Beixi Li, Guest Correspondent
Since its invention as a technology for Bitcoin in 2009, blockchain has expanded its applicability beyond cryptocurrency into other industries. Driving this expansion are the fundamental changes that it enables and the benefits that it brings to business transactions. Let’s take a look at the four most important concepts you need to know to understand blockchain today.
- How it Works
Imagine a financial transaction: one party requests money, another sends money, and a third party may work to verify that the right amount of money is sent to the right person. Each party keeps a separate record of the transaction. At some point, records of the transactions may begin to vary, compromising transaction validity and integrity.
Blockchain technology creates a single record, known as a ledger, across all parties. A copy of this ledger lives on every computer in the network and is updated approximately every 10 minutes. Each change to the ledger is grouped into a “block.” This block is then connected to previous versions of the ledger, creating a chain of blocks, or blockchain. Each time a new block is added to the chain, all computers in the network are updated. As a result, blockchain replaces the current piecemeal nature of transactions with a single source of truth.
- The Benefits
Having a single, consistently updated ledger across all parties provides key benefits:
Each time a new block is added to a chain, all computers in the network receive the updated information. As a result, Blockchain technology guarantees that all parties view and reference the same data and that all are alerted simultaneously to any changes or updates. Having synchronized access to updates automates transaction accountability and visibility, replacing any manual validation or verification.
To add new blocks into a chain, multiple computers in the network validate the information in the block. Once validated, the information is published out to all computers in the network, providing every participant with the latest block of data. As identical data is decentralized across all computers in the network, hacking becomes virtually impossible. Hackers would need to change the ledger on every single computer to be successful. If only one or a handful of databases were altered, the discrepancy would be immediately visible and traceable. Only a validated update to the blockchain would affect every single database in the network.
The ability to keep parties on the same page at all times during a transaction removes the need to spend time resolving transaction discrepancies. Blockchain creates an environment that assumes a level of trust in business activities, allowing businesses to de-emphasize bookkeeping. Additionally, blockchain technology enables smart contracts: contracts programmed to execute automatically when specific criteria are met, eliminating the need for manual approval processes.
- The Debate Today
While blockchain shows potential for industry use, customizing it for each industry remains a work-in-progress. A key obstacle in industry-specific blockchain is the scale and level of publicity necessary for the network. Two types of blockchain networks exist today: public and permissioned. The original Bitcoin blockchain network was public: anyone could participate in the network and validate new blocks. New, permissioned networks only allow participants with permission to enter the network, receive data, and validate data. Permission criteria can come from government officials, rules built into the platform, and current participants. Currently, most enterprise blockchain technology being developed uses permissioned networks with the following key benefits and limitations.
Permissioned networks limit the parties who can join and the parties who can validate new blocks, which increases:
- Scalability: Limiting the number of participants decreases the computing power and costs required to update every participant in the network.
- Security of the Network: Only those with permission may enter into and add to the blockchain.
- Privacy: Transaction details are only shared with approved participants.
The primary concern with permissioned networks is the limit to decentralization of data. Blockchain’s value comes from dispersing data through a large network using cryptography, and using that scale to hold all members accountable. By limiting that scale through selection criteria, the open, public nature of blockchain is constrained.
- Recent Developments
IBM has developed the latest advancement in blockchain technology with a platform to facilitate international payments. Currently focused on the South Pacific, the platform simplifies the transfer of fiat currencies from different countries, using cryptocurrency as a value holder in between the two currencies. This new technology aims to decrease both processing times and costs of international currency transfers, a time-consuming, error-prone process today. While currently focused on international money transfers, this platform has the potential to become the foundation of future trade agreements, including trade financing, to streamline the exchange and visibility of financial transactions.
Blockchain’s ability to provide one, consistently updated and decentralized ledger of transactions across all parties provides a groundbreaking technology applicable across industries. It has the potential to provide a new baseline of trust when conducting business, to create a more secure way of exchanging information, and to decrease processing times of current transactions. While still in early stages of development, companies have already begun developing blockchain platforms that could be the foundation of future industries.
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