What is blockchain technology and what makes it special?
If two parties want to transact using technology as a platform, they typically both store a copy of the transaction on their system, but over time there is a risk that the system could become out of sync and that a transaction is registered on one platform but not on another. This leads to both parties spending time, money and effort on reconciling records.
So, you need an independent record system between the two parties. So far, that need has been fulfilled through intermediaries of various sorts. Blockchain technology allows you to have a shared record system – a distributed ledger – where there is no need for a central database or central party or intermediary, at least for that purpose.
The way the blockchain works is that each party holds a copy of the entire ledger for particular types of transactions. New transactions are entered onto the blockchain (by various parties), and distributed to the other parties. At regular intervals, the transactions that were recently sent are batched into a 'block', and there is a consensus mechanism whereby the parties agree that the block contains the correct set of transactions. The blocks are 'chained' together using cryptographic technology – forms of mathematical ‘proofs’ that provide high levels of security – ensuring that the integrity of the chain isn't compromised. Each party holds a copy of the transaction, but it is ‘glued’ (via these layers) to the consensus mechanism and stored in a chain that cannot be challenged at a later date.
Can you outline the main types of blockchain, permissioned and non-permissioned? What are the benefits of each?
Permissionless (or public) blockchains, put simply, are those that allow anyone to access a database of transactions, verify transactions or maintain a blockchain, and the database is distributed globally. They have an open community of users. Bitcoin has usually used permissionless blockchains, which make users anonymous and can be a problem for jurisdictions that require financial transaction processers to be identifiable.
Applied Blockchain focuses on finding application solutions for private commissioned blockchains. These are blockchains for which permission must be granted to certain approved market participants, and contain closed communities of users.
Does this pose regulatory issues?
Public, permissionless chains have a regulation problem in that you don’t know who the participants are and they don’t have to identify themselves. But on a private, permissioned network you could avoid that by closing the network to the wider public and using an ‘onboarding’ process. You would follow regulatory procedure to onboard participants. A feature called ‘out of the box’ on permissioned blockchains would allow the regulator to connect to the blockchain and instantly obtain a copy of everything that has transacted on that network, assuming they were permissioned to see it. This in itself could be somewhat revolutionary because it is getting more costly and more difficult to meet regulatory reporting requirements. Yet, here you would have a mechanism that opens one or more blockchains up to the regulator.
About the expert
Adi Ben-Ari is a technologist with more than 20 years' experience as an enterprise architect, designer, developer and development manager for blue-chip companies and, more recently, startups.
Ben-Ari gained financial services experience at Lloyd's Insurance Market and Lloyds Banking Group. He co-invented, designed, and registered a patent in the mobile payments space. He is passionate about start-ups and new technology, and in particular building innovative new applications using blockchain technology.How will blockchain technology change the wider payment landscape? What practical applications are there?
Remember, nothing has happened yet. Most of this is still at the proof of concept stage. But there are examples of companies creating real-world applications that will come into effect sooner than other types of technology.
Ripple was launched a couple of years ago to provide non-permissioned real-time gross settlement (RTGS) and recently released its Interledger Protocol to support moving money between ledgers.
UK-based institutional payment and settlement infrastructure SETL is focusing on central bank money and the UK RTGS systems, with a permissioned blockchain.
These are just two of the applications seeking to transform the payments landscape.
At Applied Blockhain, we are working on a project called Tally Sticks, which is an invoicing platform using the blockchain. All companies in the network can invoice each other and all invoice-related activities are recorded in a shared ledger. That is a real-world application that is going live soon.
How long will it take for blockchain technologies to be more fully infused in daily transactions?
For large financial institutions, it will take years. Even if individual banks were to do it on their own it would take years, but if all financial institutions are going to implement such technology together, it will take even longer. Just coming together on the same page, agreeing the scope of transactions, and deciding who would be in charge of what would take months. Having said that, there are start-ups creating infrastructure from the ground up to allow for larger banks to adopt this technology sooner, and potentially challenge the existing financial services providers. That is where it is going to get interesting.
How will the blockchain evolve over time? Is regulation evolving in tandem?
Activity will likely occur gradually and in pockets, perhaps by sector type, and regulation will have to evolve alongside it. Blockchain technology will have to be open so that it does not close off competition to financial institutions that have yet to take up the technology. Regulators continue to review the use of blockchains – the recent use of this technology by Nasdaq to support the first Bitcoin exchange-traded transaction in the US will help to accelerate matters.
Also, participants on the same blockchain will need to be able to communicate with each other on the network. As yet, blockchain technology does not fully allow for this. So there is some logical thinking required and there are key steps to be taken before the technology can be universally applied – all of which will take a long time.