Fad or Future: An Introduction to Blockchain Technology1 September 21, 2015 at 9:43 am by Catherine Smola
Since 2009, Bitcoin has been a reliable source of headlines and controversy – and it’s easy to see why. The digital currency (or cryptocurrency) is both entirely unregulated and incredibly powerful, making it possible for businesses and individuals around the world to exchange money as easily and freely as they do text messages or emails. Bitcoin’s staunchest advocates see a future in which the global economy has been revolutionized, with central banks made obsolete.
Clearly, that future has not come to fruition as yet. In fact, for all of the promise Bitcoin holds as a standardized currency for global use, the cryptocurrency community is alive with innovation and development of alternate, competing currencies. Auracoin, BlackCoin and Bitcoin XT have all sprung up since Bitcoin first made waves, and the pace of innovation and development among independent programmers shows no signs of slowing.
However, as Greg Maciag of ACORD noted recently, the real story behind cryptocurrency may not be its potential to replace money as we know it, but instead the underlying technology that makes Bitcoin and its competitors possible in the first place. That technology’s name is blockchain, and its implications reach far beyond the money in your soon-to-be digital wallet.
What Is Blockchain?
Blockchain technology is a way to store data for a given application – Bitcoin being one example. When Bitcoin began, it consisted of a single block, or unit, of data. When the first financial transaction occurred, a second block of data was added onto the original block. Each additional transaction is recorded as a new block of data, added in sequence to those that came before. In this way, Bitcoin’s blockchain is like a skyscraper that never stops growing, with each floor representing the record of the next transaction or group of transactions in sequence.
So where does the revolutionary potential lie? How can blockchain technology match the authority of a bank, and why would anyone trust it as a record of their financial transactions?
Because the blockchain itself is shared, in full, with every participant in the network. No new block is accepted as part of the chain until it has been vetted and verified by the individuals who make up the network. In this way, the determination of data authority becomes decentralized and security is a shared responsibility. While it is technically possible to hack the blockchain and convince the network to accept a false data block, it would take such a tremendous amount of computing power that doing so is widely regarded as impossible. As of this writing, the Bitcoin application of blockchain technology has proven resistant to direct cyber attacks, though individual users have been successfully targeted. A recent Lloyd’s report details several security concerns that might give even the most enthusiastic supporter pause.
Why Focus On Blockchain?
Simply put, the potential for blockchain to transform nearly everything it touches is immense. Individuals could use blockchain records to quickly prove their identity for health, notary, contract and financial purposes. The collaborative economy, including businesses such as Uber and Airbnb, could use the permanence of blockchain data to confirm and enforce contract agreements. Blockchains could transform personal insurance as well, enabling nimble and more nuanced assessment of risk by underwriters, or even creating a free market where individual consumers can form their own informal insurance pools.
If you feel that the above list of potential uses for blockchain is simultaneously far too short and wildly speculative, I would agree wholeheartedly on both counts – blockchain technology is still very much experimental, with many possibilities and innumerable unknowns. However, given the stunning rate of advancement in other technology disruptors, such as drones and driverless cars, the insurance industry would be remiss to discount or ignore the blockchain just because it is in its infancy.
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You should have a look at this Fictional story from the Society of Actuaries Speculative Fiction Contest titled “Blockchain Insurance Company”. https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0CDAQFjABahUKEwictaas2IrIAhXOgJIKHSS1B0g&url=https%3A%2F%2Fwww.soa.org%2FFiles%2FSections%2Fsections-2015-11th-spec-fictions-stolyarov-ii.pdf&usg=AFQjCNH97KcLcVKO1bYMhgaGIcaUhzBiug&sig2=IrydtAL8J2bwL1xbZcFaSA