What is blockchain?
Blockchain: basic technical structure
Blockchain is a new way of conducting and recording financial transactions between parties. In a moment, we will look at why blockchain is considered a potential disruptor in the world of financial services and supply chains. First, though, let us describe the physical arrangement of a blockchain. Each participant in a blockchain has their computer (or ‘node’) linked to a network of other participants’ computers. Each computer contains a ‘ledger’, the digital equivalent of an accounts book, and each ledger holds a record of all the transactions that have occurred within this network of users. Transactions are compiled into ‘blocks’, and each new block gets added to the end of an existing chain of blocks, hence the ‘blockchain’. The arrangement contains cryptographic and security technologies, as well as an algorithm that enables a voting mechanism to determine which blocks get added to the chain. The precise technologies and algorithm can vary; there are already several different blockchains, although authors often refer to the blockchain.
Enabling peer-to-peer (P2P) transactions through disintermediation
Many industries rely on intermediaries between the buyer (or user) and seller. These include insurance, healthcare, financial services, transportation and logistics, and retail and real estate. For instance, if you use a bank card to make a purchase, then the card company imposes a charge on the vendor for their service. By contrast, blockchain allows people to make peer-to-peer (P2P) financial transactions without the involvement of intermediaries and the costs they impose. The removal of intermediaries is known as disintermediation. Proponents see this as the key advantage of the technology. Consider the simple act of purchasing a rail ticket with your bank card. The transaction is routed via the bank and they charge the rail company for enabling the transaction. A blockchain system has no central authority.
Security: Ensuring honest, valid transactions
The blockchain ensures only honest, valid transactions occur between participants. Because there is no central authority, transactions can only be added to the blockchain if they are approved by a consensus of users (not the actual human participants; this is an algorithmic process within the system) Whenever a transaction is proposed, it is circulated to all users in the network for a validity check. If its validity is agreed by a consensus of users, then users compete with each other to create a new block of valid transactions. The first person to create such a block is financially rewarded, and that block is then added to the blockchain.
The history of previous transactions established the ownership of property, whether tangible or digital. These records are available to everybody in the network. Although blockchain is often discussed in relation to financial services, the blockchain is in essence a data store. It is not at all restricted to the recording of financial information. There is considerable interest in using blockchain to improve transparency in supply chains. Some industries can have dozens of organisations in a supply chain, making it difficult for the final vendor and for customers to know everything that has occurred prior to a product reaching its market. For example, tests on honey have shown that some products have been adulterated (e.g. with sugar cane) before reaching supermarket shelves. Customers may also want assurance that the products they purchase were sourced or manufactured by organisations that meet acceptable quality, environmental and labour standards. In recent decades, there have been numerous controversies and concerns about products imported from countries that do not meet the levels of health and safety that would be expected in the UK. Examples include the manufacture of cheap high street fashion garments by Asian factories, and the mining of minerals by cheap labour, often children, in the Democratic Republic of Congo (a war zone).
Blockchain in Transport
In 2017, an organisation called Blockchain in Transport Alliance (BiTA) was created. It has nearly 500 members, “primarily from the freight, transportation, logistics, and associated industries”. They say:
Alliance members share a common mission of driving the adoption of emerging technology forward. We accomplish this by developing industry standards; educating members and others on blockchain applications/solutions and distributed ledger technology (DLT); and encouraging the use and adoption of new solutions.
The members listed at the BiTA website include American and Canadian railroad companies, but apparently none from other countries.
Elsewhere, a blockchain application is being developed to record subway invoices in the city of Shenzhen, in China. Similarly, in early 2019 the Head of the Pension Fund of the Russian Federation stated: “We are now preparing an agreement with Russian Railways on the use of the blockchain for determining transport benefits, in order to eliminate the facts of falsification and fraud. The agreement should be concluded this year, and the pilot will be held on the basis of the Moscow-Tver Railway”. There is evidence that blockchain is being taken seriously by several rail organisations outside of the UK.