This is article 1 of 10 forming the first part of a series of articles dedicated to my attempt at helping payroll & HR professionals understand what Blockchain, Cryptocurrency and DLT technology are, and perhaps more importantly, how it may affect Payroll & HR processes in the future.
Please also look out for the next Payroll Podcast, which is with Anita Lettink, SVP of Global Alliances at NGAHR which also goes into significant detail about this subject, which is due for release next week.
Why do I think it is essential that payroll and HR professionals understand these complicated and much-hyped technologies? Well, wild volatility in the trading price of Bitcoin has been the main entry point raising up cryptocurrencies, Distributed Ledger Technology and blockchain from a technological oddity to the front pages of the Wall Street Journal, Bloomberg, Forbes, The Guardian and The New York Times.
The payroll industry today contributes some £418m to the UK economy every year and ranks as one of the most expensive back-office functions for the vast majority of small businesses.
These series of articles seek to explore the intersection between the payroll and HR industries, and the most popular technology of 2018: blockchain. Rampant speculation on the price of Bitcoin has forced blockchain and cryptocurrency into the mainstream but it appears that the majority of us are still not quite familiar with what the technologies are.
Blockchain itself has become something of an investor’s buzzword, and it has become hard to separate the hype from reality, but I hope these articles may do just that.
Take the example of Long Island Ice Tea Company. On 21 December 2017 this New York drinks brand announced a startling pivot: it was to change its name to Long Blockchain Company. Company stock rose as much as 289% on the back of the announcement, even though it had no blockchain-based products to sell and had no concrete plans to develop any blockchain technology. The change of direction failed. By 10 April 2018 Long Blockchain Co learned their stock was to be de-listed by the NASDAQ exchange for misleading investors and the company formally abandoned plans to purchase Bitcoin mining equipment.
So easy was it to convince investors that they were worth investing in, all with a simple name change.
It would be foolish to ignore blockchain technology and the impact it could have on both payroll and HR industries. However, this should come with the caveat that blockchain will also not solve all of your payroll problems, nor is it a magic bullet to, overnight, cut your HR or back-office costs in half.
It is still highly experimental technology, so to set the scene of understanding, in thie article , I would like to focus on what Blockchain, Cryptocurrency and DLT Technologies are, an introduction if you will…
Article 1: An introduction to Blockchain, Cryptocurrency and DLT Technology.
What is blockchain?
A blockchain is a type of distributed online accounting ledger which is essentially, an ever-growing list of records. Blockchains are stored across multiple computers and need agreement from each computer to update the entries on the ledger.
Blockchains collect blocks of transactions together in groups, which are then added to the chain of previous blocks and linked together using a form of encryption called ‘cryptographic hashes’ or ‘hash functions’.
These hash functions assign a fixed-length string of letters and numbers to each entry on the ledger. It would take more computer power than there is in existence in the world to randomly guess these hash functions, which is what makes a blockchain so secure.
Blockchains are also tamper-proof because their structure only allows new blocks of transactions to be added, and previously agreed blocks cannot be edited or changed.
While interest in blockchain technology has been growing in the wake of the rocketing (and plunging) price of Bitcoin, driven by speculative mass trading, there are still few enterprise-level blockchain-based products for businesses to use.
The blockchain employs a method of verification for each transaction called ‘proof-of-work’.
Specific computers called mining nodes (miners) each hold a copy of the blockchain and compete in a race to solve a mathematical puzzle to prove that each block of transactions is correct. The winning miner receives a cryptocurrency reward for doing so.
Because of this proof of work, no-one can fraudulently forge new Bitcoin without the agreement of the rest of the blockchain network.
However, proof of work takes a long time and uses up significant electricity as each computer runs through millions of calculations to update the blockchain.
This is quick overview of what blockchain is. Of course, my future articles will explore the technology in much more detail over the coming weeks, but I hope this gives you a platform of understanding. So, next up, cryptocurrency…
What is cryptocurrency?
A cryptocurrency is a digital, virtual currency. Transactions are secured not with the agreement of banks, but by doing it person-to-person, relying on a kind of encryption called cryptography.
Cryptocurrency transactions are recorded on a blockchain and are linked to a database which is shared (distributed) across multiple computers. This creates a permanent and irreversible online ledger of every transaction made using the currency.
Bitcoin is the first and most widely used cryptocurrency, and it is, in fact, possible to view every Bitcoin transaction that has taken place since it was created.
It’s no coincidence that the idea for Bitcoin, a payments system that deliberately does away with the need for banks and financial institutions, came in the wake of the 2008 global financial crisis. Developers wanted a way to bypass the banks – seen as greedy and corrupt – and still, make financial transactions safely and securely.
The idea behind Bitcoin was to create an online store of value that would work without a central point of control.
It is deflationary because it is different from bank-controlled money: no-one can create their own Bitcoin out of thin air, unlike central banks who print millions in the form of quantitative easing.
Cryptocurrencies like Bitcoin and Ethereum are built using public, open, ‘permissionless’ blockchains that anyone can view, use and contribute to without asking first.
These contrast with private blockchains, which we’ll discuss later in a future article. Hopefully, you are still following me up to this point right? Okay – so finally we have distributed ledger technology, also known as “DLT”…
What is Distributed Ledger Technology?
Distributed Ledger Technology or DLT is an umbrella term which describes a type of online database which is copied across multiple computers and needs the agreement of each machine to make changes to the entries in that database.
The blockchain is one form of DLT.
Not all DLTs employ a chain of linked blocks as blockchain does, but all DLTs are databases which are spread out across different computers in a network. So, every blockchain is a DLT, but not every DLT is a blockchain.
The agreement on the one correct copy of the ledger is called ‘consensus’, and each computer which stores the ledger contributes to updating it.
In theory, this technology should be able to increase the speed of payments and reduce costs for financial institutions.
This is because recording payments in fiat (national) currencies like the US dollar or the British pound requires a network of participants including banks, governments, regulators, lawyers and compliance officers, which slows down the whole process. DLTs could work autonomously, agreeing to payments automatically and cutting out back-office waste.
So hopefully, now that we have an understanding of what blockchain, cryptocurrency and distributed ledger technology (DLT) are, we can explore how and indeed if, we should expect companies to start to pay their employees in cryptocurrency in the future.
I hope you have found this very quick introduction into very complex technologies useful. This article will form the foundation for the future articles I will be releasing on the subject so please save it to your favourites and refer back to it if you need too!
Future articles in the series will include:
- Will companies start to pay their employees in cryptocurrency?
- How will blockchain affect HR?
- How could smart contracts affect payroll and HR?
- What benefits could blockchain bring to the payroll industry?
- Blockchain payroll companies
- How to build a blockchain-based payroll system
- When should businesses start planning for blockchain?
- Risks and costs
- Conclusion – is Blockchain and Crypto the future?
Look out for article 2 in the series: Will companies start to pay their employees in cryptocurrency?