What exactly is a blockchain?
Basically, a blockchain is a spreadsheet. But it has two unique features that make it a very special one:
1. Immutability and verifiability
Like a spreadsheet, a blockchain records data, which is fed into a datastore by either a human or a machine. The big difference is that you can’t change this spreadsheet. It’s only possible to add information to it – you cannot alter or delete anything. Any change is recorded as a visible addition to the datastore, making it immutable. Moreover, there are always multiple parties looking at the datastore. So if you decide to alter data in a blockchain datastore, your change is visible to and checked by every other participant.
The fact that no single party has authoritative control – the second aspect of a blockchain – has received much more attention. If, for example, eight insurers set up a blockchain, they will constantly see and check each other’s mutations. Should someone wish to mislead the network, they would have to get each participant on board to get it done – a difficult endeavor. This way, a blockchain helps prevent fraud.
Disintermediation is really a matter of trust: if all stakeholders can identify and agree on a single trusted party, it can administer all the information, and no blockchain is needed. In other cases, there is trust, but verification would be better. Here, a blockchain can offer a solution. If there is no trust at all, everybody administers their own spreadsheet, checking on everybody else’s actions. Bitcoin is the best known example of this most radical implementation of disintermediation.
But blockchain is not only useful to prevent fraud. Most unwanted changes are, in fact, human errors. For example, while nobody distrusts the Dutch cadaster, there is still a reason for storing its information in a blockchain: it helps detect and limit errors.
On the other hand, disintermediation is not always useful. It adds most value when there is no trusted intermediary available and setting one up is hard, or when a newly set up intermediary would not be trusted – which may be the case for banking in Africa, for example. However, it is important to realize that a blockchain only records information. A recent initiative heralded blockchain as the go-to solution for land registry in Brazil’s favelas: it would ensure that each inhabitant had a title to their land. But without any legal infrastructure to back it up, a piece of information is just that – and it will not put a halt to wealthy project developers’ bulldozers.
So when should you use blockchain?
Provided that the implementation of blockchain is cost efficient, immutability and verifiability are nearly always useful. Disintermediation is a more difficult matter, as notaries, banks, AirBnB, and other middlemen do a lot more than maintain spreadsheets. They perform background checks, provide payment infrastructure, and bring letters and potential renters together. Being a smart spreadsheet, a blockchain does not directly threaten to make such middlemen obsolete. It might, however, make them more cost efficient and less susceptible to unwanted manipulation.
Therefore, it is wise to consider the costs of data errors as well as the risk of data fraud: if both are high – which may be the case when administrating international money transfers, for example – there is probably a pretty good solution in place already. The added value of a blockchain will be limited to potential cost efficiencies. If both are low – in your company’s football pool, for example – it’s probably too much of a hassle, and you shouldn’t bother to set it up.
In the remaining cases, a blockchain might be of value. We’ll give you some examples below.
- Firstly, blockchain is very good at indicating when something happened, making it perfect for registering patent applications, for example.
- Secondly, it accurately captures the order in which information was generated, such as decision dates in board minutes or audit trails on financial transactions.
- Finally, you can use blockchain to keep track of changes made to important information that is shared between different parties. Instead of using ‘track changes’ and having the contract (re)checked by twenty different people twenty times, your intelligent spreadsheet guarantees that any change made is visible to all.
This article was written with the kind help of Sidney Richards.