Benefits of Blockchain

Benefits of Blockchain   

   Since the internet first emerged in 1983 there has been an exponential increase in global connectivity which has allowed for new industries like e-commerce to flourish. As the internet began to emerge and evolve from being used solely by academics to being used by everyday people, the world wide web presented extreme potential and investors took notice. The internet was not well understood by most people at the time, in fact, many thought the internet was just a passing fad. Due to all the potential the internet held to disrupt a number of industries, money began flooding into stocks of companies who claimed to be working on anything related to the internet. Financial markets began to bubble up as Internet-based companies grew rapidly. The NASDAQ reached incredible heights, as did skepticism surrounding the valuations of companies. 

   The internet has allowed for overall societal progression in a wide range of fields varying from digital banking to entertainment and everything in between. With all the fantastic benefits the internet has to offer, it still has some vital flaws. All technology is imperfect to an extent because all technology is created by humans which are inherently imperfect. One of the main issues with the internet is the lack of trust. Sure, the internet has become increasingly more secure by the year with advancements in cybersecurity, but it would be wrong to think there is no way to further improve digital trust. Luckily, in recent years we've seen a breakthrough innovation for improving digital trust through what is called the Blockchain, otherwise known as distributed ledger technology. In short, a blockchain is nothing more complex than a decentralized database. Think of a distributed ledger as a spreadsheet which is duplicated across a network of different computers, and the spreadsheet is designed to be automatically updated as additional information is added to it.

Birthing the Blockchain

  The first introduction of the Blockchain was in the bitcoin protocol by Satoshi Nakamoto which created a distributed data structure for managing electronic cash which neglected to have a central authority. Instead of having a central authority to monitor and verify transactions, all transactions are made public on a digital ledger and operated across a decentralized network of volunteer-run nodes. Thousands of these decentralized volunteer-run nodes comprise the Bitcoin network which made it unique.

   When any transaction was made across the network, let's say person A sends person B $10 worth of Bitcoin, it is recorded on the ledger. Once a majority of the nodes reaches a consensus that the transaction has been made and there is no double spending, it is cryptographically secured in a block. Every new block is then linked to the previously secured block which creates a chain of accepted historical transactions, thus preserving a verifiable record of every transaction, hence the blockchain.

   The Bitcoin blockchain is a relatively simple distributed ledger which only has to focus on monetary transactions, but it inspired developers everywhere to attempt to create other unique variations. Since Bitcoin emerged we have seen other similar projects that provide more utility such as Etherum which aims to decentralize and in a sense democratize the internet completely cutting out third parties. While Etherum has many challenges that lie ahead, the underlying distributed ledger technology is still key. 

Why Governments Should Use DLT

  Blockchains and other distributed ledger technologies have great potential for use outside of just monetary transactions. Governments may turn out to be some of the largest adopters of distributed ledger technology as it allows them to maintain credible information about individuals, organizations, assets, and activities in a more secure fashion. In the United States where the government is broken down between the federal, state, and the local levels, there is an abundance of dysfunction in maintaining various records such as birth dates, marital status, criminal activity, and other files. A government distributed ledger could possibly simplify the management of trusted information which in turn would make it easier for dysfunctional governments to access and use critical public-sector data while simultaneously preserving the security of the information. 

  The United States government has not announced plans to roll out any sort of distributed ledger projects to ease the burden of their everyday duties, and it is unlikely they will anytime soon. The U.S. government acts retroactively for the most part in implementing technological innovations to smooth out the fabric of their society. They were late on the implementation of cloud computing due to their incomprehension to decipher the model, but whenever new military technology is available we are always the first to flex it.

Estonia's Experiment

   Perhaps in the case of implementing any sort of distributed ledger technology, the U.S. government should turn to Estonia as a model. Yes, Estonia, the tiny European nation which neighbors Russia and Latvia. Estonia is in the process of rolling out a technology called Keyless Signature Infrastructure (KSI for short) which aims to safeguard all public-sector data. KSI will create hash values which uniquely represent large chunks of data as much smaller numerical values. The hash values then can be used to identify records but cannot be used to reconstruct the information found within the file itself. The hash values are then stored in a blockchain which is distributed across a network of private government computers. If an underlying file changes, then a corresponding new hash value is appended to the chain so the information can no longer be changed. The history of all records will be fully transparent and unauthorized tampering from within the system or outside of the system can be detected and prevented. The KSI initiative will allow government officials to monitor changes within various databases including who changes a record, what changes are introduced, and when the changes were made through a simple timestamp.

Getting Exposure

   It is hard to get direct exposure to blockchain technologies as a retail investor, but through ETFs you can add some of the hype to your portfolio. There are currently only four ETFs that are labeled as "Blockchain ETF", those tickers are BLOK, BLCN, LEGR, and KOIN. BLOK, being the largest of the four with $162.21 total assets doesn't have any startups or smaller companies weighing heavy in their portfolio, instead, you'll find companies like Taiwan Semiconductor Manufacturing Co, Digital Garage, NVIDIA, Square, Overstock, IBM, and Microsoft. These are all companies who have slight exposure to building and facilitating distributed ledgers, especially companies like IBM and Microsoft with their enterprise blockchain products. BLCN has a similar structure with similar companies, but with the addition of financial institutions which will likely be some of the first major adopters of this technology. BLCN has slightly fewer assets under management than BLOK, totaling in at $102.67 million. BLCN has diversified their risk to a greater degree as opposed to BLOK by having positions in more companies with a lower average weight in each. The distributed ledger technology revolution will most likely produce many winners rather than one big whale so it would be a safe bet to have exposure through ETFs rather than directly singling out companies.

In Conclusion

   Aside from governments using blockchain to improve their daily functions, distributed ledgers can also be applied in a number of other areas such as supply chain management, healthcare, real estate, media, and energy. Distributed ledgers obviously aren't the answer to the many problems the world is facing, but it can certainly help solve some of them. I'm optimistic that the best and most practical implementations for distributed ledger technologies are the ones we haven't even thought of yet. This was definitely the case when the internet first surfaced, and distributed ledgers will allow for an additional layer on top of the internet providing transparency and trust in an unprecedented manner.


If you need a visualization to help you better understand how a blockchain works then I highly recommend this video: https://youtu.be/SSo_EIwHSd4

Sources

https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/using-blockchain-to-improve-data-management-in-the-public-sector

https://www.economist.com/news/business/21722869-anti-establishment-technology-faces-ironic-turn-fortune-governments-may-be-big-backers

http://www.zyen.com/what-we-do/mutual-distributed-ledgers.html

https://bitcoinmagazine.com/articles/op-ed-how-blockchain-will-help-fix-internet/

https://www.coindesk.com/information/what-is-blockchain-technology/

https://www.coindesk.com/information/what-can-a-blockchain-do/

https://www.coindesk.com/information/what-is-a-distributed-ledger/

http://www.zdnet.com/article/blockchain-explained-in-plain-english/