The world runs on information.
In this new world, information needs to be accurate and delivered quickly. What’s more, it needs to be protected against hacks, frauds and scams of all sorts. Any technology that achieves these goals is likely to foster innovation and economic growth.
Enter Blockchain Technology.
When people hear these words, they usually think of Bitcoin and other cryptocurrencies, but blockchain technology is much more than a platform used to create, buy and sell digital money.
In fact, it is revolutionizing how individuals, businesses and governments record transactions and track assets. In this article, we will explain what blockchain technology really is, how it works, and how it can be used to make our lives more efficient and secure.
How Does Blockchain Technology Work?
A blockchain is an electronic ledger that stores data in chronological order.
When new information is entered – such as an electronic transfer of funds – the data enters a newly created block. As more information is received by the network, the new block fills up with data. Once the block is full, it receives a timestamp, and is then linked to the previous block, which creates a chain of blocks that are attached to each other in chronological order.
The blockchain process is simple yet incredibly efficient and secure.
How is the blockchain any different than existing electronic ledgers?
The fundamental difference between a blockchain and a traditional ledger is the fact that the blockchain is immutable and permanent. Once a block is created, it is set in stone and will never disappear: the blockchain cannot be modified, reversed, canceled or altered in any way.
This is arguably the single most important aspect of Blockchain technology.
Public vs Private Blockchains
The second most important feature of blockchain technology is the fact that it can be public or private, centralized or decentralized.
Indeed, traditional databases require a central authority to confirm transactions and enforce overall network security. Typically, these networks are private and permissioned, which means that only certain people can access and manage them.
Blockchains, on the other hand, can be public and fully decentralized: there is no need for a third party to own and operate the blockchain. A decentralized blockchain allows anybody to join the network and help validate transactions. A permissionless blockchain means that no single entity has the authority to restrict access of grant special authorizations.
A blockchain can be either permissioned, permissionless, or hybrid.
Thus, a public and fully decentralized blockchain enables anyone to participate in the network by setting up a node and validating transactions. A node is a small server that stores all of the blockchain’s data. Whenever a new block is being created, nodes verify the blockchain’s history to ensure the information received is correct. Once all the nodes have confirmed the information, a block can be created. If the nodes identify false information, the transaction is rejected.
On a private blockchain, the central authority that owns the network is in charge of deciding who can operate a node. In addition, this authority can grant different rights and privileges to each node. Thus, private blockchains are not fully decentralized, as public access it not granted, and they are permissioned, because the controlling entity grants different authorizations to different people.
Hybrid blockchains combine features of both public and private blockchains.
An Infinite Number of Use-Cases
While most people think blockchain technology is limited to Bitcoin and other cryptocurrencies, it actually has many more real-world applications. Indeed, it is a reliable way of storing information about just about any type of transaction.
In fact, it is believed that 94% of Fortune 500 companies plan to launch some form of blockchain initiative in the near future.
For example, IBM recently created the Food Trust Blockchain to track the origin and journey of food products that reach their various locations. This helps the food and safety department identify anomalies in the supply chain and reduce the risk of food poisoning and other illnesses. If contamination occurs, the company can trace the product back to its origin and identify the source of the issue.
Here are other examples of how Blockchain technology is used in business:
- Banks and Financial institutions are adopting Blockchain technology to speed up transaction times and provide electronic services – such as bank deposits and transfers – during off hours. In addition, trading departments are using Blockchain technology to speed up settlements and clearing times.
Blockchain technology has near infinite use-cases across industries and sectors.
- Healthcare providers are using blockchain technology to store patient records securely. Once a medical report is created, it is incorporated into the blockchain, which means it will never be lost of tampered. Further, blockchains can be encrypted, so sensitive records can be stored with a private key, which means that only authorized personnel can access it.
- Currency is another major industry that blockchain technology will disrupt. Indeed, the IMF revealed that 100 central banks are currently exploring the possibility of creating their very own digital currencies based on blockchain technology.
- Voting can also benefit greatly from Blockchain technology. Major democracies are suffering from low voter turnouts, and the fact that the blockchains are transparent and immutable could boost voter confidence.
The bottom line is that blockchain technology’s ability to record transactions securely will favor adoption in almost every industry across the world.
The advantages of Blockchain technology
Blockchain technology has several advantages:
- Accuracy: on the largest blockchains, transactions are verified by thousands of computers, which results in accurate records and minimal human error.
- Transparency & Confidentiality: public ledgers can be verified by anyone. However, the private information regarding who is behind the transactions is not revealed. Blockchains are confidential, but not anonymous.
Blockchain technology has plenty of advantages
- Access: Bitcoin is the best example of blockchain technology “banking the unbanked”. An estimated7 billion people worldwide do not have access to bank accounts. Blockchain technology helps individuals in underserved areas get access to financial services and secure methods of storing and tracking information and assets.
- Cost: blockchains do not require third-party verifications, which saves consumers, businesses, and organizations money. For example, PwC believes that blockchain technology could reduce financial services infrastructure cost between US$15 billion and $20 billion per annum.
- Decentralized: the blockchain’s information is spread across the network. In some cases, thousands of nodes have copies of the ledger. Therefore, the risk of information being stolen and compromised is greatly reduced.
- Security: transactions are secure and permanent. It is very difficult for hackers and scammers to falsify transactions.
The disadvantages of Blockchain technology
While it has numerous advantages and use cases, Blockchain technology also has several drawbacks:
- Technology Cost: some types of blockchains consume lots of electricity. For example, Bitcoin’s Proof-of-Work system consumes more electricity than Argentina.
- Scalability: critics of blockchain point to the fact that the technology is currently unable to process large volumes of data quickly. Indeed, Bitcoin’ Proof-of-Work validates one block every 10 minutes, which amounts to roughly 7 transactions per second. In contrast, Visa can process up to 24,000 transactions per second.
Despite its numerous advantages, blockchain technology has several limitations
- Regulation: cryptocurrencies are notorious for escaping government control and enabling illegal activity. Indeed, several countries – including China – have tried to ban Bitcoin, unsuccessfully.
- Criminal Activity: blockchain provides a certain level of anonymity, which fosters criminal activity such as tax evasion and money laundering. However, the anonymity argument tends to fade away as governments start implementing strict Know-Your-Customer (KYC) policies and learning how to track movements on the public and transparent blockchain. The Canadian Revenue Agency claims it does not “have any trouble tracing transactions that involve mainstream cryptocurrencies such as Bitcoin.”
The Bottom Line
Blockchain technology is revolutionizing how individuals, businesses and organizations of all sizes share, store, and track information and assets. As the technology matures and spreads across industries, adoption will accelerate.
Michael Megarit is a partner with Cebron Group.