Many people have heard about blockchain but very few understand what it really is. The extent of most people’s knowledge about blockchain technology is that it is the infrastructure that makes cryptocurrencies like Bitcoin work. However, technology has far more promising potential in other aspects, including business use. This blog is an easily digestible piece designed to help even non-techies understand blockchain and its underlying technology.
What is Blockchain Technology?
Imagine if you want to make a large transaction through your bank account. There are different levels of security, including one-time passwords and biometric verification. Most banks also require the confirmation of your linked phone number, in my case, my Spectrum Voice landline. Despite all these security layers, bank fraud and cyber-crime occur with alarming regularity. Blockchain changes this.
At it’s most basic, blockchain is a technology that allows you to create a shared ledger distribution. Every transaction in this shared ledger comes with a digital signature.
The digital signature proves the integrity and authenticity of the proposed transaction. This makes every transaction much more secure than a conventional digital transaction. This is one of the reasons many big enterprises are looking at blockchain technology with interest.
How Does Blockchain Work?
In a blockchain, structured data represents every entry in a financial ledger. This structured data is a record of each transaction in the ledger. Since the digital signature on each transaction ensures its integrity, the ledger and its contents are assumed to be taper-free. Simple enough? This is just the basics.
The real potential that blockchain has in the sharing and distribution of this digital financial ledger. You require and infrastructure or deployment to distribute the digital entries among. What this does is extremely important. With additional layers and nodes, you can get a consensus on the status of any given transaction at any time. Each node has a copy of the authentic financial ledger.
The Mechanism behind Blockchain
Let’s say you have blockchain deployed across your infrastructure. You want to execute a new transaction or edit an existing one. What happens? When this transaction enters the blockchain, the different nodes on the infrastructure execute complex algorithms. These algorithms help the nodes determine the integrity and authenticity of the transaction.
If a majority of the nodes reach the consensus that the transaction is valid, the blockchain accepts the new block of transactions. If a majority does not reach this consensus, then the blockchain rejects or denies the transaction.
This consensus ability is what makes the shared distribution of ledgers possible and secure. The blockchain infrastructure you have deployed will not have any need for a central authority. The consensus model allows it to identify both valid and invalid transaction based on the digital signature and user history.
The Advantages of Using Blockchain
Blockchain technology has attracted much attention from a diverse selection of businesses over recent months. This is because of a number of advantages to using structured blockchain. Some of these benefits include the ones listed below.
Blockchain can help businesses track how both digital and physical assets move through their supply chain. It can be structured to verify specific vendors and manufacturers. It can track assets all the way from the transmission to transportation to final locations. This helps businesses keep track of the value added with each step in the supply chain.
One of the reasons blockchain is attracting so much interest is its cryptographic integrity. Blockchain structures use digital signatures and user history to verify the integrity of a transaction. This makes it almost impossible for an unauthorized individual to execute fraudulent activities or harm data integrity. The pending transaction needs to clear several layers of security, including a validity consensus of a majority of the nodes. Theoretically, this helps prevent malware attacks and preserves the integrity of the structured data.
A blockchain distributed financial ledger does not require a central unifying authority to verify valid and invalid transactions. This makes it a particularly attractive option for businesses formed as the result of a joint venture of 50/50 stake. It eliminates the need for an independent arbitrator to manage financial affairs.
Since nodes within the blockchain technology can independently verify the validity of a proposed transaction, a unifying authority is not needed. You can completely cut out the need for a settlement agent or a clearinghouse. This helps to both reduce costs while boosting the speed and security of transactions.
The Limitations of Blockchain
Of course, like most things in this world, blockchain is not free from a downside. The biggest problem businesses face is applying blockchain to their business processes. This is primarily because blockchain is an open-source technology.
Open source technology typically features different projects. It also features different teams of people working on different aspects of blockchain. This makes a cross-functionally applying blockchain to business very difficult.
Theoretically speaking, you can configure the structure of a blockchain for different business functions. Each configuration can use a separate mechanism for the purpose of achieving consensus. You can also configure each structure to verify, include, and include the right participants in different ways.
Bitcoin is one of the most obvious examples of blockchain technology in practical use. In Bitcoin, blockchain creates a public ledger that is anonymous and open to anyone. However, there are different ways to configure blockchains to business scenarios.
Unlike Bitcoin, a business typically has a smaller number of authorized users. Many businesses make use of blockchains with stringent permissions to only a select few actors. The blockchain system recognizes and verifies these actors before executing any proposed transactions. This ensures only a limited number of people in activities that raise transactions.