Guest Co-Author: Benjamin L. Roderick

What Is Blockchain?

Blockchain is the term given to a highly sophisticated database tool that allows “distributed verification.” Most of us heard about blockchain because it is the technological backbone of Bitcoin, the alternative currency, but the possible applications go far beyond that.

To understand what “distributed verification” means, let’s look at a typical Bitcoin transaction, where Franchesca uses her Bitcoin currency to buy a TV from Herb.

On the surface, the transaction is simple: Herb gives Franchesca his TV and Franchesca gives Herb some Bitcoin. But how does Herb know that Franchesca actually owns Bitcoin? And how does he get it from her?  The answer is the blockchain. Distributed all over the world, the blockchain verifies that Franchesca owns Bitcoin, and then records the transfer from Franchesca to Herb, so Herb can use the Bitcoin to buy groceries from Janet.

Benefits of Blockchain

The primary benefits of the blockchain are:

• It’s secure
• It provides universal authentication
• It provides trust for trust-less networks
• It’s automated
• It’s almost friction-free, drastically lowering transaction costs
• It’s easy to audit
• It’s decentralized
• It can be (but doesn’t have to be) anonymous.

Here’s a table illustrating where and how blockchain technology can add value:

Blockchain technology isn’t perfect yet; some might say it’s not even ready for prime time. Today, the primary drawback is how long it takes to authenticate transactions. A transaction today in Bitcoin takes about 10 minutes to clear, and Bitcoin is a microscopic market compared to, say, credit card transactions. Indeed, the Bitcoin community is engaged in a civil war as to how, or even whether, to change the technology to speed up transactions.

Application of Blockchain Technology

But you can understand why blockchain technology is attracting so much interest from government and private industry. For example, the music industry is plagued by uncertainty over ownership of rights. The title industry exists because of uncertainty as to the ownership of real estate. Credit card issuers spend tens (hundreds?) of millions of dollars processing and authenticating transactions. Airlines have yet to find a way to ensure that every plane is late.

Everyone wants a secure, decentralized, efficient network that can authenticate transactions or information, as long as the FBI gets a back door (no joke).

Here are some possible applications in the Crowdfunding industry:

• In Title III, we need a centralized system that knows how much an investor has invested in Title III deals.
• In Title III and Title IV, we need a way to verify the income and net worth of investors.
• In Title II and Title IV, we could certainly use a way to verify that investors are accredited in some centralized way.
• A blockchain: the ultimate aggregator and verifier of Crowdfunding deals.

Crowdfunding and blockchain are both pieces of the FinTech industry. We’re going to see blockchain startups raising money using Crowdfunding, and we’re going to see Crowdfunding companies using blockchain technology. A blockchain startup using a Crowdfunding company that uses blockchain technology – that’s not far down the road.

Ben Roderick is currently working on blockchain applications for his MBA Capstone project at Carnegie Mellon University, graduating in May 2016. His email address:  Broderic@tepper.cmu.edu.

Questions? Let me know.