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The Mysteries of the Blockchain

Delwin Graham - Feb 05, 2018
What is “blockchain” and why is it important? It certainly seems important. 

What is “blockchain” and why is it important? It certainly seems important.  On January 9, 2018, the CEO of Eastman Kodak (KODK:US) announced that the company was working to offer a blockchain-based service that would let photographers get paid when their images were being used. Shares in the company jumped 200 percent on the news, with volumes up 22,000 percent. Similarly, Long Island Iced Tea (LBCC:US) saw its share price surge when it announced its foray into blockchain technology. 

 

But what is blockchain technology? It is meant to be transformative because it uses a public ledger of information that is difficult to tamper with and allows for a decentralized system of trust.  A blockchain is essentially a digital ledger whereby transactions are made without a centralized authority that are recorded chronologically, publicly and cannot be reversed. Such a ledger promises to allow parties who may not trust one another to work together.  Each party knows that it can make transaction on the blockchain, but once a transaction has been verified for internal consistency, it cannot be changed retroactively and remains open to introspection until the end of time.  This is meant to deter fraud and increase trust. (Cf., Ian McGugan, “Learn to Avoid the Weakest Links in the Blockchain,” The Globe and Mail, January 13, 2018, p. B12.)

 

“Mining” is the process by which transactions are verified and added to the public ledger, that is, the Blockchain.  The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle.  Miners use special semi-conductors designed to solve math problems.  They are rewarded with digital tokens, that is, “cryptocurrencies,” that can be used in the network or converted to another currency.  Bitcoin and Ethereum are two of the more famous of these cryptocurrencies. Kodak intends to issue its own cryptocurrency -- KODAKCoin – to allow photographers to maintain control of how their digital images are use.  These digital tokens would be used by people who want to license a given image.  They’ll pay the photographer in KODAKCoins, and the transaction would be duly noted on a blockchain. 

 

But all of this can be done quite easily using Canadian or U.S. dollars, or any other currency. (Cf., McGugan, “Learn,” p. B12.) Furthermore, the photographers who accept KODAKCoin as payment, will eventually have face the issue of converting it into a currency that they can spend in the grocery store.  In addition, while the blockchain might be able to record who has properly licensed the image, it can’t prevent someone from copying and using the image illegally.  The photographer would have to go to the courts to enforce payment. At the moment, then, a centralized national currency and justice system is required to implement and enforce a supposedly decentralized system of trust.

 

Keep in mind too that the technology is not that new.  In 2009, a white paper was posted on the Internet by Satoshi Nakamoto proposing the development of the Blockchain.  Contrary to other recent technologies - personal computers, smartphones, the internet – it is hard to find examples of companies that have already used Blockchain to vastly increase their sales of profits. (Cf., McGugan, “Learn,” p. B12.) Part of the problem is that no one owns the Blockchain concept which makes it different than computers or smartphones, where large early returns went to the companies that owned key patents or were able to establish their proprietary products as the industry standard.   Some companies, Kodak included, are using the Blockchain technology for specific corporate purposes.  For example, Maersk and Walmart are currently looking to Blockchain to cut global supply chain costs by using the digital ledger to efficiently track shipments and improve inventory management. The consultant companies that set up the Blockchain systems for these companies should also profit from the technology. 

 

Please contact me (delwin.graham@canaccord.com; (780) 408-1518) for further details and a few actionable investment ideas.

 

 

Canaccord Genuity Wealth Management in Canada is a division of Canaccord Genuity Corp. Member-IIROC/Canadian Investor Protection Fund.

 

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