Riding on the back of the Bitcoin failure, a quiet digital revolution of sorts is in the offing. Packed with the power to change conventional ways of doing business, Blockchain as a concept is being experimented and waiting to be harnessed globally. To fully appreciate the underlying possibilities, it is best to start with a representative as-is way of an electronic transaction.

Let us assume that an article ‘X’ is being bought off an e-commerce store. Once the product has been identified and a payment is triggered, the following sequence ensues:

  • The customer chooses the mode of payment and enters the requisite data.
  • The online store routes this transaction data to a payment gateway, which is typically an aggregator/intermediary of multiple banks and Card Payment Networks.
  • The aggregator/ intermediary may additionally be integrated with various banks/ financial institutions. The transaction data is sent by this intermediary for onward processing to the relevant bank.
  • The bank uses a mode of authentication (OTP etc.) to authorize debit of funds.
  • Upon successful debit, a return receipt is fired to the intermediary.
  • The intermediary re – routes the transaction success to the e-commerce Store or the merchant.

The above transaction has three major limitations:

  • Increased costs: The intermediary charges some fees which add to the overall cost of transaction.
  • The issue of trust: Whether or not the transaction goes through is singularly dependent on the last mile of authentication at the bank’s end. All the other systems partnered in the network have to rely on this single ‘node’. Which means that not only is the entire transaction reliant on the availability of uptime at this single node, but also concentrating risks of fraud at this single point.
  • System performance: Focusing the outcome of the transaction at one node, significantly impairs the performance of all connected devices on the network.

This is where Blockchain as a concept brings a paradigm shift. It empowers all the devices connected on the network. Formally speaking, “A blockchain is a ledger of records arranged in data batches called blocks that use cryptographic validation to link themselves together. Put simply, each block references and identifies the previous block by a hashing function, forming an unbroken chain, hence the name.”

To elucidate, every Blockchain ecosystem comprises three components:

  • A network of interconnected devices: With an upsurge in ‘smart’ devices there is already a plethora of avenues for transacting electronically.
  • A network protocol: Each device on the network functions as an independent node, maintaining individual data store for the ledger’s consistency. These communicate among each other using a protocol.
  • A consensus or validation mechanism: This is the most critical component. For any transaction on the network, a new digital fingerprint is created through certain hashing algorithms. This is validated not singularly by any agency but by all distributed devices on the network using some pre – defined mechanism. If the validation succeeds, a new block of data is created and added to the individual ledgers of all the devices in another link to the ‘chain’. These ledgers are almost like security log books – all synced and available with all the connected devices.

The ingenuity of the concept lies in that the ledger is not stored in a master location or managed by any particular body. Instead, it is said to be distributed, existing on multiple devices at the same time in such a way that anybody with an interest can maintain a copy of it. This ensures that all past transactions are validated and linked together in a ‘chain’. Any edit or tamper operation will create a new signature triggering a new block, for validation. Hence chances of fraud due to data manipulation are rather low.

The primary reason why Blockchain has been picking up steam in recent times, is how well it dovetails into the notion of Internet of Things (IoT). A conjunction of both these ideas presents a disruptive way of doing business. It does away with intermediaries and makes every transaction transparent to all participants. This is disruptive in that existing intermediaries may cease to exist or evolve into altogether new entities. It would open up possibilities on peer-to-peer transaction without a central authority.

Picture this: A product completes its final assembly on the floor shop and is checked into the inventory. As the SKU code and RFID/ NFC tags get assigned, a ‘chain’ is initiated for this device. The new ‘block’ is validated by all the systems and appended into the ledgers. This means that even the final retailer system has knowledge of this product long before it ships. Now as this product ships downstream along its supply chain, at every interface it has with a connected device, a new block keeps getting added to the chain. By the time it reaches the seller’s warehouse, the seller system already has a full trail of where and what it has been through. Even without any data having had to be entered manually!

This magic can continue even after it is paid for and moves into the customer’s home at which point the chain would extend into the warranty data space. Now whether one would want to have such hidden ‘chains’ lurking within ones home is a thought for another day. Or another Facebook status perhaps!