With all the buzz on blockchain in the media, the average person, business-owner or executive may have unanswered questions on what blockchain really is.
The buzz on the term “blockchain” is hot and it has been used to describe many different applications of the technology. When Bitcoin first boomed in 2017, it was the first time most of the general public ever heard of the idea of blockchain or cryptocurrency. Bitcoin is a worldwide payment system that operates outside of the traditional banking system. It uses a digital currency (bitcoin) with encryption techniques in order to secure a verified transfer of funds between parties.
Blockchain, however, is much more than bitcoin. It is the underlying system that allows it to run and has numerous applications outside of finance, in high-risk industries that require workflow digitalization, traceable, irreversible information, privacy and transparency of information as well as fraud reduction
Breaking down blockchain
The simplest definition of blockchain is that it is a “distributed ledger”.
According to Investopedia:
A distributed ledger is a database that is consensually shared and synchronized across networks spread across multiple sites, institutions or geographies. It allows transactions to have public “witnesses,” thereby making a cyberattack more difficult.
A useful analogy for the basic “public witness” effect of blockchain technology is a soccer game. In any sports game there are multiple parties that make the game possible: the players, coaches, referees, sports officials and viewers. For a point to be given in a soccer match, all of these parties have to agree that the goal was scored fairly, by the rules of the game. Once all have agreed and the point is given, it is very difficult for the score to be reversed.
In the same way, blockchain records transactions across a shared network of parties, such as the parties in a supply chain. These transactions are verified by consensus by all parties. In the precious metals industry, as raw materials move along the chain from mine to smelter, each transaction between parties is verified and encrypted so that the data associated with the transaction is immutable (cannot be changed).
Think of the distributed parties in a supply chain as “matryoshka dolls.” They are assembled together based on set parameters like size and shape. Similarly, parties in the supply chain set parameters for transactions. With each recorded transaction in the supply chain, the dolls are assembled into one form- representing consensus on the data among parties. An odd doll will not fit, nor will ill-recorded or forged data. The transaction data is therefore verified by peer consensus and secured by the layers of encryption each party (matryoshka doll) gives. At any point in the supply chain, a hacker would need to remove all the layers of encryption (dolls from the formation), in order to alter the data.
According to an article by Deloitte, blockchain operates using the following principles:
- Distributed verification: consensus amongst distributed parties within a network removes the need for an intermediary to validate transactions
- Digital signatures: allows users to remain anonymous while still having unique accounts
- Immutability: recorded transactions cannot easily be changed, allowing for a secure system
- Time-stamped transactions: allows for easy tracking by recording date and time
- Consortium networks: private networks can be established, limiting access to the network
- Smart contracts: transactions can be automatically executed once defined conditions are met
Is blockchain a disruptor?
The main principle of blockchain is that it removes the need for a central authority, or intermediary to verify transactions, replacing it with a distributed ledger (peer-consensus) as a tool for data verification. In the world of finance this means that banks are eliminated from the equation. This, of course, means blockchain has the potential to turn the current system of financial and government operations on its head.
Deloitte has identified three potential barriers to blockchain:
- Regulations: blockchain presents a fundamentally different way for industries to function, and while regulators are closely examining its effects, there are still regulatory uncertainties which prevent its broad-scale adoption
- Awareness: lack of public understanding around how the technology works, and its applications outside of bitcoin
- Culture of resistance: given the radical transformation blockchain offers by removing the central authority, it is expected that it will face resistance, so it is important to reveal how blockchain can be smoothly integrated
Building with the buzz
Blockchain is today, what the internet was in the early 1990s. Just like internet has made search and communication faster and cheaper, blockchain has the potential to make data transactions more efficient and secure. Peer Ledger has been named by Deloitte in it’s 2018 report, “Tracking the Trends: 10 issues shaping mining in the year ahead”, as an example of how “blockchain enabled solutions could transform the relationship with mining companies and communities.”
With the adoption of new technology, there are constant changes and challenges accompanying the buzz. As the world adapts to blockchain and its use spreads exponentially, the focus is on how blockchain can be integrated into our current systems with the best transition.