Towards the end of 2008, an anonymous person by the name of Satoshi Nakamoto released a whitepaper online describing the protocol for a Bitcoin digital currency.
Nobody knew who he was. Some doubted that ‘Satoshi’ as a person even existed – they believed ‘he’ was actually a team of people. The elusive identity of its creator added to the allure of Bitcoin, which people quickly realised how useful it was as an anonymous exchange of value.
Last December, the virtual currency garnered widespread media attention and exploded into public interest when the price of one Bitcoin surged to a record high of US$19,783.06. While the pioneer cryptocurrency craze has since cooled, the general interest in its underlying technology blockchain is still going strong.
At the NUS-ISS Learning Day 2018 held on 13 August, the room was filled to the brim at Senior Lecturer Mr Eric Tham’s keynote presentation on the uses of blockchain in financial transactions. He gave an introduction to the technology, its principles and applications, as well as its implications for the financial industry.
What exactly is a blockchain?
In simple terms, blockchain is a continuous and growing chain of records in ledgers. Each of them is a record of transaction or identity, or assets in various sectors.
What underlies the usefulness and interest behind blockchain, is that it is immutable, decentralised, and distributed. “The growing list of records are linked using cryptography – each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain cannot be altered, and this immutability gives rise to trust,” explained Mr Tham.
The same blockchain exists in consistency in the different parties, and the data recorded in any given block is also recorded across all others. Moreover, decentralisation ensures that there is no single point of control and storage. “This removes the need for a middle man, as consensus is made based on a decentralised basis, without a central authority,” he said.
The blockchain at work
When Satoshi created Bitcoin network and mined the genesis block, he embedded a line of text that talked about a bailout for banks: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’
People believed that he was hinting that this electronic cash could address a lot of current problems in the financial industry – such as banks being too big to fail that regulators have to bailout with public money, as well as incentives that are driving financial speculations, among others.
Subsequently, on the online black-market Silk Road, people started using the virtual currency to pay for illegal things, from drugs to fake driver’s licenses. When the website was shut down and the creator arrested in 2013, Bitcoin’s ‘usage’ came to light and this gave it a lasting impression as something mysterious and belonging to the back alleys.
While blockchain had remained at the proof of concept (POC) stage for the past few years, Mr Tham highlighted four up-and-coming applications for the technology.
The first of which is digital currencies. Besides Bitcoin, there are now over 1,600 cryptocurrencies in existence, and the number is growing.
Blockchain can also be used to manage digital assets. “For example, in some exchanges around the world, rather than using stock certificates for transactions done digitally, they put it on a blockchain network. This does away with the need for brokers, or brokers after brokers in the case of overseas brokerage,” he explained.
Thirdly, the technology has been used to prescribe persistent and immutable identities to individuals and entities. In fact, it is making an impact at refugee camps. Building Blocks, which is powered by Ethereum, helps the World Food Programme (WFP) distribute cash-for-food aid to over 100,000 Syrian refugees in Jordan.
Lastly, blockchain has the potential to digitise and automate paper contracts for purposes such as mortgages, loans and trade finance. This will greatly reduce the amount of paperwork and manual labour involved in these processes.
Too good to be true?
Amid all the excitement about what blockchain can do, it is also important understand the implications and potential pitfalls.
One of the key features of blockchain is that they are immutable and hence cannot be hacked. But in fact – they actually can! “If you can get 51 percent of the network to collude, they can actually backtrack and change the data in the blockchain,” said Mr Tham.
Most of the time, these blockchain servers are aggregated together – almost half the world’s bitcoin mining happens at Bitmain in Inner Mongolia, China. “This means that you just need two of these mining farms to work together and they will be able to wreak havoc within the network.”
Environmentally, cryptocurrency mining is not ideal due to the high energy consumption. “Some of the mining farms reportedly use more energy than the whole of Switzerland,” Mr Tham added. In fact, authorities track down illegal mining dens by identifying locations with unusually high electricity usage.
But all in all, while blockchain first captured the public attention through cryptocurrencies, investors, fintech startups and even regulators are relatively optimistic about the potential of the emerging applications.
As industries try to find problems to apply distributed ledger to, we can expect to see the technology break into new sectors to provide innovative solutions.
For more information or to sign up for the Introduction to Blockchain & DLT for Executives course, click here