UPSC Mains 2019 : The importance of blockchain for India



Topic: The importance of blockchain for India

Topic in Syllabus: GS Paper 3: Indian Economy


Blockchain Technology


  • Blockchain is the promise of completely new Internet, the Internet of Value.
  • Internet is going to transform from Internet of Information to Internet of Value.
  • The ownership of digital assets of any type, say money, deeds, Government records, financial instruments or art can be securely stored, transacted and tracked.
  • It is considered revolutionary for its ability to enable the secure movement of assets without intermediaries.
  • Its economic impact is projected to exceed $3 trillion in the next decade.


Blockchain Technology:

  • The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.
  • Blockchain is a digital, decentralised (distributed) ledger that keeps a record of all transactions that take place across a peer-to-peer network.
  • It is an interlinked and continuously expanding list of records stored securely across a number of interconnected systems.
  • This makes blockchain technology resilient since the network has no single point of vulnerability.
  • Additionally, each ‘block’ is uniquely connected to the previous blocks via a digital signature which means that making a change to a record without disturbing the previous records in the chain is not possible, thus rendering the information tamper-proof.
  • The key innovation in blockchain technology is that it allows its participant to transfer assets across the Internet without the need for a centralised third party.
  • Blockchain technology was developed as the underlying technology behind the cryptocurrency called bitcoin.



  • Blockchain Technology was invented by Satoshi Nakamoto in 2008 for use in the cryptocurrency bitcoin, as its public transaction ledger.
  • Satoshi Nakamoto’s aim in creating the decentralized Bitcoin ledger—the blockchain—was to allow users to control their own money so that no third party, not even the government, would be able to access or monitor it.
  • The creator of Bitcoin, Satoshi, disappeared back in 2011, leaving behind open source software that the users of Bitcoin could update and improve.
  • The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem without the need of a trusted central authority or central server.


Applications of Blockchain Technology in Various Industries

Blockchain technology can be utilized in multiple industries including Financial Services, Healthcare, Government, Travel and Hospitality, Retail and CPG.

  • Financial Services: In the financial services sector, Blockchain technology has already been implemented in many innovative ways. Blockchain technology simplifies and streamlines the entire process associated with asset management and payments by providing an automated trade lifecycle where all participants would have access to the exact same data about a transaction. This removes the need for brokers or intermediaries and ensures transparency and effective management of transactional data.
  • Healthcare: Blockchain can play a key role in the healthcare sector by increasing the privacy, security and interoperability of the healthcare data. It holds the potential to address many interoperability challenges in the sector and enable secure sharing of healthcare data among the various entities and people involved in the process. It eliminates the interference of a third-party and also avoids the overhead costs. With Blockchains, the healthcare records can be stored in distributed data bases by encrypting it and implementing digital signatures to ensure privacy and authenticity.
  • Government: Blockchain technology holds the power to transform Government’s operations and services. It can play a key role in improving the data transactional challenges in the Government sector, which works in siloes currently. The proper linking and sharing of data with Blockchain enable better management of data between multiple departments. It improves the transparency and provides a better way to monitor and audit the transactions.
  • CPG and Retail: There is a huge opportunity for Blockchain technology to be applied in the retail sector. This includes everything from ensuring the authenticity of high value goods, preventing, fraudulent transactions, locating stolen items, enabling virtual warranties, managing loyalty points and streamlining supply chain operations.
  • Travel and Hospitality: The application of Blockchain can radically change the travel and hospitality industry. It can be applied in money transactions, storing important documents like passports/ other identification cards, reservations and managing travel insurance, loyalty and rewards.
  • Smart contracts: Any industry heavily reliant on contracts, such as insurance, financial institutions, real estate, construction, entertainment, and law, would benefit from blockchain’s indisputable way to update, manage, track and secure contracts. Smart contracts, those that are embedded with if/then statements and be executed without the involvement of an intermediary, also use blockchain technology.
  • Supply chain management: Whenever value changes hands or the status of asset changes, blockchain is ideally suited for managing the process.
  • Asset protection: Whether you’re a musician who wants to ensure you get royalties when your music gets played or a property owner, blockchain technology can help you protect your assets by creating an indisputable record of real-time ownership.
  • Personal Identification: Governments manage vast amounts of personal data from birth and death records to marriage certificates, passports and census data. Blockchain technology offers a streamlined solution for managing all of it securely.
  • Crowd funding: As with traditional crowd funding, a blockchain powered crowd funding campaign seeks to secure investment for a new project from an interested community. But in this instance, funding is most likely to come in the form of bitcoin or other cryptocurrencies.


