The blockchain is a security system that could prove to be the saviour of the Internet of Things, but what is it and how does it work?

What is blockchain?

A blockchain is a system of recording transactions. Trades are recorded on a ledger. There are thousands or millions of copies of this ledger, each owned by a market participant. Every new transaction is updated simultaneously across all ledgers. The ledger is an open book, easily viewable, ensuring complete transparency in the market.

Why is it useful?

The vast number of copies of the blockchain make it almost impossible to commit fraud. To do so would require taking control of a majority of the copies. By contrast, traditional methods record transactions on a single ledger, which can be altered by the owner.

Furthermore, a ‘hash’ technology melds blocks of transactions together, making it extremely hard to alter the historical record. As the ledger is open, any dispute can be investigated by multiple parties, giving the platform a high degree of transparency.

Anything else?

Yes. Blockchain is fast, paperless and cheap to use.

How is it used at the moment?

Blockchain is the technology underpinning bitcoin. Unlike traditional currencies that rely on a central bank to issue new currency and regulate fraud, bitcoin is decentralised with no regulator. All bitcoin transactions are entered into the blockchain, which currently stands at more than 60GB in size and is growing exponentially.

Currently there are 116 million transactions each day, and every single one is recorded on the blockchain.

Is it exciting?

“You should be taking this technology as seriously as you should have been taking the development of the internet in the early 1990s,” says blockchain entrepreneur Blythe Masters. “It’s analogous to email for money.”

Why the hyperbole?

Blockchain has so far been used for digital currencies such as bitcoin. That will change. Any type of transaction from real estate to music files can be revolutionised by blockchain. And there is the potential to use it to address some of the security risks of the Internet of Things.

The Bank of England held a contest last year for students to make society better using the blockchain. The winning team from the University of Edinburgh developed a system for tracking blood in the NHS.

The University of Nicosia is using blockchain to verify certificates for its crypto-currencies course. The course founders said: “Even if the University of Nicosia and its website were to disappear, so long as the validated hash still exists as a public record, people can […] authenticate any certificate.”

In December the Nasdaq stock exchange announced the first issuance of shares to a private investor using blockchain. This cut settlement time and removed the need for paper certificates.

Nasdaq CEO Bob Greifeld said: “Through this initial application of blockchain technology, we begin a process that could revolutionise the core of capital markets, infrastructure systems. The implications for settlement and outdated administrative functions are profound.”

Which companies will dominate?

There are at least 220 blockchain start-ups Blythe Master’s Digital Assets Holding recently raised $52 million to fulfil a contract with the Australian stock market to build a new trading system based on blockchain.

R3 is backed by 42 banks, including Goldman Sachs and UBS. It has completed trials with 11 members to simulate financial transactions across the network, proving blockchain could replace traditional clearing-house technologies.

Blockstream is a noted leader in bitcoin blockchain, having raised $55 million in February to make it easier for companies to deploy the currency.

What’s next?

Watch out for esoteric uses of blockchain. The Estonian stock market is trialling shareholder voting using the technology. The Property Institute of Honduras is looking at a land-based registry. Insurance, concert tickets and voting are being reinvented by blockchain entrepreneurs.

Image (CC): BTCkeychain/Flickr