The Chain with No Weak Links

Imagine an information management system that could monitor, verify and keep track of every modification made to the system. That would herald the end of endless feedback loops in business practices. This is precisely what blockchain algorithms promise to deliver.
 
So what is a blockchain? It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. To put it simply, a blockchain is a continuously growing list of records, comprised of blocks, which are linked and secured using cryptography. Each block typically contains a ‘Hash Pointer’ as a link to a previous block, a timestamp and stored data. By design, a blockchain is inherently resistant to undue alteration. Blockchain algorithm was first used to found Bitcoin, the predecessor of all cryptocurrency.
 
The blockchain has three main components in its structure: personalized security, decentralization and openness (Figure 1). Blocks are ‘activities’ – be it transactions, information or specific tasks. Each block is protected by digital cryptography, and connected to the previous block, hence creating the chain. The second component is decentralization. One of the problems of current information management systems is that every ‘activity’ needs to go through a central control system to be properly vetted. But in blockchain, the sanctity of the data is verified by its user base, who earn incentives in the process. Thus the community is more than capable of conducting this function itself. The last and most ingenuous stroke is the complete openness of the platform. Once a block is verified and added to the chain, updated copies of the total blockchain is sent to all the ‘nodes’ (computer terminal of a user) simultaneously. Therefore, by using a distributed ledger system, the records of specific activity are stored throughout the digital universe, with indelible timestamps and encrypted signatures. So, if somebody wants to alter any block in the chain, that person needs to do so simultaneously in every other copy, otherwise it will be rejected due to dissimilarity. This could take care of fraudulent activities in a brand new way.
 
One area where blockchains may be used in Bangladesh is to help address the limited access to finance problem typically faced by Micro and Small Enterprises (MSEs). Traditional banks find it very difficult to collect and validate financial information on MSEs for their loan applications. Banks often require costly physical verifications which still provide a limited view of an MSE’s business at best.
 
Consider an alternative – a digital ecosystem with N number of users (Figure 2). Every user has access to a common platform via an application which lets the user share individual financial transactions. This platform has a blockchain network in the backend, which verifies each entry using the mutual P2P connections in the ecosystem, and logs it with timestamp. Now, let’s imagine there are 4 users in this ecosystem. Users X and Y are shopkeepers, user C is a customer who buys from those shops, and user B is a bank who may want to lend to the shops. Let’s say C comes to X for 5 soap bars, and pays BDT50 to X. If X only has 3 soap bars left, he fetches 2 soap bars from Y to fulfill the purchase. All of these interactions – A paying X for 5 products, Y giving 2 products to X, X repaying Y for those 2 products – would be recorded and verified within the platform as one incident, and the system will encrypt and distribute the data to all N users. Hundreds of iterations of such processes later, if X were to apply for a loan from bank B, the bank can extract verified transaction and financial data on X from the system to determine the risk factors and inform its lending decision. Moreover, if X were provided with a loan but had trouble repaying it down the road, smart contracts could be automatically generated by the system to arrive at updated loan terms that are mutually acceptable by the borrower and lender.
 
The scenario described above is just one of several potential applications of blockchains in Bangladesh, and one that is currently being explored. There are other possibilities. Most discussions on blockchains quickly evolve into cryptocurrency (which has not received approval from Bangladesh Bank yet); but we must recognize that it is possible to explore blockchain applications that are not necessarily tied to cryptocurrency. However, like anything new, blockchains still have to be given sufficient time to iron out some kinks. A ‘proceed with caution’ approach is therefore in order.