Blockchain and Cryptocurrencies – From Hype to Reality to Disruption

The Blockchain (and related: Cryptocurrencies as well as Initial Coin Offerings / ICOs) is currently one of the most talked about technologies around. You hear people hailing them as “the end of the financial system as we know it” with others comparing the potential impact of the technology to be as great or even greater than the Internet itself. Meanwhile, others observe that many ICOs are plain fraud, cryptocurrencies are nothing more than the next tulip mania and the blockchain is just a hyped decentralized database. And of course, the truth will likely be somewhere in the middle.

To understand the blockchain one must come to terms with its underlying technology. Short of going into a lengthy explanation, consider the blockchain as a way to store data – similar to a database with a few notable differences: The data itself is stored in a truly decentralized fashion; i.e., the information doesn’t reside on a single server or a series of tightly synchronized servers but rather a copy of the data is stored on many nodes in the network. Further, the data is stored in a way that it is effectively tamper-proof (through the use of some clever cryptography and linking each entry to each other into a chain).

The result of this is that the blockchain enables the storage of data in a way which doesn’t require any of the participating parties to trust each other – and this is truly novel. In every other infrastructure so far we have to trust at least one party; the blockchain makes trust obsolete.

This feature alone means that the blockchain, as a storage mechanism for data, has tremendous potential and will be quite disruptive. Everywhere where we typically don’t trust the other party (think about topics such as land rights in developing countries) or where we pay money to establish trust (a notary in Germany charges you quite a bit to establish trust between two parties), the blockchain has the potential to revolutionize the way we transact.

Moreover, the blockchain (at least some implementation of a blockchain – note that there is not a single blockchain but instead many blockchains) has another trick up its sleeve: Using technologies such as Etherium or Stratis you can add functionality to a transaction – turning data storage into a smart contract.

The simplest way to think about a smart contract is a magazine subscription: Every month you receive a copy of your favorite magazine and in turn once a year the publisher automatically deducts the cost of your subscription from your bank account. Smart contracts are clever little pieces of software which can settle payments based on verifiable conditions. For example, a merchant gets paid automatically once you signed for delivery of her products into your warehouse. This, in turn, reduces the level of trust one needs to have in a system and increases efficiency. The merchant doesn’t need to trust the customer that he will pay on delivery as agreed upon and the customer doesn’t need to have his accounting department keep track of the payment as it is issued automatically once the condition in the smart contract is met.

Taken together these two core features of the blockchain (a trust-less cryptographic store of data combined with the ability to execute software commands on it) is what makes the technology genuinely disruptive. Today we are mostly in the explorative phase of the technology. Organizations all around the world are wrapping their heads around the core principles and how to best use them in either existing or entirely new processes. As usual in these situations we see a lot of useless or plain wrong implementations – it takes time for a new concept to be fully digested and leveraged to its real potential. Having said that we will see many backend implementations of blockchain technology resulting in reduced cost, increased transaction times and reliability. Moreover, we will also see entirely new applications which just weren’t possible before.

From supply chains (Walmart is currently implementing a blockchain-based supply chain software, cutting down the time it takes to track an item on the shelf to the lot it was manufactured in from two weeks to less than ten seconds) to new peer-based banking and insurance products, the blockchain holds many promises which we will see play out over the next decade. Your first step in wrapping your head around the potential and possible pitfalls is to study the technology, as without a good understanding of the underlying principles one is stuck in either following or dismissing the hype without much thought for true potential.