Blockchain is Capable of Much More than Fintech Applications.
By: Marquis Allen
In the wake of the global upheaval being felt in financial markets from the mishandling, misappropriation, and outright theft of digital financial assets–called “cryptocurrencies”–on so-called “decentralized” finance exchanges like Terra, and most recently, FTX, it is critically important to decouple the association of blockchain technology from its use cases.
Cryptocurrency, specifically Bitcoin, was the first publicly accessible blockchain use case, but blockchain as an innovation is much more than cryptocurrency.
Blockchain > Crypto
In a recent NYT article, a columnist sardonically quipped, “Blockchains: What Are They Good For?”, while referring to blockchain and cryptocurrency interchangeably as if using two different words to describe the exact same concept. The columnist’s conclusion that cryptocurrency, and therefore, blockchain is good for nothing, is akin to presuming that the invention of the automobile is a failure because a driver got behind the wheel of one and caused an accident.
Conflating blockchain and cryptocurrency as being one and the same is a common mistake among non-technical laypeople, but the fact of the matter is while cryptocurrency exchanges are built using blockchain technology, blockchain is not used solely for financial products, financial instruments, or financial networks and exchanges.
The recent fiascoes in the crypto sector do not equal the failure of blockchain as a technology; rather, the failure of FTX and other cryptocurrency exchanges showcases poor business processes, lack of oversight and overt abuse. The utilization of any technology requires proper planning, implementation, and governance, and this is especially the case when applying automation tools to a convoluted, multi-step, check-and-balance-requiring process like financial asset creation, valuation, and transaction.
Here is a bit of blockchain history:
Blockchains were first invented by cryptologists Stuart Haber and W. Scott Stornetta in 1991 who imagined the technology as a way to timestamp digital documents to verify their authenticity. This capability is vital to certify when a document is created or modified.
17 years later, Satoshi Nakamoto authored a nine-page white paper using this foundational technology to describe a use case to create a “peer-to-peer electronic cash system” called Bitcoin. Two years after that, in 2010, the first real-world financial transaction involving Bitcoin took place.
At its core, a blockchain is simply a database that is maintained by a network of users and secured through cryptography. When new information is added to the database it is parceled in “blocks” which can be thought of as time-stamped containers for this data. Every so often a new block is created and linked to a chain of previously created blocks. Each block has a unique ID (called a “hash”) that is created by running the ID of the block that preceded it and the data stored in the current block through a cryptographic algorithm. This validates the integrity of all the data stored in the examined block as well as all other blocks on the blockchain because altering the data in any block would produce a different, unexpected hash result.
So, what IS blockchain good for?
Overall, the key advantage of blockchain is that it allows for secure and transparent record-keeping without the need for a central authority. This makes it well suited for use cases where trust is important such as supply chain, voting, sensitive records management such as in healthcare, and yes, finance.
Here are a few examples of useful blockchain innovation: data scientists are excited at the prospects of using blockchain to create tools for an individual to prove their identity in a “self-sovereign” way that does not require an intermediary to validate the person’s claim repeatedly (Sovrin is one of the global leaders of this usage).
Blockchain network verification and auditing capabilities also show great promise in accurately validating a person’s vote and ensuring that it is cast once, properly attributed to the caster, and counted accordingly (see how Voatz is leading the way with this use case).
And it can’t be understated that blockchain technology has been successfully used in supply chain management solutions by large corporations (see an example of how Walmart used it), pharmaceutical companies (Here is how Pfizer is working with the technology), and agricultural businesses (look at this product offering from BlockApps) to track the origin and condition of products created and distributed to consumer markets.
In each use case, blockchain also affords the capability for users to see if their data has been altered or tampered with in any way, and by using enhanced cryptography, any data element is extremely difficult to manipulate.
In conclusion, it is obvious that for blockchain to be valuable as a useful and safe data security innovation in fintech, blockchain innovators and adopters have a long way to go. However, it is important for us to consider that the combination of peer-to-peer networking with advanced data encryption and redundant, secure copies of information stored throughout the network (IE, blockchain) has great value in a host of examples where establishing trust between participants is critical.
As for the question, “Blockchains: What Are They Good For?”, the accurate response is, “Plenty when it comes to creating, sharing, and tracking data securely.”