Is blockchain the solution for government inefficiency, particularly in financial transfers?
An annoying issue, which tends to plague internationals in foreign countries, is the fees that are imposed with the international transfer of funds. Western Union charges a massive fee of about 10% and takes 4-7 days to complete an international transaction.
Even the approval of these transactions is dictated by such central systems with few to question their judgement. Consequently, we place all our trust in them to store and transport our money safely. But, why should we?
In an era when individual rights and freedoms are not being compromised, why should we let powerful, centralized financial dictators define our monetary exchanges? Financial Institutions are so powerful that they even decide who takes part in the economic/financial system based on affordance of bank accounts because of which a huge number of people in underdeveloped nations are excluded from the global economy. This hinders our progress towards an equal, just and globalized economy.
Hence, we are in dire need of a decentralized economy where there are few barriers to participation and where everyone can be treated equally; this problem may not only be restricted to finances and can have consequences in other industries as well. Fortunately, Blockchain technology offers a universal, decentralized and cryptographically secure platform to overcome the tyranny of centralized institutions.
One of the most popular and successful applications of Blockchain has been with digital currencies, especially Bitcoin. With humble origins and beset by lack of trust for a long time, today, Bitcoin is gradually integrating itself into our lives (you can even buy coffee at Starbucks with it) and threatens to change the dynamic of our financial exchanges.
Bitcoin, powered by Blockchain, has solved the century-long problem of double spending by preventing users from using the same unit of currency more than once in order to gain an unfair advantage. This was a problem that had previously stumped pioneers of digital currencies. With centralized systems, there exists a trusted third party which verifies transactions and thwarts any attempts to double spend, but in a decentralized system such as the Bitcoin Blockchain, each participant has a ledger of all transactions being made; everyone surveys this ledger and casts a vote on whether a transaction is valid or not.
If there is agreement among a majority of users, the transaction is accepted by the community and added to the list of all valid transactions ever made, linked to each other, in the form of (block)chain. But a determined attacker could perform a Sybil attack by creating many fake nodes on the system and use them to get a majority vote on the validity of his/her fraudulent transactions. However, Bitcoin, and a few other Blockchain powered technologies, overcome this issue with the help of Proof of Work (POW). In order to verify a transaction, instead of receiving majority vote, a user needs to solve a hard, cryptographic hash problem to show he/she has done enough work to get a solution to the hash puzzle; this process is called mining.
Once a user finds a solution to the puzzle, he/she broadcasts the solution to the network where everyone verifies the solution is accurate after which the transaction is added to the list of verified transactions. These solutions are normally found every 10 minutes and thus make the validation of transactions much faster. Users who succeed in finding a solution receive a certain amount of bitcoin as a reward. This incentivizes users to invest in hardware to boost computational power to help solve the hash puzzle; interestingly, some mining companies have more computational power than Tech Giants like Google itself. This reward of cryptocurrency is also interestingly the reason why attackers are discouraged from attempting to take over the network by gaining 51% (majority) of the computational power in the network.
A successful attack would reduce people’s trust in Bitcoin, causing its exchange rates to crash and since gaining that 51% of the computational power of the network includes making enormous investments into mining hardware, overall, an attacker would incur huge losses due to the crash of Bitcoin. This way, Blockchain is maintained securely with no attacks despite there being no central supervision. There are many open-source platforms, such as Ethereum and Hyperledger, which enable developers to build their own decentralized Blockchain systems and while it is possible to find and exploit a bug in these systems, as in the case of Mt. Gox, it is statistically impossible to hack the underlying blockchain technology itself. Hence, any reference to blockchain or bitcoin being hacked refers to an attack on the platform provider’s systems and not the blockchain system itself.
Blockchain can be applied to a lot more use cases than just cryptocurrencies such as supply chains and provenance. A key point to keep in mind though, is that, despite offering several advantages, Blockchain tech is resource intensive and needs to be used with wise discretion; it may not always make things better and more efficient. For this reason, it is important for Developers to understand the technology inside-out to scrutinize use-cases for Blockchain tech and analyze where it may actually have value.
Blockchain is revolutionary, but it is restrictive in terms of net gain. Therefore, it is of paramount importance to build business models prior to development and weigh the pros and cons of a blockchain-powered solution in comparison with an optimized centralized solution to ensure the blockchain solution adds value. In most cases, the primary features that Blockchain provides are decentralization, an environment lacking in trust, top-notch security and faster settlement, all with minimal extra fees. Overall, Blockchain is a niche and growing technology which is sure to revolutionize several industries in the foreseeable future and it would be a mistake to ignore its potential.