Advantages of blockchain technology:

  • Increased time effectiveness due to the real-time transactions
  • Direct Transactions eliminate the overheads and intermediary costs
  • Reduced risks related to cybercrimes, frauds and tampering
  • More transparent processes with a proper record creation and tracking
  • Highly secure due to cryptographic and decentralized Blockchain protocols
  • The blockchain allows our smart devices to speak to each other better and faster.
  • Blockchain solves the problem of manipulation. It brings everyone to the highest degree of accountability.
  • Online identity and reputation will be decentralized. We will own the data that belongs to us.
  • Cryptocurrencies take the power away from governments to control the value of currencies and hand it to people.
  • The potential is great for people in the informal economy to exploit the blockchain’s middleman-free way to exchange asset.
  • Blockchain technology can more equitably address issues related to freedom, jurisdiction, censorship, and regulation, perhaps in ways that nation-state models and international diplomacy efforts regarding human rights cannot.
  • Blockchain-based systems allow for the removal of intermediaries involved in the record keeping and transfer of assets.
  • The removal of intermediaries and settlement on distributed ledgers allows for dramatically increased transaction speeds compared to a wide range of existing systems.
  • Data entered on the blockchain is immutable, preventing against fraud through manipulating transactions and the history of data. Transactions entered on the blockchain provide a clear trail to the very start of the blockchain allowing any transaction to be easily investigated and audited.


The status of blockchain technology in India:

  • In India Financial players are the first movers to capitalise on this technology.
  • It is witnessing a lot of traction within India, in sectors such as banking and insurance.
  • In most of these industries, players are coming together to form a consortium to realize the benefits of blockchain at an industry level.
  • The Institute for Development and Research in Banking Technology (IDRBT), an arm of the Reserve Bank of India (RBI), is developing a model platform for this technology.


Gains for India:

  • Blockchain is now the fastest-growing skill set demanded on job sites, with job growth rates at 2,000-6,000% and salaries for blockchain developers 50-100% higher than regular developer jobs.
  • The decentralized nature of projects with distributed teams can translate into lakhs of high-paying jobs from all over the world being available to Indian developers.
  • Blockchain-based initial coin offerings (ICOs), when done correctly, open up a whole new channel for startup funding and tap into more than $20 billion raised through the ICO route.
  • With its strong IT ecosystem, India can become a leading blockchain development hub and a major net beneficiary of global capital inflows.
  • Decentralized applications on public blockchains can solve myriad Indian problems, such as eliminating middlemen, providing data security, reducing corruption and tampering of financial ledgers, and improving the speed of service delivery by governments and corporations.



Regulation in India:

  • The current debate in India has, unfortunately, focused too heavily on trading and speculation, looking at cryptocurrencies as an investment tool, rather than understanding the potential of core blockchain technology and the basic role of cryptocurrencies as an incentive mechanism to secure decentralized transactions.
  • As core developers/shapers of this technology in India and fully cognizant and sympathetic to government concerns of money laundering, tax evasion, investor protection and capital flight.
  • However, the blockchain sector is especially sensitive to regulation. Any regulatory action on cryptocurrencies that misses the nuance of separating speculative activity from core software development inadvertently shuts down core development as well.
  • There are sufficient global examples of countries that have taken nuanced and cautious steps in regulating the technology, and are focusing on stopping illegal activity without hurting innovation.
  • In the current regulatory environment, Indian developers do not have to ability to develop open blockchain solutions at scale.
  • Serious blockchain professionals are migrating rapidly to countries with more friendly regulations. As a result India’s ability to benefit from jobs, capital, local innovation and positioning is all curtailed without the talent ecosystem in place.


Challenges with blockchain technology:



  • Blockchains are having trouble effectively supporting a large number of users on the network. Both Bitcoin and Ethereum, the leading blockchain networks, have experienced slowed transaction speeds and higher fees charged per transaction as a result of a substantial increase in users.
  • While this fact has led to in-depth research about how to help both these networks, and blockchains as a whole, to scale, the conversations around the proposals are highly varied and are likely to take a significant amount of time.
  • Moreover, scaling methods need to be verified and thoroughly vetted before implementation into the ledgers. Scalability concerns must be effectively addressed before the blockchain can be adopted on a wide scale.


