Blockchain: a real revolution?
By Vittoria Bondoni
Everyone talks about it. The spread of the blockchain has grown exponentially, becoming one of the most disruptive technologies established in recent years: secure and capable of enabling the disintermediation of traditional value chains overturning the axiom according to which the physical control of the information corresponds to greater data security. It represents a concrete example of sharing economy of technological infrastructures, a decentralized and shared ecosystem of computational power that can be used to develop innovative services.
3 main pillars of the blockchain
The goal of the Blockchain is to manage the creation, validation and transaction registration in such a way that there is not a single “trusted” entity that has full responsibility for the following steps.
1 – Distributed Ledger: The Blockchain is a distributed chain of information contained in a worldwide network of computers connected to each other. Each segment holds a copy of the Blockchain, for this reason it is not possible to delete the data contained without going to hack over half of the computers in the network. This guarantees the properties of Immutability and Transparency
2 – Consensus: the most widespread among the many mechanisms of consent provides that every transaction must be validated by the network by solving a complex mathematical problem (proof of work). It is believed that a transaction is immutable after at least six confirmations, i.e. six successive blocks. This guarantees the property of disintermediation and control of the calculation algorithm.
3 – Cryptography: The hashing cryptography, the basic concept of the Blockchain, transforms every data into a complex alphanumeric string, which makes all types of information inserted in Blockchain unalterable and encrypted, creating a fingerprint (imprint) of that data within the register. This guarantees the Privacy and Security properties offered by the Blockchain
The system consists of “blocks” that contain the various transactions, the information recorded within them is essentially immutable and unchangeable.
Not just on the single server but on all the “nodes” of the network we can find a copy of the digital register. This feature makes it really impossible to be able to falsify or corrupt the transmitted data. Privacy is also guaranteed by the use of cryptography for operations collected in “blocks”, that are linked to each other by a double security system consisting of two keys: one public, one private.
We can distinguish two macro types of Blockchain: public or private. Public Blockchain, or also called “Permissionless” Blockchain, do not require any authorization to access the network, execute transactions or insert themselves in the creation of a new “block”. Instead Private or “Permissioned” Blockchains are subject to a central authority considered highly reliable by users, which controls their accessibility; they can be defined as hidden networks with the possibility of having large storage spaces and execution speed.
An interesting feature of the public blockchain, which gives real added value, is the independence that Blockchain guarantees with respect to each third party or central authority: the technology offers the same guarantees of supervision and control that would offer a “trusted” central part, but at the same time is more dynamic and convenient, because it escapes intermediation costs. This aspect is particularly linked to the trends of the moment, namely the progressive abandonment of “trusted parties” in many areas, starting, for example, from insurance companies buying and selling real estate.
Main data on market trends: presentation of some market benchmarks
The strengths and characteristics of the Blockchain have allowed an increasingly widespread diffusion of this technology. The dissemination was guided by the FinTech sector, which saw great potential and applicability of the model in different fields. In fact, there are several initiatives by financial institutions, typically operating according to four methods:
- Internal development – creation of work groups or research laboratories for testing proprietary blockchain solutions.
- Venture Capitalist (VC) in startup – investing in startups active in the blockchain world both through venture capitalist operations and directly.
- Partnership – creating partnerships to start projects based on new technologies and speed up the absorption of know-how.
- Consortium – joining a consortium of financial players (e.g. R3 CEV) or cross-industry (Hyperledger Project) with the aim of defining de facto standards that are interoperable with all the other members.
An important commercial application of BC technology is represented by “smart contracts”. Smart contracts are used to allow and verify the negotiation or the execution of a contract. They are computer protocols that allow the total or partial exclusion of a contract clause because they automate it, partially or completely. Ethereum allows developers to program smart contracts via a comprehensive set of calculation instructions. The purpose with which the smart contracts were designed is to reduce the costs associated with traditional contracting and ensure greater security. The main features of smart contracts are to act as a “multi signature” account, to store information about an application (such as registration of the domain or membership record) and to manage agreements between users.
The case of the US R3 CEV startup
Reason for the creation of this startup is the analysis and the study of protocols and standards for the use of Blockchain in Financial Services. Since April 2016, when R3 has started using this technology, it has already completed at least eight different Proof-of-Concept (PoC) projects. The purpose of the startup was to demonstrate how a large number of processes and even audit operations by the supervisory bodies could be supported by a Blockchain register. The demonstration has a revolutionary impact for the financial world and beyond: the security and transparency, which the Blockchain guarantees, allow to limit the physical control of the data. The success of the start-up has meant that international insurance companies, such as AIA or Ping An, and banks like South African Bank, Itau, Banco Bradesco have decided to join, the number of member companies has thus exceeded 60 units in November of 2016. The formation of the consortium and the adhesion of the main world financial organizations marks a first step for the revolution in this sector.
To date, the Blockchain is the workhorse of the fintech, a new market. But is this a real revolution? A profound and extensive change can be achieved if technology will also take the field in traditional financial organizations. All this is possible, but it must be remembered that disruptive technologies require time to develop and mature. We can compare the potential of Blockchain technology to that of the Internet: it took some time for the applicability and tangible benefits of this innovation to emerge. We can not consider the Blockchain a patented solution for change, but an opportunity to make future changes in the financial sector. We can speak of an evolution rather than a real revolution.