The Application of Blockchain Technology Beyond the Financial Services Industry

[About the author: Dawit Meskel is an IT architect. He was a student on the City, University of London Writing for Business short course in Oct-Dec 2018, and wrote this blog as part of a homework/in-class exercise on that course.]

Blockchain is a hot topic particularly in financial services as a disruptive technology, but will it fade away in the near future or revolutionise the sector, as seen by many who compare it to the internet age?

Blockchain technology has been around for a while now, nearly ten years, and the technology continues to mature at a phenomenal pace. The disruptive nature of blockchain has been recognised in the financial sector for some time; its first significant application is bitcoin, a crypto-currency that is not issued or backed by a central bank, but rather by consensus among a network of users described as ‘miners’.

Bitcoin was created as a medium of exchange to replace money, but blockchain is also making a substantial impact on other industries as we mature into a new digital age. The uses of the technology are now growing at a faster rate than anyone could imagine. Here are some examples which illustrate the possible use of blockchain technology in different industries:

  • Identity management to securely manage identity for persons and devices;
  • 2nd generation blockchains allow programs called smart contracts to run on the blockchain, enabling automated contractual agreement between persons or devices;
  • Documenting, tracking and verifying the authenticity of goods as they move through the supply chain industry.

These examples are the tip of the iceberg for what this technology is going to achieve in the coming years.

So, what is blockchain?

Blockchain technology is a distributed ledger that maintains data, sequentially ordered, which is sometimes referred to as Distributed Ledger Technology (DLT). Data kept on the blockchain is maintained in an encrypted form. The participants and their encrypted signatures are recorded and verified through a consensus algorithm. A set of transactions are verified by miners and encrypted to be included in a block. The block is linked to a previous set of transactions to form a chain, hence the term blockchain. In addition to verifying a set of transactions, miners also solve a complex mathematical problem and include it in the block to secure the blockchain. Miners are rewarded a set amount for securing and maintaining the blockchain.

Building a blockchain

The blockchain is then distributed to all parties associated with the network. Once a transaction is recorded on a blockchain, it cannot be changed or cancelled which make the technology both accurate and secure. This is why it is becoming an accessible technology, providing a robust audit trail where the authenticity and validity of transactions can be verified reliably.

These are some of the benefits of blockchain:

  • It is distributed, so will work as a shared system of record keeping among participants on a network, eliminating the need for a centralised gatekeeper;
  • A permission-less or a permissioned ledger can be created as needed;
  • It’s highly secure: data cannot be changed without other participants being alerted.

Identity management

In today’s digital age, identity fraud has risen exponentially due to the process of online transactions requiring users to disclose personal details before they even log in to use online systems such as like internet banking, Amazon Pay, Apple Pay, Paypal or Google Pay. Hence, every time a user reveals information, it gets stored in many online systems. Users become a digital clone of data across the internet on different platforms. This process exposes a lot of security concerns online. In recent years a growing number of significant data breaches on the internet have been revealed, indicating that the way in which we do business online has to change.

This problem can be solved by blockchain, creating a platform that protects identities from theft and massively reduces fraudulent activities. The technology can also help build strong blockchains that handle the issues of authentication and reconciliation for online transactions. Furthermore, individuals can create encrypted digital identities that will replace multiple usernames and passwords while offering more comprehensive security features, capable of saving customers and institutions valuable time and resources.

Smart contracts

The application of smart contracts on a blockchain allows for the immutable encoding of rules and procedures related to specific transactions to standardise activities; these standalone programs, once started, automatically execute predefined conditions encoded within the blockchain, working like any conditional (“if-then”) statement. Once the condition gets satisfied, the consequence is similar to the running of a program. For example, with a smart contract, it is possible to create an automated and transparent insurance system that compensates insured passengers after the cancellation of their flight, which does not need any form of human intervention to process the transactions. So blockchain offers autonomy and valuable time and resources, along with the security and transparency that are usually provided by trusted third parties such as notaries and financial intermediaries.

Supply chain industry

The use of counterfeit diamonds and unethically mined stones poses real hurdles to the mining industry. With blockchain the solution is to maintain a record of high-resolution photos for each diamond at every touch point along its journey on the blockchain. Furthermore, by tracking in real-time all records of every payment transaction for each diamond on the blockchain – and by maintaining a certificate of authenticity for each diamond – fraud in the mining industry should be significantly reduced. I also believe the same issues exist in the pharmaceutical industry, where blockchain technology can be applied to track and maintain the quality of the drug products going through its supply chain. Consumers or suppliers could trace every characteristic of every component of the drug or medicine all the way through its life cycle.

Conclusion

With the increased use of the new technology, blockchain is moving at increasing speed, but it is hard to know exactly how it is going to be adopted across different businesses. The industries described earlier give some ideas on how the technology is shaping different sectors. I believe that in the end blockchain is going to do for business what the internet did for communication: disrupting and revolutionising how we do business online in the new digital economy.
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Glossary

Bitcoin: Cryptocurrency created using blockchain technology. Bitcoin is a crypto currency, a form of electronic cash. It is a decentralized digital currency without a central bank or single administrator that can be sent from user-to-user on the peer-to-peer bitcoin network without the need for intermediaries, Bitcoin was invented by an unknown person or group of people using the name Satoshi Nakamoto and released as open-source software in 2009.

Distributed Ledger Technology: A consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. There is no central administrator or centralized data storage.

References

Schatsky, D. and C. Muraskin, “Beyond Bitcoin, Blockchain is Coming to Disrupt Your Industry”, Deloitte Insight, 7 December 2015
Swan, M; “Blockchain: Blueprint for New Economy”, O’Reilly Media, USA, 2015
Pinto, R: “Blockchain Technology Decoded”, 4th January 2018
Wikipedia, Bitcoin
Wikipedia, Distributed Ledger