“Blockchain is a newspaper.” That’s the analogy Andrew Wu, Assistant Professor of Technology and Operations and Finance at Ross School of Business, uses to describe blockchain, a type of database that has exploded in popularity and use cases in recent years. Wu, a Faculty Co-Director of the Michigan Ross Fintech Initiative, also teaches one of the largest Fintech series on Coursera, Fintech Innovations. In an Oct. 5 session, part of Business+Tech’s inaugural Tech Literacy Download, Wu explained to students the fundamentals of blockchain and how the technology is transforming fintech through new and exciting applications.
Understanding how databases work is critical in understanding blockchain. “For all intents and purposes, blockchain is nothing but a simple database,” Wu said. He likened the technology to a decentralized version of DropBox or Google Docs, explaining that a peer-to-peer (P2P) network is used to receive data and process it using consensus algorithms. Once the data is processed, it is stored on the database in a unique data format that chains each piece of data together, hence the name blockchain. This facilitates fast data searching and retrieval. An advantage of using blockchain over cloud computing is that blockchain acts as a permanent record (much like a newspaper) of the execution of a program.
According to Wu, the evolution of blockchain technology can be divided into four generations: gold 2.0, distributed computing platforms, utility and security tokens, and non fungible tokens (NFTs). Gold 2.0 includes cryptocurrency and can be thought of as a distributed ledger. These first-generation blockchains only record text files and have limited functionality. Distributed computing platforms expanded the type of data stored from simple scripts to code. This technology was pioneered by Ethereum, a decentralized open-sourced blockchain that has been instrumental in expanding blockchain’s capabilities and scope. Utility tokens like Golem and FileCoin offer a right to use a product or service, while security tokens represent an investment product. Lastly, NFTs are digital assets that represent real-world objects. Recent innovation has centered on second-generation blockchain distributed computing platforms, namely DeFi Ethereum.
DeFi Ethereum is the collective term for the financial services and products accessible to Ethereum users. DeFi apps and tokens are a new innovation in the blockchain sphere that have only emerged in the last year or so, according to Wu. “Apps hosted on Ethereum are complicated and pushing the blockchain to it’s limit, but directly replace financial intermediaries like banks and brokers,” Wu said. By conducting financial services without traditional middlemen, these apps expose users to risks. With DeFi, markets are always open, and no centralized authorities can block or prevent payments.
“These technologies represent a fundamental change in the direction of blockchain, and have allowed its transformation from a niche technology to a platform with more use cases.” This has resulted in a pivotal point for the technology: “It is now a make or break moment for the blockchain,” Wu said, noting that if the DeFi Apps fail, the blockchain will probably fail as well.
The advancement of blockchain technology has expanded its use but increased risk, “Once we move from generic technology to general business implementation, we have to worry about how people are going to use it,” said Wu. For example, while cryptocurrency exchanges act as a hybrid of a bank, brokerage firm, and stock exchange, because they are largely unregulated, they also expose traders to risk from all components. The future of blockchain, Wu said, depends on preventing disuse from users and networks alike.
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Michigan Ross FinTech Initiative