Blockchain – Piecing it all together

Published by Sean Rodwell on 26 November 2018

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It’s the supposed buzzword of 2018 and it’s being touted as the future of almost everything, but what actually is Blockchain and do you need to know about it?

Before I delve into the detail, it’s worth considering the changes we are seeing both economically and socially throughout the world.

We live in a society where we are moving from trusting institutions and beginning to place our trust in strangers. Instead of hotel chains we use someone’s house with Airbnb. Instead of taxi companies we ride in an Uber. You can even leave your dog with a stranger whilst you’re away on holiday, rather than going to a traditional kennel. These all form part of the so-called sharing economy which is shaping the way we interact and transact with one another on a daily basis. It allows people to monetise their assets that are being underutilised. One example I particularly like is the tool share scheme, where neighbours share power tools, rather than each having a cordless drill that sits in the tool shed for 99% of the year. This more efficient use of such goods is perhaps, along with Amazon, why more businesses are beginning to struggle. The obsession with ownership of possessions and assets is reducing, replaced by an attitude for rental or borrowing.

So if strangers are replacing the need for institutions in some of these examples, how far could this ideology extend?

This is where Blockchain comes in.

Simply put, or as simple as possible, Blockchain is a digital public ledger which contains a record of transactions. This digital public ledger is exactly what it says on the tin; a record of transactions kept on a network which no “one person” or entity controls. This decentralisation of records allows everyone in the network to see and access them so it can be updated constantly and transactions can occur on a peer-to-peer basis.

Security

Most people by now will have heard of Bitcoin, which is a form of cryptocurrency. Blockchain is the system behind cryptocurrency and allows bitcoin to work. Bitcoin is a means of two people transacting without the involvement of an institution, such as a bank. For example, I want to make a payment from my bank account to a supplier’s bank account. I have to instruct my bank to take money out of my account and send it across to their bank account. This requires the two banks to talk to each other, there are some verification processes and then depending on the method of transfer the transaction will happen perhaps in a couple of hours or a couple of days. Blockchain removes the need for the two banks in this transaction. The currency is transferred instantly from me to my supplier with a record of this transaction then stored on the public network as a completely traceable and trackable record. Unlike a bank, where the transaction would be stored on their network or system, this record is kept as a block, linked to all the related transactions in a chain (hence the name Blockchain), stored on the network for anyone to access.

This is what makes Blockchain so secure.

If I wanted to hack a bank, sure, there would be some high-level security to get through, but there is a central system or network where this record is kept that could be accessed and changed. I know the chances of a bank being hacked are fairly remote, but if you’d asked Mark Zuckerberg how secure Facebook was a little while ago I’m sure he’d have said the same about Facebook.

To change a block on the blockchain you would have to simultaneously change the transaction on every of the computers on the global network. The mathematical and computing power required to do this is so vast that it is practically impossible. To give you an idea of how difficult exactly that would be, it would take more computing power than even Google has at its disposal, so your typical hacker sat in a dark bedroom of his parent’s house is probably going to struggle.

Traceability

Earlier in the article, I mentioned the traceability of transactions what give the added benefit of supply chain management and quality assurance. It allows the movement of goods to be traced all the way back to their origin. Imagine the food industry where quality assurance is vital, this system will make it much easier to conduct investigations and take any actions. Similarly, any other entity where several components from other companies come together to form one final product or service. If one component fails it is typically that company at the top of the chain that bears the brunt of the product failing. Blockchain provides auditable digital records to the stakeholders of each value-added step in this production process.

Another benefit of Blockchain is that it removes human error. In order to record a transaction, it has to be verified each time it is added to an existing chain on the network. So rather than entities having separate records that may not agree, this produces one single, joint and verified register with a full audit trail for all to see. No longer should there be disputes between customers and suppliers between the amount owing to and from at any given point.

Smart contracts

One of the very clever parts of Blockchain is the use of smart contracts. These are contracts that can be written and coded in such a way that business terms are automatically validated, reducing the need for onerous monitoring and therefore payments being made and goods and services delivered will see fewer delays. The most basic example I can give of a smart contract is something that’s been around for a rather long time; a vending machine. Take your typical drinks machine, this has code written into it what basically says if a customer pays, say £1.50, then pushes a button it will dispense the chosen drink. It seems simple, but here we have a contract with two validation points that must be met if a set outcome is to occur.

There are an awful lot of companies that are developing smart contracts to reduce the amount of administrative time that’s taken handling contracts manually. Charities may find that in future, service level agreements for their funding are managed by smart contracts which automatically deal with the “Payment by results” elements. When goods are delivered by a supplier, once the goods delivery note is signed payment is automatically made from the customer to the supplier.

It’s not unreasonable to conclude that even property transactions will be handled through smart contracts, rather than lengthy email and telephone battles with your estate agent.

Global transactions

The main use though is likely to be the peer-to-peer global transactions, like Bitcoin. Services like PayPal and other similar companies allow such payments to be made, but these will typically charge a reasonable fee per transaction, or have restrictions on the amounts or locations you can transfer to. With Blockchain, not only could you transfer money anywhere in the world without a fee, or very low fees at least, but you could trace that payment along the chain. So imagine a foreign aid charity that makes grants or donations to overseas countries. No longer is there the risk of this money being spent on non-charitable purposes, as the payment can be traced right through to the end user and how the money has been applied.

People will also have more confidence when making payments due to the high level of security. As I mentioned before, it’s very secure due to it being almost impossible to hack. The other benefit is that only your “public address” is visible, almost like a username as such, rather than any personal information which protects against identity theft.

Whilst a lot of this seems a long way off and something that won’t affect you or your charity imminently, top economists and business people are predicting that Blockchain will change the way that people run their business on a day-to-day business.

I’m not saying go and change all of your processes now and fully adopt Blockchain instantly, as this probably isn’t feasible at the moment. But now, you all know it exists at very least and hopefully, you understand a bit more about it and potentially have some ideas of how in the future it will apply to your charity.

We have a specialist charity team who can advise on insolvency and restructuring matters. If you require support on this topic please do not hesitate to contact us here.

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