Independent Thinking^®

Connecting the Blocks: A Blockchain Primer

Blockchain is well named. At its core a specific type of database, a blockchain collects data together into groups, or “blocks,” which store digital information, such as financial transactions or asset ownership records. Imagine a series of these blocks. Each block has a specified storage capacity and, once full, is placed by a network computer next to the previously filled block by updating the openly viewable and editable record; it is only allowed to make this placement through network consensus. Now imagine those blocks linked together through cryptography, a computer-generated scrambling set to prevent alteration from outside parties. The result is an unbreakable (as far as we know) and irreversible list, or “chain,” crossing hitherto established silos and borders.
 
Bitcoin is the best-known application of blockchain technology: moving value online without the need for a trusted third party, such as a bank or payment network. But there is no end to other existing and potential applications. These include:

• Smart contracts, which execute objectively based on the piece of computer code written, for use in financial, government, legal or real estate transactions.
• Decentralized finance, or DeFI, transactions, replacing traditional banking and finance processes. Peer-to-peer lending and borrowing, and trading on cryptographic exchanges are good examples.
• Decentralized file storage networks, whether general, legal, medical or business-related.
• Advertising models in which users are paid (via tokens) for viewing ads and can elect to keep their own data (as opposed to those of Google, Facebook and the like that monetize user data).
• Stable value digital payment networks operating within existing social media platforms.
• Decentralized ride-sharing platforms.
• Supply chain information, for example in organic food and wine production.

We are all just beginning to appreciate the scale of potential blockchain application. It clearly can disrupt significant technology platforms and traditional business models in ways similar to the revolutionary changes brought by the internet. As with any new disruptive technology, some efforts will fail and others will reap outsized rewards. We expect blockchain to be an area of increasing investor focus.