What is Blockchain Technology and Why Does it Matter?
In Nicolet’s IT-Web Software Development program, students will learn the foundational skills necessary to become a software developer. The program now includes a special focus on the new and exciting world of blockchain technology. Students will learn what a blockchain is, what a blockchain does, the technologies and philosophies built on blockchains such as, cryptocurrency, decentralized finance (DeFi), smart contracts, and non-fungible tokens (NFT).
The future of blockchain technology is expected to expand from $4.9 billion to $67.9 billion by the year 2026, according to the blockchain Training Alliance website. https://blockchaintrainingalliance.com/blogs/news/blockchain-career-job-outlook-in-2022
But what is Blockchain and why does it matter? Let’s start with some definitions:
Blockchain: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. (https://www.ibm.com/topics/what-is-blockchain)
Smart Contracts: Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without any intermediary’s involvement or time loss. They can also automate a workflow, triggering the next action when conditions are met. (https://www.ibm.com/topics/smart-contracts)
With those definitions out of the way, let’s look at an insurance industry example. Suppose you are a farmer who is seeking crop insurance, an insurance to protect one against the financial losses associated with the loss of a crop. In this example, the farmer is particularly worried about drought destroying their crop this year since it is forecasted to be a particularly dry growing season.
Insurance Company A has a crop insurance product to protect against the losses associated with a drought. They do business as usual. You get a quote based on the value of your crop and if the growing season is too dry and all or part of your crop is destroyed, you call and file a claim. Then, the insurance company, utilizing their customer service reps, claim adjusters, actuaries, and attorneys make a determination based on their investigation how much you get reimbursed for your loss. Pretty standard stuff.
Insurance Company B, on the other hand, has decided to leverage smart contracts on the blockchain to handle their insurance contracts. In other words, their contract is hard-coded and immutable, meaning it can’t be changed, to execute automatically based on a set of conditions. For example:
If rain is less than or equal to X inches over X time period in X location
Then pay X dollars to insured farmer
In the event that the rain is greater than X inches, then the drought conditions did not occur and no loss reimbursement triggers. Certainly, conditions could get significantly more complex than this depending on the circumstances, but this simple example illustrates the power of the technology.
It certainly seems like one could trust Insurance Company B more. Why? Because you reduce the need for it. Humans, profit centers, aren’t making a determination on your claim. The terms of your agreement with the insurance company are hard-coded and transparent. If a condition is met, the coverage triggers, if it is not met, it doesn’t.
We don’t eliminate the need for trust with Insurance Company B, we just drastically reduce it. Presumably, Insurance Company B would be the ones who authored the crop coverage smart contract in this example, so we would have to ensure that the smart contract itself is sound. Generally, in the world of smart contracts, companies get their contracts audited by third parties for this exact reason; to reassure potential customers that the contract is legit.
So why would Insurance Company B do business this way? It certainly seems like they have the potential of paying out a greater number of claims if coverage is automatically triggered. Simple, profit. By doing business this way, Insurance Company B can drastically cut down their staff and likely precipitously increase their sales. They recognized the naturally adversarial relationship that exists between the parties and they took advantage of technology to overcome it. Entities that embrace the idea of reducing the trust needed to complete any sort of transaction will have a higher likelihood of thriving. This is the future.
The potential far reaching impact of blockchain technology cannot be overstated. There are so many industries and applications that the technology could help to improve.
Uh oh! A bacteria was found in a spinach crop that was sold at the grocery store, thankfully our transparent digital ledger can trace back to exactly where that crop came from, when it was harvested, how and where it was transported, packaged, etc. so we can get it off the shelves and reduce the harm it may have caused.
Whoops! I lost the keys to my car! No problem! We have a digital NFT (non-fungible token) that is associated with you and your vehicle that will allow you to access it.
I’m worried that the financial institution that I use may go out of business or cut off access to my funds! With DeFi (decentralized finance) the need for third party intermediaries goes away so you and only you have access to your funds.
We are still in the early stages of blockchain technology, but development is moving quickly. As you read this, blockchain pioneers are coming up with crazy, innovative ideas to try and change the world leveraging a world-changing technology. As they say, necessity is the mother of invention. Contextual conditions and attitudes toward institutions are such that it felt necessary to invent an alternative transactional system. Not just monetary transactions either, but all kinds of transactions that we experience in our daily lives. If you want your organization to thrive, you should take advantage of blockchain technology.