With their dramatic rise, and subsequent fall, in value over the course of this year, cryptocurrencies like Bitcoin and Ethereum have sparked heated debate in 2018. Unlike conventional currencies that are reliant upon a central banking system, these virtual currencies use encryption tools to facilitate financial transactions directly between users in a decentralized manner over a network.
Although the broader investor community remains skeptical of the speculative nature of these new currencies, the architecture that underlies them, namely blockchain technology, has much more traction. Estimates put spending on blockchain at U.S. $2.1 billion in 2018, double of that in 2017, with the potential to reach U.S. $9.2 billion by 20211. As part of this, we have seen several blue-chip companies now heavily investing in the technology with a view to developing a far broader set of applications. This includes providing solutions to many of the environmental, social and governance (ESG) issues that companies face every day.
What is blockchain technology?
Having been invented over 10 years ago as part of Bitcoin’s development, blockchain technology is a method by which information is stored and shared between different parties.
In its simplest form, it can be best described as a “distributed ledger” technology. A “ledger” is essentially a list that gathers in one place a collection of transactions or records of information. “Distributed” means that this ledger is shared between a network of peers rather than stored in a central location and administered by a single authority.
Blockchain technology achieves this by creating a continuously growing list of records, called blocks, which are linked together in a sequence to create the ledger. Each block is linked to the previous block using cryptography in a form that is virtually impossible to decode, and can contain information such as a location or other attribute. This means that inside every block is a complete history of everything that has ever happened in the chain before it. This information is packaged through “hashing,” which is a cryptography technique that takes an input and turns it into a fixed-size alphanumeric string of characters.
Whenever someone on the network wishes to make an entry, or create a new block, the proposed transaction is broadcast to everyone on the network, which is then evaluated by network users running a complex algorithm (“proof of work”), or solving a mathematical puzzle, to check it is valid against a pre-set criteria that evolves as the ledger grows. This is needed because anyone on the network, whether they are known to be trustworthy or not, can attempt to add information into the blockchain, making it necessary for all new information to be reviewed and confirmed before being accepted. Consensus among users is then required and achieved by a majority of those on the network individually concluding that the proposed transaction is valid against some pre-set criteria. The block is then created, time-stamped and given a unique identifier. Finally, each user within the network is provided with an updated version of the ledger, complete with this latest transaction.
There are two main types of network in which blockchain systems operate. Cryptocurrency networks are public in nature, meaning that anyone can join the network and read the ledger, or use it to send transactions. Public networks typically allow users (but not transactions) to remain anonymous. Those on the network who are willing to contribute the processing power to build and verify blocks through the process previously described are rewarded through coins or tokens, such as Bitcoins, through an arrangement known as “mining.”
By comparison, private blockchain networks allow control over who can conduct transactions or access the ledger, and do not reward the processing of transactions through mining, but instead take on the cost of processing themselves.
