and more efficiently.
3. Vote
Right now voting happens either on paper or on special computers that are running proprietary software. Voting on paper can be costly and electronic voting has security issues.
Hence, another problem that blockchain can solve is the issue of rigging elections. Due to the immutability of a distributed database, votes cannot be changed after they have been cast. This prevents false votes and helps to eliminate fraud.
Further, it makes the entire process of voting transparent. This prevents opposition parties from creating false theories about voting fraud. With the immutability of data, blockchain can also make it easier to verify the legitimacy of voters’ votes.
Each citizen registered to vote would have a record on the blockchain. Citizens could exercise the right to vote after authentication using a personal key. Another major advantage of this system would be the elimination of voter intimidation.
Decentralized technology also eliminates the need for voting stations, making it more convenient to vote. Votes are tallied automatically every time a citizen selects a candidate.
A startup has released a patented, end-to-end blockchain voting system called Follow My Vote. The system could count votes immediately when they are submitted.
Blockchain-based voting systems could eliminate the need for recounts. Because there is a transparent and verifiable audit trail, a decentralized voting system can help prevent election fraud.
Other companies are developing blockchain voting tools that aim to reduce the likelihood of election fraud. One such company, Agora, has already applied its voting technology in Sierra Leone and showed results that were close to official tallies.
4. Government and good governance
For instance, after an election, certain policies could be implemented through smart contracts. This can automate some administrative processes since everybody knows that government operations are usually slow.
Smart contracts can also easily allocate money to specific budgetary categories. Citizens on the other hand can track government expenditure, contract allocation, and whether policymakers are fulfilling their promises or not.
Blockchain smart contracts could be used throughout the whole economy. Transacting parties can agree on a set of instructions and terms that would automatically be triggered if certain conditions of a contract are met.
These contracts would be self-contained, self-performed, and self-enforced. Digital contracts could transform the delivery of public and private services while enhancing productivity through a wide range of applications.
Using blockchain technology to improve government services can cut costs, support compliance, increase transparency, establish trust, and foster accountability. It would also help collect taxes, disburse benefits, and make interactions with citizens more fluid.
Distributed databases can create a more open and transparent platform for governments agency which can eventually end corruption. You can also track things like intellectual property and patents or even use blockchain as a notary.
Government agencies are responsible for maintaining public records such as birth certificates, marital statuses, property transfers, passports, etc… Blockchain technology could dramatically simplify this recordkeeping and make the data far more secure.
The technology can also help minimize infringement as well as provide an electronic chain of custody for every piece of intellectual property. In this way, the public can judge the strength and value of any particular work.
According to the Corruption Perceptions Index, two-thirds of countries around the world are considered corrupt. Blockchain can make budgeting decisions highly transparent thus reducing corruption and fund wastage.
One major impediment to economic development is the lack of access to formal financial services. It is estimated that more than 1.7 billion people don’t have access to basic banking services. However, with major leaps in technological advancement, these people have easy access to powerful and cheap mobile devices.
Hence with blockchain technology, these people can have easy access to financial aid. The Bill and Melinda Gates Foundation has launched the Level One Project as part of its Financial Services aimed at creating national digital payment systems based on the blockchain.
5. Healthcare
Blockchain is not just a tool for transaction processes but it can also be used to facilitate the management of data. Data management can be a headache in the healthcare sector.
A major problem the healthcare industry faces is that medical practitioners sometimes lack a clear and complete understanding of a patient’s medical history. Sometimes the medical record of a patient can be in the company databases that are separated from each other.
This hinders their ability to provide effective healthcare solutions. But if the medical record were on a decentralized database, this would allow multiple healthcare companies to access that data anytime and anywhere.
Those medical records can include prescriptions, every doctor visit, allergies, past surgeries, medical conditions, and so on. But more importantly, the data would be highly secure.
Not to mention that hospitals are often the target of cybercriminals because these institutions contain patients’ personal information. Blockchain uses strong cryptography to encrypt data. This way it will be difficult to identify any particular patient if by misfortune the information was divulged.
In addition to security, a medical practitioner will have to ask permission from a patient before being granted access to the full medical history. And the medical history is temporarily viewable for a specific reason.
For instance, a healthcare provider will need a doctor’s history to properly diagnose a foreign patient. Because if not this can be problematic since the doctor may not be familiar with the patient.
With zero-knowledge proof, blockchain will reduce the chance of misdiagnosis. Furthermore, blockchain-based medical information will allow healthcare organizations to form collaborative communities online.
The potential to trace errors in production could dramatically reduce the number of recalls and reduce the impact of unsafe drugs on patients. The GE Blockchain project is an example of decentralized technology in action.
The market for blockchain technology in healthcare was estimated at USD 1.19 billion in 2021. A CAGR increase of 68.1% is expected between 2022-2030, the market is estimated to reach USD 126 billion by 2030.
