Let’s get one thing straight right away: Blockchain does not equal Bitcoin, as many might assume. Blockchain is a crypto technology. Bitcoin, on the other hand, is a cryptocurrency. Bitcoin and Co. have turned the financial world upside down in the last decade, even in Switzerland. But the secret star in the cryptocurrency hype is the blockchain. Its technology is what makes cryptocurrency transactions possible in the first place.
Liquid markets are emerging
And not only that. Are you an investor? Then the blockchain will also bring tokenized art (beware of risks), classic cars and luxury real estate to your custody account – so-called “non-bankable assets” via tokenization. Dr. Nils Bulling, PhD computer scientist, book author and Head of Digital Strategy & Innovation at Avaloq says about the blockchain potential: “Thanks to blockchain technology, it is possible to offer nBAs in the form of tokenized assets. This lowers such barriers to entry as minimum investment, and creates liquid markets for these assets.”
Blockchain: What is it actually?
A blockchain is a decentralized database. A large number of participants can share it. Thanks to the special structure of the database, the most diverse types of digital transactions can be mapped, as follows:
- Data, information and documents are transferred between parties in a fully automatic and forgery-proof manner
- And it does so directly, without an intermediary entity
- There is no central control entity. All participants in the blockchain network are in control
- The blockchain is, so to speak, a completely democratic system – and completely transparent: all information is available to everyone at all times
“There are literally no limits,” says financial expert and blockchain specialist Professor Andreas Park of the University of Toronto. The emergence of non-fungible tokens (NFTs) could change the way we think about property and ownership, he adds. And in the same way that the Internet has changed the way we look at communication and commerce.
How does the blockchain work?
In principle, the blockchain is a tamper-proof directory updated in real time. This is stored on many different computers and servers. Several steps are required to keep the servers all up to date at all times:
A party starts a process with a transaction. In doing so, it exchanges information with another party: for example, a document or an instruction to transfer money. This entails other transactions.
Computers on the blockchain network verify that parties are authorized to transact.
- Block creation
The records that accrue are collected into a block of data and encrypted.
The system validates the information and then generates the data block for the chain. This is usually done via a “proof of work”. This is provided by so-called “miners”. They are paid for their work.
When the block is validated, all computers in the network receive a copy and attach it to the blockchain.
Various forms of application
Originally, blockchain technology was only about cryptocurrency transactions. However, there are now potential applications in almost every sector – from finance and insurance to the energy sector and Industry 4.0 to supply chain management. The blockchain can represent the most diverse types of data information:
- Digital property, e.g., tokenized cars or art in the context of tokenization
- Non fungible tokens, tokens that cannot be exchanged, such as shares in art
- Logistical processes
- Patient records
- Environmental management processes
- Land records
- Documentation of electricity volumes in the grid
With its decentralized structure, the Blockchain also offers room for innovative solutions in the non-profit sector: in charitable projects or to achieve climate and sustainability goals. For example, there are even tokenized trees that can be purchased to save forests.
FAQ – Frequently Asked Questions
The blockchain is completely transparent and consistent, safe from manipulation, fast and cost-effective. And: there are very many potential applications. This is because the blockchain can map a wide variety of transactions. Moreover, it does not require a large infrastructure.
The encryption mechanisms make the blockchain secure. However, they also demand enormous computing power. This leads to high energy consumption. The blockchain also needs fast network access. And the huge amounts of data eventually push the storage capacity of the servers to their limits.
Yes, if you want to buy auto tokens or cryptocurrencies, for example. But ultimately, cryptocurrencies and blockchains benefit everyone who wants secure transactions: consumers, retailers, suppliers. Often unknowingly, because crypto applications run in the background. Crypto technology is new. The future will tell if and to what extent it catches on.
Where does the name “blockchain” come from?
The blockchain, as its name suggests, is a chain of data blocks. In each one, data records are collected that arise in connection with digital transactions: when money or assets are transferred, when a contract is concluded, or when digital documents are transferred. The data blocks are strung together chronologically and linked to form a continuously growing “blockchain”. This stores each transaction exactly once in the data chain.
Why is blockchain considered secure?
Two things make the blockchain secure: cryptography and consensus. Everything is encrypted. Nothing happens until everyone agrees. The blockchain uses a special encryption technique. The principle here: equations are placed between the blocks. These can be solved forwards, but not – or only with extreme difficulty – backwards. In addition, the information in the blockchain is not stored on a single server. It is scattered across a network of thousands of computers. And: There is a built-in consensus mechanism, the so-called “Proof of Work”. This ensures that participants in the blockchain validate all new transactions. Only then does the system add them to the network. This makes it virtually impossible to manipulate transaction data.
What are miners and proof of workThe Blockchain explained in 100 words - by Richard Bradley, partner at Deloitte Switzerland, in the blog: "You (a "node") have a file of transactions on your computer (a "ledger"). Two government accountants (let's call them "miners") have the same file on their computer (so it is "distributed"). When you execute a transaction, your computer sends an email to both accountants to inform them. Each accountant hurries to be the first to check if you can afford it (and to get paid their salary in "bitcoins"). The first one to check and confirm clicks on "ANSWER ALL" and attaches his considerations for verifying the transaction ("Proof of Work"). If the other accountant agrees, everyone updates their file."
Is it the technology of the future?
At the same time, the advantages of blockchain also expose its second major weakness (in addition to high energy consumption): limited scalability. Walter Dettling, Professor of Business Informatics and Mathematics at the FHNW, says about this in an interview in Netzwoche: “You can’t make an infinite amount of data simultaneously available online in a decentralized and fast tamper-proof way. That’s where all blockchain applications have failed so far. They require existing business processes to be digitally mapped in the usual way. As a result, they generate data structures and volumes that no blockchain can process fast enough.”
Nevertheless, blockchain has great potential – digital strategist Dr. Nils Bulling is convinced of this: “Blockchain is currently one of the most prominent technological developments worldwide and is unfolding a dynamic that will continue to accelerate. In fact, more and more real-world applications can be found in a number of industries, first and foremost in the financial sector. For the financial and especially the wealth management industry, now is the time to embrace the technology.”