You keep hearing about blockchain. What is it, really? And why is it being touted as a technology disruptor in every industry?
At its beating heart, blockchain is a way of recording transactions. While this process is nothing new — humans have been keeping books even before the invention of the abacus — blockchain is especially radical because the way it does so confers a number of advantages.
What is blockchain?
Picture an 800-page composition notebook with 80 rows per page. You effectively have 64,000 rows of records you can keep. That entire unit can be considered a block. When the notebook is over, you pick up a new one and append it to the original, identifying book 2 as a continuation of the first. Over time, each such notebook can be labeled as a “block” linked to the earlier one in the chain.
If each notebook sounds like a regular old database, it is — sort of. An important difference: vanilla databases have create, read, update, delete (CRUD) functions whereas in blockchain technology, you can only create and read. Users can’t alter or delete historical data already added to the blockchain.
So, what is blockchain? How to the experts define blockchain?
- IBM defines blockchain as technology that is “used in a peer to peer network of parties, who all participate in a given transaction. Because the ledger is distributed, everyone involved can see the ‘world state’ at any point in time and can monitor the progress of the transaction.”
- Microsoft suggests that “blockchain is a transparent and verifiable system. The technology is a shared, secure ledger of transactions distributed among a network of computers, rather than resting with a single provider.”
- The common consensus is that a public blockchain is a “distributed ledger” technology, which means that no single authority controls (or even records) the data. Blockchain is decentralized ownership.
How blockchain works
Every block in the blockchain contains three components: the data; its own hash identifier and the hash identifier of the previous block. For example, in the following chain:
Block 1 → Block 2 → Block 3
Block 2 has data: Block 2’s hash information and Block 1’s hash information. Block 3 has data: Block 3’s hash information and Block 2’s hash information. Blocks 4, 5, 6 and so on would repeat in the same way.
Blocks are not added to the chain unless they contain the data of the previous block, and the ledger maintains its data integrity. Special computers called nodes carry out the tedious process of checking this hash information on blocks. The nodes approve every transaction in the chain before new data gets added as a fresh block.
Data integrity: Why is blockchain a big deal
Blockchain confers a host of advantages through the use of cryptography and decentralization:
- Transparency. Because bad blocks/players are spotted immediately, the blockchain emerges as a single source of truth. Everyone who can access the data is on the same page with the same information.
- Decentralization. Unlike traditional databases that work according to algorithms developed by one or two agencies, public blockchains at their core are decentralized leading to a democratization of information. Anybody can access records, a process which leads to better trust systems. Blockchain is essentially a trust system which does not require an intermediary.
- Immutable. You can only add records of transactions to a blockchain. A block in the chain can’t be changed. That data is immutable, which further fosters trust from all parties.
The disadvantages of blockchain
No system is ever completely golden and the same applies to blockchain. This technology is still early in its lifecycle and issues such as mainstream adoption, government regulation and privacy concerns among others are still be worked through by those in the space.
Real-world applications and potential uses cases
So how does this all translate to the real world? Here are some practical applications of blockchain technology.
- Finance. Since blockchain is often spoken in the same breath as Bitcoin, it might be tempting to think they’re one and the same. They’re not. However, blockchain’s many advantages make it a ready fit in the financial sector where immutability and transparency of all transactions are key.
- Government use. Countries such as Estonia have implemented blockchain to help both the government and citizens. Each citizen receives a special digital ID and is part of a distributed ledger system (blockchain). Citizens can log in and check on validity of their interactions with the health registry for example, and contest entries if they notice something wrong. Digital government documents further promote efficiency in all sectors.
- Shipment tracking. Samsung uses blockchain to simplify its complex supply chain and track shipments worldwide. Since blockchain transactions are verified more easily, using the technology reduced time spent on paperwork and dealing with port authorities. The company has also decreased shipping costs by 20% and expects to be able to respond more fluidly to changing consumer appetites.
- Supply chain auditing. How can you tell that a company is selling you the products it claims to be? Distributed ledgers with time-stamped transactions and location data enable consumers to verify the provenance of the items they buy. This is especially useful for high-value luxury goods such as diamonds or designer items.
Blockchain takes a fundamental principle, record-keeping, and puts it on steroids. The technology’s many advantages are sure cause positive disruption in many industries.
Interested in learning more?
Whether you need to test a concept or custom develop a blockchain application for your business, we can assist with conceptualization, developing the business case, software development and integration. Or if you’re already working in the space, we have a team that is entrenched in the accounting, internal controls, tax and regulatory compliance aspect of this technology. Learn more on our web page.
Or read our other articles on blockchain:
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