What is blockchain, beside cryptocurrencies?

When you think of blockchain, you probably imagine a cryptocurrency like Bitcoin. And yes, cryptocurrencies are a large part of blockchain technology (we talked about that here). 

But blockchains are not exclusive to the crypto world. In fact, some of the most exciting applications of blockchains have nothing to do with Bitcoin or any other cryptocurrency. Let's discover some of them together.

First, a quick primer for those who are not properly versed in the subject. A blockchain is a system in which information is recorded so that it becomes difficult or impossible to change, hack or cheat the system. When it comes to crypto, the blockchain essentially acts as a ledger of transactions that gets duplicated and distributed across the entire network of computer systems on the blockchain. The blockchain leverages the characteristics of a computer network of nodes and allows a ledger containing data and information to be managed and updated in an open, shared, safe and distributed manner without the need for a centralized control and verification entity.

‍

Smart Contracts

‍

Smart contracts are one of the most promising applications of blockchain technology. These contracts are basically computer programs that can oversee all aspects of an agreement between parties, from facilitation to execution. 

In a smart contract, two parties – this can be people or companies – have to agree on the conditions, following the simple rule "if X happens, then Y happens". If the conditions have been met and verified, a network of computers performs the required actions, which can include exchange of money, shares, etc. When the transaction is completed, the blockchain is updated. At this point, the transaction can’t be changed, and only parties who have been granted permission can see the results. 

Let's say you booked your summer holidays after months of corona isolation. Following almost two years of cancelled flights, you don't fully trust the aviation system, so you decide to get travel insurance. Your travel insurance is your smart contract, and it's linked to the database that records flights' statuses. In your travel insurance, one of the conditions states that if your flight is delayed more than 2 hours, you will get automatic compensation. As it turns out, your flight is actually delayed 3 hours. But hey, guess what? Thanks to blockchain technology, the contract will be self-executed, and you’ll automatically receive compensation without the hassle of chasing your insurance broker. And you’ll be able to treat yourself with some extra money during your vacation, which doesn’t hurt. 

If all conditions are met, these types of contracts can go as far as being wholly self-sufficient and self-enforcing. For advocates of smart contracts, they can provide a secure and more automated alternative to traditional contract law, together with faster and cheaper enforcement compared to conventional methods.

The potential applications of smart contract technology are basically limitless and could be extended to almost any field of business where contract law is usually applied. Of course, while highly publicized, smart contracts aren’t a magic substitute for old-school diligence. In fact, the Decentralized Autonomous Organization (DAO) case has been something of a warning for investors. 

Still, smart contracts are seen as one of the most interesting ways blockchain technology can extend beyond the cryptocurrency space.

‍

Supply Chains

‍

Many companies depend on having robust supply chains – processes and methods to get physical things from suppliers, through the company and to customers. Blockchain technology has already been used in the past as a tool to keep supply chains under control and efficient. 

For example, since there is an immutable and public record of every transaction, it is possible to trace a crop back to the farm where it was grown. If you take a recycled item, you can use blockchain technology to find out what it was before it was recycled, and even when it was picked up by garbage collectors. 

In a world where being environmentally friendly is becoming increasingly important, resource tracking can help us know more about the things we consume. In opaque supply chains, it's not easy to tell if the t-shirt you are wearing was produced using unethical labour practices or if the orange juice you are drinking is organically made.

Identity management

‍

The whole point of blockchains is that it’s very hard for someone to fake an entry on them. So when you’re trying to figure out, for example, if someone is who they truly say they are, the blockchain can offer a place to store information that can’t be faked. ‍

Because blockchains are made up of many different nodes – computers, basically – and each of those nodes can verify the chain on its own, the information on the chain is secure.

With cryptocurrencies, this type of verification is used to approve blocks of transactions before they are added to the chain. But this mechanism can just as easily be applied to other verification procedures, including identity verification. 

Let’s say you’re trying to open a bank account. Traditionally, you would have to bring along multiple documents to prove who you are. But what if you have a space on the blockchain that everyone can see and only you can access – this is where the private key and public key of blockchains come in. (If you want to know more about how those work, read our primer here). Everyone can see that this one block is the one that contains your proof of identity. But only you have the private key to open it. Your bank could ask you to put in a specific string of text into your identity block, which they know only you can do. That way, you can skip the documents and complete the verification process in seconds. 

So, blockchain technology has uses that extend way beyond just cryptocurrencies. Though the technology itself won’t really have an impact on your crypto investments, the companies that are working with these technologies might change how we work, travel and make agreements with each other. Whether you invest in crypto or not, it might be worth keeping an eye on this fast-developing sector. 

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.