There’s been an increasing amount of buzz around blockchain technology lately, and people are more interested than ever before. “A new technology that functions as a distributed ledger within a decentralized network and promises greater security, lower transaction costs, etc.” is usually how it’s described. But what does all of this really mean?
What is Blockchain? In its simplest form, Blockchain is a digital ledger (consider the general ledger your organization’s finance/accounting teams use) that stores information across a network of computers. It stores information in batches called “blocks,” that are linked together in a chronological fashion, similar to a chain of blocks. This information can be virtually anything, but try imagining it in terms of a financial transaction, since that’s probably the easiest to visualize.
To illustrate, here’s what happens when you make a purchase: Imagine purchasing new software online from Microsoft (for illustrative purposes only). The block would store the date, time, and dollar amount of your purchase. It would also log information about who is making the transaction. For security purposes, your name would be recorded as a unique “digital signature,” more like a username instead of your actual name. Once your block has been verified and added to the blockchain, it’s assigned a “hash,” a unique code that allows it to be identified among any other block.
What makes Blockchain so different than the other technology we have available?
- It’s encrypted security methods make it extremely difficult and/or pointless for hackers to attempt to corrupt the system. Hash codes are created by algorithms that transform digital information into a string of numbers and letters. Each block that is added to the blockchain contains its own hash, along with the hash of the block before it. If anyone attempts to edit the information on a block, the hash code changes as well, making it apparent that the information was tampered with. To cover up the change, a hacker would have to change the hash on every subsequent block in the blockchain. This is very similar to the financial general ledger system as it’s built on the same principles. Once a block is added to the blockchain, it is very difficult to edit and impossible to delete.
- It’s decentralized. The information stored on the blockchain is not housed in one central location. Instead, the blockchain is copied and spread across a network of computers. Each time a transaction occurs and a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. In the event that a hacker is able to access a copy of the blockchain, a single copy of the information would be compromised versus the entire network.
- There are no third-parties. This is where it becomes even more interesting. With other public records, consumers pay a third party, i.e., a bank or notary, to verify new data entries, but with blockchain, a network of computers heads up this department. To illustrate, business owners pay a small fee when customers pay using credit cards, because banks use their resources to process those transactions. A system built using blockchain technology is not restricted in this way as there is no central authority and in turn little to no transaction fees.
How are transactions on blockchain verified? Blockchain networks use “consensus models,” tests that require users to validate/prove themselves before joining the network. A popular cryptocurrency you’ve probably heard of, Bitcoin, uses a model called “Proof of Work.” In this system, when new transactions occur in the network, complex computational math problems are assigned. At this point, all computers in the blockchain network rush to solve the problem; once a user’s computer solves a problem, he/she becomes eligible to add a block to the blockchain. They also receive a reward, a number of Bitcoins (newly created and added to the network for growth purposes) to compensate for the significant amount of power and energy it requires. As blockchain is adopted for more purposes, more consensus models will arise.
How can blockchain be applied in real-world scenarios?
- Healthcare Records – Blockchain could be used to store medical records, providing patients with additional security knowing that their records cannot be changed. In this care, the information would be best stored with a private key, instead of public, so only certain individuals have access.
- Smart Contracts – These computer codes, which are built into blockchain, can help facilitate the terms of certain contract agreements. Example: A market research company can agree to automatically sending a report 1 week after receiving full payment online. If the company doesn’t supply the report by the deadline, the smart contract refunds the payment.
- Purchasing and Acquisition – Suppliers can use blockchain to give their customers confirmation about the authenticity and/or origin of their materials and products.
We are still in the beginning stages of blockchain, but it has incredible potential to disrupt our industries, creating opportunities to innovate and grow. To learn more about blockchain and how to it can revolutionize your organization, visit www.doblerconsulting.com or call us at +1 (813) 322-3240 (US) /+1 (416) 646-0651 (Canada).