First, what is blockchain and how it differs from bitcoin?
Blockchain is the technology behind bitcoin, ether, and most other cryptocurrencies. Bitcoin is merely just one application of Blockchain and in this article we will explore the many other applications of blockchain.
Blockchain is essentially a way of keeping records and can be used in almost any product that uses some sort of record keeping or database management. Blockchain is great for protecting any data that needs to be tamper-resistant, and indestructible.
Traditionally, data is kept in a server which is owned and operated by a third party company. This has some disadvantages: A 3rd party has access to your data, it might be destructed, it might be tampered, and it might be leaked. Using blockchain, the data is encrypted and then spread in a distributed network of computers. This way, it is not owned by anyone, it cannot be destructed, and it cannot be tampered with.
A block of data is a permanently recorded set of data, such as a financial transaction. The data is first hashed, which is a way a representing the data in a compact format where it could be easily compared for any changes. Any small changes in the data completely changes the hashed version which makes comparison super easy. Then the hashed data is encrypted. A private key allows the producer of the data to encrypt the data and serves as a digital signature whereas a public key allows everybody else with the key to decrypt it.
Then the blocks of data are connected to each other (chained). The unique thing is that each block not only contains its own data, but also the hashed version of the data of the previous block in the chain. This means that changing data of a single block would break a chain and the tampering would become evident.
Imagine a hacker with high computing power who controls a critically high number of the nodes in the network. This way, the hacker is able to change the data in subsequent nodes and tamper the data. Blockchain has one extra layer of security which comes from the genius of its mythical inventor, Satoshi Nakamoto. For each new block to be added to the chain, it needs to be verified. This verification process is extremely computationally heavy and therefore the cost of taking over a large proportion of a blockchain outweighs any possible benefits.
What are some blockchain applications? What type of blockchain-based startups can exist?
Blockchain is still in its infancy and is going through a technology maturation period similar to many other technologies. We can compare this to the evolution of TCP/IP protocols into the World Wide Web, into static websites and then to Web Apps.
I will categorize the blockchain companies into infrastructural (I), application-level (A), and ecosystem level (E). There needs to be many infrastructure level companies who provide the backend and APIs to other companies who build applications based on blockchain. There will also be ecosystem level companies which will serve the companies in the blockchain industry (e.g. news outlets, consultancies, analytics software, etc).
Below I summarize the various types of companies which can be based on blockchain. Obviously, this is not an inclusive list, so please comment the other types of companies that you know or can think of.
I also made the use cases that I think are promising and most useful, Italic.
Financial Services — Consumer
- International Transfer (A)
- P2P Payments (A)
- Microfinance (A)
- Peer-lending (A)
- Investment (e.g. ICO) (A)
- Micro Charity (A)
- Escrows (A)
- Smart Contracts (programmable, self executing and self-enforcing contracts (A)
Financial Services — Enterprise
- Investment Bank Smart Contracts (fast transaction settlement) (A)
- Trades (connecting NASDAQ to Bank of America on blockchain) (I)
- Audits (A)
- Anti-money laundering (A)
- Underwriting and Know your Customer (A)
- Insurance (A)
Non-Financial Services — Government to Citizens
- Records Management (e.g. titles, deeds, etc.) (A)
- Identity Verification and Issuance (A)
- Transparent, low-cost Voting (A)
- Tax collection/disputes, etc (A)
- Government Transparency (A)
- Regulatory Oversight (A)
- Permits (e.g. Gun) (A)
- Smart Contracts (A)
- Wills/Trusts (A)
- Patents/Copyrights (A)
- Clinical Trial data integrity (A)
- Illegal fishing, etc (A)
Non-Financial Services — Enterprise
- Supply Chain Management (A)
- Health Care and medical record sharing (A)
- Media Distribution (A)
- E-commerce with no middleman (A)
- Sharing economy with no central authority(A)
- Authenticated News Sharing/Data Sharing (A)
- Collaboration between companies knowing who owns what (A)
- Data Sharing Between companies (A)
Non-Financial Services — Consumer
- Energy Management (Selling/Buying to/from grid P2P) (A)
- Authenticated certificates/grades/degrees (A)
- Secure Medical Records and Genome Records (A)
- Secure Accounting (A)
- Tracing valuable items such as diamonds, wines, brand clothing (A)
- Tracing sources of food ingredients, clothing, etc. (A)
- Smart Contracts (A)
- Digital Content Distribution (Articles, Music, etc) (A)
- Drug Tracing (A)
- Prediction marketplaces (A)
- Data Storage (I)
- Cyber Security (I)
- Database Management (I)
- Internet of Things Data Network (I)
- Blockchain Search (I)
- Distributed Computing (I)
- Bitcoin, Ether, Eris, etc (I)
- Blockchain News Outlets (E)
- Blockchain Analytics Software (E)
- Blockchain consultancies (E)
- Blockchain investment funds (E)
Generally I think a lot of the existing companies would adapt Blockchain and it is hard to differentiate and compete with an already existing company if the only differentiation is using blockchain.
Blockchain is mostly useful when it eliminates a third party whose main responsibility is maintaining trust (e.g. banks) and the most promising start-ups in blockchain would be in the infrastructure/API level so that other companies improve their already existing solutions based on these start-ups. Blockstack, BlockCypher, Brave, and BitMark are my favorite blockchain startups.
On the application level, companies who help businesses and consumers trace and authenticate a product and its source are the most valuable.
Do let me know in the comments what you think about these categories, and the other unique applications that you know about or can think of!