Our Articles

Bits & Blocks

January 8, 2018

If you’ve been watching the financial news recently you’ve almost certainly come across the terms ‘Bitcoin’ and ‘Blockchain’. What are they and how exactly do they work?

While its spectacular rises and falls have garnered Bitcoin a high degree of notoriety, the underlying technology and its potential applications have quietly been capturing the attention of industry.

At the heart of Bitcoin and other cryptocurrencies lies the blockchain. The blockchain technology was designed as a way to carry out transactions without the need for traditional infrastructure and trusted third parties. Contracts, records, and third party intermediaries have created an (expensive) administrative gridlock for transactions in a digital age, a problem that the blockchain promises to solve.

Traditionally trade has been recorded in bookkeeping and this information is often isolated and closed to the public. For this reason, markets have relied on the use of intermediaries and middlemen (e.g. banks, exchanges) to facilitate transactions. Blockchain enables a secure, “tamper-proof” highway for peer-to-peer transactions through an open sourced distributed ledger, which will remove the inefficiencies created by the middlemen and therefore lower transaction costs.

How does it work?

Put simply the blockchain exists within a network of computers (distributed) that maintain a collective bookkeeping (ledger). Say I want to trade with another member of the network, the transaction is presented online as a block. This block is broadcasted to every party within the network (open sourced). For the transaction to occur, the block must be approved by all members of the network at which point the block is added to a chain (blockchain). The blockchain represents an indelible and transparent record of all transactions. What makes the blockchain so unique is that this record is not kept by a central authority but instead maintained by the collective, and the process by which approval occurs (the details of which are beyond the scope of this article) does not allow for any invalid transactions to take place.

While the most common use of blockchain today is Bitcoin, its applications already spread well beyond the financial sector:

In the energy sector, blockchain technology is being used to facilitate more efficient peer-to-peer trading of electricity. Decentralised generation en masse, enabled largely by household photovoltaic solar systems, led to the advent of prosumers who trade excess electricity within the community or back into the local grid.

In the food and agriculture sector, blockchains are not only used to facilitate efficient trading platforms but also as a record to track food to source. The blockchain can be used to represent a trustworthy stamp of quality, illustrating that what is written on food labels is actually correct

Shipping company Maersk recently completed a 20- week blockchain proof of concept trial for marine insurance. The platform was designed to make auditing aspects of a shipping supply chain easier, to improve the tamper-resistance and sharing of data in realtime, and to enable many different parties to settle upon the terms of premiums in a more timely fashion.

Air New Zealand has just announced that it is partnering with Swiss travel platform Winding Tree, which is developing the world’s first travel marketplace on blockchain to connect suppliers such as airlines and hotels directly to sellers.

Andy Bowley

Head of Research

Forsyth Barr

Loading Conversation