The Criminal Connection:

  • Since its launch, bitcoin has long been associated with the shadowy dealings of the black market and the dark web. Because this is the first interaction of the public with blockchain technology, this connection has persisted with bitcoin, altcoins, and the tech underlying it as well.
  • In a paper titled ‘A Survey on the Security of Blockchain Systems’ published through the Cornell University Library, a team of researchers found that cryptocurrencies are used by criminals to facilitate purchases of restricted materials on online marketplaces, as a tool for money laundering, as well as payment methods for ransomware.
  • While these activities are illegal, they are a result of people’s applications of digital currencies and can be carried out with fiat currency too. However, for blockchain technology to be accepted by the public, it must shake this shadowy association.


Inefficient Technological Design:

  • The Ethereum smart contract platform allows developers to deploy their own decentralized apps (DApps) for a varied array of uses. While bitcoin is the leading cryptocurrency, the Ethereum network allows users to transfer the potential of the blockchain to real-world applications. However, research has shown that a substantial number of smart contracts deployed on the platform have vulnerabilities due to their coding.
  • Moreover, the Bitcoin network is designed to include a significant amount of data with each transaction. While some of this information is important, not all of it is essential. This makes the Bitcoin blockchain heavy and rather slow.
  • Blockchain design must be streamlined and optimized to minimize these inefficiencies to result in widespread adoption.


Energy Consuming Consensus Mechanisms:

  • The majority of blockchains use proof-of-work (PoW) in order to achieve consensus. PoW involves the use of the computational power of a machine to solve complex mathematical equations in order to verify a transaction and add it to a block.
  • While this mechanism works well, as is witnessed in the Bitcoin network, it does consume a lot of energy. It has been reported that the miners who work to validate transactions in the Bitcoin blockchain consume about 0.2 percent of the global electricity total per year. This is equal to what the country of Bulgaria consumes. Moreover, going on the current trend it is being estimated that by 2020 the Bitcoin network will require more electricity than what the entire world currently uses.
  • With current concerns about global energy production and consumption, blockchains will need to use other methods to achieve consensus, such as the proof-of-stake algorithm which requires much less energy. This will allow the technology to be integrated into a future, which is increasingly conscious of energy matters.



  • The Bitcoin blockchain is designed to be publicly visible. All the information pertaining to a transaction is available for anyone to view. With the exception of privacy-centric coins, this is the same with many of the blockchains currently in existence.
  • While this feature may be important in some contexts, it becomes a liability if distributed ledgers are to be used in sensitive environments. For instance, private patient data should not be available for all as is the case with proprietary business data. This is also applicable to government data or financial data.
  • For blockchain technology to be adopted on a wide scale, the ledgers need to be altered in order to limit access to the data contained therein to only those who have the necessary clearance.



  • While it is rather unlikely to happen to large blockchain networks, blockchains are vulnerable to a 51% attack. This refers to a situation where a miner or a group of miners control more than 50 percent of the mining power.
  • In such a scenario, the miners would be able to control the confirmations of new transactions, especially those by other miners. Moreover, they would be able to reverse the transactions they confirmed and therefore double spend tokens.
  • While the controlling miners would not be able to alter old blocks, this would severely affect the integrity of the token with the affected blockchain and it would need to recover in the public eye. Fortunately, the probability of this attack is reduced as more people participate in the network as miners.



  • Blockchain technology is an effective tool for reducing costs. It reduces the fees associated with transferring value and can streamline operational processes.
  • However, because it is a relatively new innovation, it is difficult to integrate it with legacy systems. Such a process is likely to be an expensive affair that many corporations and governments will be unwilling to undertake.


Way forward:

  • For the adoption of Blockchain technology in the government and public sector, the technology will need to be validated, regulated and adopted.
  • To harness the potential of Blockchain technology and reach the stage of large-scale implementation, a structured approach along with adequate financial allocation
  • Further issues related to cyber security and privacy should be addressed with robust data protection mechanism.


Sample Question :

Critically examine how blockchain technology can be used for solving Indian contemporary problems?