6. Digital copyright (Non-Fungible Token)
Before the digital age, content protection such as patents, trademarks, and copyright was relatively effective but that’s no longer the case. The digital age has made it easier to steal, duplicate, or download digitized goods and services like software, video, music, etc…
Hence, media companies can benefit from blockchain by conducting business on a decentralized network. This will enable them to cater to a global audience while reducing downtime risks.
In addition, it will allow content owners to receive royalties via smart contracts, which cuts out profiteering middlemen with the creation of NFT. The creation of a Non-Fungible Token (NFT), can link digital content to its rightful owner.
Blockchain NFT is proof of ownership for digital creation on the internet. For instance, an artist or creator can turn their creation into an NFT so that it can’t be easily duplicated. When work is converted to an NFT the owner protects its authenticity and ownership.
NFT enables digital creation to travel the internet safely and allows everybody to enjoy it. And the more the art is seen, liked, or appreciated, the more its value increases. Now even if everybody is enjoying the NFT, the creator remains the truthful owner.
And every time the creation is sold or bought, the creator receives royalties. Which is a huge benefit for artists, musicians, creators, etc… Because their work can’t be stolen in a world where the internet has allowed easy duplication of people’s work.
Blockchain also enables easy means of transferring ownership rights to another party and ensuring payment in exchange. Non-Fungible Tokens can also shift the power back into the hands of creators and owners.
A key advantage of blockchain technology is the ability to solve all kinds of problems related to media rights. For instance, a streaming service could set up smart contracts to collect monthly subscriptions and keeps track of what the user has listened to.
At the end of each month, the digital contract can automatically distribute the money to artists, based on how many times their songs have been listened to.
Using decentralized databases to eliminate fraud, and protect intellectual property reduce cost and ensure that artists are compensated immediately and transparently.
The global market for blockchain in the media, advertising, and entertainment industry was estimated at USD 166.6 million in 2020. A CAGR increase of 71.4% is expected between 2021 – 2026. The market size is projected to reach USD 4.37 billion by 2026.
7. Logistics industry
We are heavily reliant on international trade and the economy. The logistics industry is a complex field that operates 24/7 to satisfy customers around the world. The logistics industry operates pretty well to satisfy its international customer but it also has some flaws.
Even though the industry operates pretty well it faces some hitches. The logistics sector relies on inefficient practices, faces spoilage and cyberattack, is subject to theft and stolen goods, depends on a lot of middlemen, mislabel cargo, etc… Fortunately, the blockchain can give some insight.
It can be used to track packages and shipments thus providing more visibility. IBM and container shipping giant Maersk are already working on this. They are working on a decentralized ledger to make the global trade of goods more efficient and transparent.
By providing more visibility, blockchain improves the traceability of goods during shipment. This can also be used to keep track of information and verify the integrity of goods.
And if combine with smart contracts, the latter can self-execute actions when certain conditions are met. Moreover, almost 420,000 people die because of food-borne diseases. Because it takes too long to isolate the food that is causing harm.
For instance, Fast Moving Consumer Goods (FMCG) companies can track consumer goods from the moment they are harvested or made, to when they end up in the hands of customers using blockchain technology.
The technology could create a digital certificate for each piece of food, and authenticate its provenance and how long it has been on the road. So if a problem or contamination is detected, it can trace back to its root and instantly notify the person concerned.
Blockchain allows entities to trace the origin of inventories faster, more efficiently, and at a relatively lower cost. Since cargo can be easily verified and tracked, strange packages or shipments that may contain illicit products are easily identified.
This system can also be applied to other problems like creating a robust infrastructure to prevent cybercriminals to break into and battling counterfeit goods.
Blockchain is one of the key trends in the logistics market right now. The market was estimated at USD 22.5 million in 2019 and is projected to reach USD 765.5 million by 2025 which represents a CAGR increase of 80.0%.
8. Supply chain
Nowadays, most people prefer to buy products that are ethically produced but it’s not always easy to find that information. Most of the time products go through many hands and travel long distances before reaching the end customer.
Also, most of the time companies don’t want to disclose or hide the truth about their business activities. It is very easy for companies to lie about how their products are made.
Because they know most consumers will not bother trying to search for the provenance. Or the company supplies itself from so many suppliers that it is hard to track the provenance of goods.
Hence, blockchain can be used to track everything in the supply chain with a high level of transparency. It can track and provide information on business activity such as where materials are procured, where wastes are dumped, or how fairly they treat their employees.
Blockchains can also be used to track products from the producer to the store shelf and help prevent waste, inefficiency, fraud, counterfeiting, theft, and unethical practices by making supply chains more transparent.
IBM and Home Depot are working together to implement blockchain technology to manage their supplier relationships. With blockchain-based data management, Home Depot can improve transparency and reduce the number of vendor disputes and re-work time.
