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For years now, blockchain technology has been making waves. At times, being proclaimed a key driver for the next industrial revolution. At others, condemned as nothing more than a useless gimmick powering a gigantic Ponzi scheme. Regardless of the public and market sentiment toward the technology, there are certainly reasons it has received so much attention beyond speculation.
In its most simplified form, a public blockchain is a shared append-only ledger that enforces certain rules while allowing anyone read and write access. This underlying technology allows users to deterministically achieve consensus on a common reality without the need for centralized parties to keep records and govern the process.
Blockchain technology was first introduced in Bitcoin, though the term “Blockchain” was never explicitly mentioned in the original whitepaper by its author, Satoshi Nakamoto.
Bitcoin was designed to function as a peer-to-peer electronic cash system with a native, independent currency and monetary system tied to participation in the maintenance of the network and processing of transactions. For the first time in history, there was a globally standardized currency that anyone could use, but nobody could monopolize control over due to the fundamental design of public blockchain networks.
While this in itself is a historic achievement, researchers interested in the technology quickly realized other potential use cases in which such a system might yield significant benefits and potentially revolutionize how we transact, exchange value, and keep records. Early examples mentioned include the standardized recording of land titles, providing financial services to all regardless of factors such as location and access to legal documents, decentralized sharing economy platforms, self-sovereign identity, automated royalty payments for digital content, and even technology-enabled systems to support and improve governmental functions.
In general, blockchain technology primarily enables two functions: (1) digital scarcity enabling value transfer and (2) decentralized processing and validation of transactions immutably stored in a chronological ledger; the emphasis concerning more advanced applications beyond basic party-to-party asset transfer is on the latter. While digital scarcity certainly plays a role, decentralized computation and execution of transactions can be used to create systems and protocols for various use cases. The innovation here is that neither trust among participants nor the involvement of a central governing party is necessary for anyone to participate in a system or use an application.
Decentralized computation via a smart contract network allows for guaranteed neutral execution of pre-defined logic. This is useful as it removes the need for trust when engaging in even complex transactions. Decentralized computation is practical when building so-called Decentralized Applications (dApps). User-facing applications utilizing a blockchain in its back-end to achieve guaranteed execution.
Currently, the primary use for dApps is in finance, mainly on the Ethereum blockchain. Decentralized finance (DeFi) is an umbrella term for decentralized exchanges, lending protocols, derivatives, insurance, and more. All logic for such applications is written ahead of time in the form of a smart contract and published on a blockchain. Once deployed, the code cannot be changed but it can be audited by all parties. The logic outlined in the contract is executed when a party interacts with the contract. This allows parties to engage in complex transactions without the need to trust one another – the operation is trustless. There is no need for a bank, a government, a notary, an escrow agent, or any other middleman whose role traditionally is to help overcome issues of trust. This has the potential to drastically streamline and disintermediate a wide variety of transactions, even beyond finance.
Beyond this, it must be said that the potential efficiency gains made possible through basic automation via smart contracts can not be overstated. These automated systems reduce the friction associated with traditional intermediaries, ensuring that transactions are not only faster but also more secure and transparent.
Want to learn more about the potential of Blockchain technology in your industry and beyond? Frankfurt School Executive Education offers various in-depth courses on the topic.
The FSBC is a think tank and research center focused primarily on investigating the implications of blockchain technology. In addition to general research and prototype development, the FSBC serves as a networking hub for managers, start-ups, and experts to exchange knowledge and best practices.
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