Blockchain overcomes the problem of lack of trust, thereby eliminating the need for middlemen. The concept relies on math and technology that are complex and often unintelligible to the uninitiated. Here, it is sufficient to appreciate only a few elements: A blockchain is effectively an interconnected, distributed ledger. New transactions are added to the chain and then, once cryptographically locked, cannot be altered. The result is a system of records that is secure and auditable but controlled by no central authority. When a bitcoin user wants to transfer funds, that transaction is added to the blockchain and becomes a permanent part of the shared record.
Blockchains can reduce wasteful byproducts of distrust. Rather than paying intermediaries, the technology allows users to do business with each other by trusting in a vast collective to verify transactions. That’s more important than ever, as people buy and sell online with unknowable strangers.
Consider the repercussions if blockchain technology becomes widely adopted: Financially disenfranchised people, those without access to banks or credit cards, will be able to buy and sell online. Information on deeds, titles, professional credentials and even simple identification will be easily obtainable, transparent, reliable and free from error. The costs associated with many transactions will fall as middleman are cut out and cumbersome government regulation is avoided.
The transaction cost economics of that is explained here.
My RMIT colleagues Chris Berg, Jason Potts and I explain why this is important here (emphasis original):
But the blockchain allows us to exchange differently. A better metaphor for the blockchain is the invention of mechanical time. … Mechanical time opened up entirely new categories of economic organisation that had until then been not just impossible, but unimaginable.
One of the criticisms of blockchain is the amount of electricity that is employed in the mining process. That, however, is simply a realisation of the cost of trust that is imposed on the economy in traditional transactions. I expect to see innovation in that space at some point.