This can also help consumers to be better informed about how each product was made and shipped. And if an individual bought or ships something, they can easily track their goods.
Consumers can make more environmentally friendly and ethical choices. This can also enable local producers to stand out, as it enables buyers to purchase local produce knowing that it was grown locally.
This could even cut down on carbon emissions due to food not having to travel long distances. And preventing food to travel long distances reduces food waste and diseases. Blockchain can also help to tackle fash fashion which is a highly unethical supply chain.
Moreover, it could ensure that a fish being sold at a fish market came from sustainable fishermen or verify that a bag of coffee came from a fair trade producer. This can also prevent illegal goods to enter a country and overfishing.
The blockchain could greatly contribute to slowing climate change and can also position customers to understand the environmental consequences of their choices as well as tackle consumerism.
Decentralized technology can improve transparency in the supply chain, enabling retailers and manufacturers to track the movement of goods across borders and avoid counterfeit parts.
It can also improve supply chain financing. By making transactions more efficient and safer, banks can quickly trace faulty products, recall them and improve contracting and doing business internationally.
Also, since blockchain increases transparency, supply chain companies will become more conscious about their activity. If there is an issue in the supply chain, they might rectify it as fast as possible because everybody in the network will raise questions about it.
Blockchain technology in the supply chain was valued at USD 262.9 million in 2021. A CAGR of around 51.3% is expected between 2022-2028. The market size is expected to reach USD 3.15 billion by 2028.
9 Environment treaty
It is sometimes very difficult to track the real impact or compliance of environmental treaties. Companies can easily corrupt governments or they can default on their promises. Fraud and manipulation of data are common in this area.
The blockchain can be used to transparently track environmental data, the impact of companies’ activity, or whether environmental commitments are met. Every piece of data is made public through the distributed ledger and stays forever there.
With a digital public ledger, nobody can default from their commitment. Also, everything from carbon credits to legal documentation can be tracked. It can also cut down on administration costs as well as automate some tasks.
This will also potentially encourage environmentally conscious behavior on the part of companies and individuals by enabling them to transform carbon credits into digital tokens that can be traded on an exchange.
But more importantly, it would discourage corporations and governments from backpedaling on their environmental promises or misreporting their activity or progress.
10. Trace the movement of money
Usually, when donating money to a non-profit organization or a charity, it can also be difficult to track where the money goes or how it is spent. Not to mention bureaucracy, corruption, and inefficient procedure and practices are common things in the space.
Blockchain technology can ensure that money donated is invested in a specific cause. But also ensures that the money does not disappear, go into unintended pockets, or it is not a scheme to launder money.
Digital databases also enable funds to be easily and efficiently transferred without banks. This is highly beneficial to people in countries without good banking infrastructure but it also reduces indirect costs and allows money to be directly sent to remote areas where it is needed.
A lot of advancements have been made in satellite internet, people can easily connect themselves to use decentralized networks for transactions. Tax collection might also be made less complex by automatically deducting the government’s share from every transaction recorded on the blockchain.
11. Protect the environment
The Ugandan NGO Care for the Uncared is using blockchain technology to track, tag, and protect endangered species like the blue whale, the Indian tiger, the sea otter, the Asian elephant, and the giant panda.
This record will eventually help understand the determining factors in species extinction. Care for the Uncared is also launching a cryptocurrency platform to obtain donations. The blockchain can be used to benefit the environment in other ways, too, if we think laterally.
IBM developed an application for blockchain-based plastic recycling in 2020. The project will tag plastics with chemical barcode tags that will track their lifecycle and encourage recycling.
A decentralized network can be used to trace the origin of diamonds and provides assurances to customers hoping to avoid “blood diamonds”. Blood diamonds are gemstones procured through exploitation and the dislocations of war.
The World Bank is using the blockchain to allow donors to see how their money is being used. It has also launched a blockchain-based bond to raise money for sustainable development initiatives. The World Bank raises $60 billion annually in the form of bonds.
This money is used to fund development projects and a decentralized database can reduce the number of intermediaries needed in that fund-raising process and ensure that most of the money raised benefits people on the ground instead of intermediaries.
Final word
Blockchain presents the potential of creating a transparent and secure system of record for all internet transactions. It is a foundational technology that can create a new technological infrastructure for our economic and social systems.
The decentralized nature of this technology can significantly reduce fraud and corruption. And with a transparent network, problems can be collectively tackled at the beginning before they became major.
Blockchain can allow fair allocation of resources thus increasing fairness while reducing inequality. However, the technology is still in its early stages. This radical change won’t happen overnight.
It will have to pass through many phases before being fully operational. But if successfully implemented, this could completely reshape and benefits economies around the world.
Blockchain will not only be beneficial for the current time but also for generations to come. The possibilities are endless and the benefits are immense. Blockchain technology can truly make the world a better place.
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