Management of contracts and processing of payments.
Bitcoin and other cryptocurrencies are an example of blockchain technology applied to peer-to-peer payments. The technology can disrupt many other industries in a similar way. This article will introduce you to the properties of blockchain technology and show how the technology is already disrupting various industries all around the world.
Properties of blockchain technology
One of the main properties of blockchain technology is immutability of records. The breakthrough of the Bitcoin network was its ability to solve the problem of double spending and the issue of transaction finality. Double spending is when a party on a digital network is sending funds to several other parties at the same time pretending that only one party is getting the money. Transaction finality is what users of all payment systems ultimately care about: they want to know that when they receive or sent a payment, the payment is not going to reappear or disappear, that it is going to be final. This is what the Bitcoin network was able to accomplish by using a combination of tools and parameters such as network difficulty, cryptography hashes, and transaction confirmations.
Management of contracts
While Bitcoin is a purely financial blockchain network on which transaction data is all about funds being sent between users on the network, a blockchain network doesn’t have to be purely financial. The data about transactions can be about anything.
What matters is that blockchains enable parties that do not know each other and do not trust each other transact on a digital network without having to refer to a third party that they both trust. The network itself serves as such a party. On the Ethereum network, that has a Virtual Machine and smart contract functionality, this means that parties can create almost any type of contract and the network would monitor the state of contract, activate it and execute it according to the terms of the contract.
A blockchain network being such a party has several practical benefits. The first benefit is costs. In the past, people would have to hire lawyers and enforcement parties to monitor the execution of contracts.
For example, think about what happens when you buy a new piece of clothing or any other product. Essentially, you enter into a contract with the seller. You pay money and the seller provides you with a product. If the product is defective or if you are not happy, you can return or exchange the product. The more expensive or complex the product, the more it is likely that the contract is going to be complex. For example, you may get a three or a five year warranty for complex electronic equipment that describes how and when you will get service for the equipment. The reason you believe that you will get service and the seller will simply disappear with your money is because to open a store, the seller needs to go through a certification process such as getting a license from a city to open a retail location or proving to a merchant service that it will not disappear when it gets the funds. This certification is often complex and very expensive.
With blockchain, processes can be much simpler. For example, certification could happen on a blockchain network with a seller submitting proofs from other parties digitally and the network issuing a certificate is the party is meeting the necessary conditions. A smart contract on a blockchain network could execute an insurance contract, too.
if a network is running an insurance contract between a farmer and an insurance company, the network can monitor the weather conditions and trigger the execution of an insurance contract is the weather is too hot for too long, is there is no rain for an agreed number of days, is the weather is too cold, or any combination of similar conditions. A smart contract on a blockchain network could also monitor the temperature, humidity and state of goods in a cargo container and trigger an insurance claim if something happens to the cargo. Smart contracts could change multiple industries, including insurance, construction, real estate, entertainment, and many others.
Processing of payments
It may seem that payment processing already exists with Bitcoin and other financial networks, but the issue with payment processing is that most regular banks can’t use existing cryptocurrency networks because they have to comply with heavy regulations that countries have at federal, state and local level to protect the consumers. When sending funds out, a bank that has a license from the government can’t be sending them to an address on a decentralized network because the bank needs proof of liability. It currently can’t be sending money on a decentralized network that exists on its own. It may be able to do so technically, but not legally.
This doesn’t mean that blockchains couldn’t help banks send money faster and cheaper. Helping banks do so is what Ripple protocol is about. The protocol helps banks create networks on which all members are liable for their actions, yet the protocol still uses blockchain technology to facilitate transactions. Such a network is very different from a public blockchain network open to any party, but blockchain networks don’t have to always be public and open to anyone.
Today banks and governments spend a lot of time on audits and compliance because of trust and verification issues. To protect consumers, the governments need to know that the banks are complying with regulations and the only way to check the compliance is to perform audits. If a bank knew that it would never be audited, it would have no incentive to comply. The audit process is very expensive for both banks and governments.
With blockchains, transactions could go on a blockchain, meaning that they would become immutable and nobody would be able to tamper with the books. Because a blockchain network can be decentralized, the government could run several nodes (a node on a blockchain network is a computer with a full copy of a blockchain), meaning that it could access all the transactions at any time.
Then, there could be software that verifies compliance. Such software would work on auto-pilot and notify the authorities about mistakes and irregularities. Such a system would be cheaper to run, more effective, and easier to manage than many of the currently existing systems.