Saturday, 16 January 2016

#137 A review of... blockchain?

"By 2025, instead of burying their nuts in the ground, the squirrels will be encrypting them so cleverly that they can just leave them out in the open. They'll know exactly where they are, how many there are and nobody will be able to steal them."

To break down the word itself, we might start by thinking of blockchain as a chain of blocks. That's a good starting point.

Now imagine a chain of blocks of data. The data hasn't just been put into blocks, it's been encoded into blocks. Inside each block is four pieces of data: a transaction (eg. a banking payment where person A owes person B £10), a time stamp of when the transaction was created, a proof of work code (an intricate code used for validation of the legitimacy of the transaction and the way it was encoded or, if you like, a digital signature) and a reference to the previous block in the chain, because these blocks are chained up sequentially, just like invoices are numbered sequentially in general accounting.

So why go through the hassle of grouping transactions into these so-called "blocks" at all? Why not just have them in a traditional list or database? Well, the first thing to note about these blocks is that they are very cleverly referenced and encrypted. They're made by people called "miners", whose function is to create lots of intelligent codes using specialist hardware, running specialist software, all specifically designed to create the blocks. This means that the database is very difficult to hack or manipulate. So much so, that the transactions can exist, be traded and get authorised all within the blockchain itself. So you can forget printing out share certificates, signing them and mailing them to people. You can forget transaction receipts.

You can also forget having to own and take responsibility for the place where your securities are stored. A blockchain database is decentralised and saved on a network of computers that can be owned by more than one company. Any computer connected to the blockchain network is called a "node" but particular nodes, owned by the owners of the network, help with the validation of all transactions by downloading a copy of the entire blockchain, affirming it and relaying it onto other nodes. This creates consensus among participants around the accuracy of the blockchain.

Bitcoin, the virtual currency, built its entire ledger, all of its transactions, in this way. The miners that built the Bitcoin blocks were remunerated using Bitcoins. Now, regardless of the popularity of Bitcoin, it is being recognised that blockchain potentially has much wider applications. This is because it's so secure, easy to share securely, self-validating and entirely digital, which makes it efficient.

Last year, most large companies in the financial services industry began putting significant research into the possibility of using blockchain technology for their data and their clients' data.

Lloyd's of London held a seminar in November 2015 which included blockchain in a talk about its overall modernisation plan. UBS has been carrying out test runs of trading transactions on their own internal blockchain, to get to grips with the technology. Last year, HM Treasury announced its intention to regulate and fund research into digital currencies.

The technology is still in the research and development stage at the moment. Critics have expressed concern over limitations of processing capacity and power usage when it comes to the long-term scaling-up of something like the Bitcoin network but blockchain is being discussed and researched by enough of the right organisations to appear on "top ten predictions" lists for the next ten years. If you know someone who's naturally quite techy or futuristic, try and drop it into the conversation. They'll probably buy you a drink.

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