Blockchain Explained

For many people, if the term “blockchain” means anything at all, it’s probably associated with the digital currency bitcoin. While bitcoin has gotten lots of press for its mysterious founder(s) and wild swings in valuation, it’s the blockchain infrastructure behind it that’s poised to be a truly transformative innovation. In fact, blockchain has the potential to reshape some of the foundational structures of our economy and society.

Why Blockchain Matters

First, what is blockchain? In short, blockchain is a distributed database designed to facilitate transactions and keep track of assets. This may seem like a relatively straightforward goal, but historically these have been major problems for consumers, businesses, financial institutions, and governments. Even in the digital age, fraud and forgery remain difficult problems, and merely processing transactions can be absurdly expensive for both buyers and sellers (think of the fees charged by banks and credit card companies). And then, even when everything goes according to plan, it still takes time to execute and verify transactions.

Taken together, these inefficiencies can significantly slow down the pace of business, potentially leading to lost revenue for individual businesses and lower growth for the economy as a whole. Blockchain has the potential to solve or alleviate many of these fundamental problems. According to the Harvard Business Review, blockchain is less a disruptive technology (i.e., one that upends a particular industry, like the way the .mp3 disrupted the music industry) than a foundational one, meaning something that has the potential to fundamentally reshape our economy and society, the way TCP/IP paved the way for the World Wide Web and in the process upended our decades-old telecommunications infrastructure.

In practical terms, that means that blockchain is less likely to overthrow current means of recording, verifying, and executing transactions overnight. Instead, it may slowly gain traction over a period of years, until its so widely used that it simply becomes how things are done.

Building a Blockchain

So what exactly is a blockchain? By itself, a blockchain is just a file, similar to a database file. You’ll be unsurprised to find out that the two key components of block chain are blocks and the chain. Blocks store transaction data and are identified with an unique string called a hash, which is determined algorithmically by the contents of the block. (Note: The transactions are timestamped and given their own hashes as well, but ignore that for the moment.) Those blocks are strung together chronologically to form the chain, which grows as more transactions are added.

The blockchain itself is hosted across a number of computer “nodes,” which are simply computers that have a distributed copy of the blockchain. These nodes validate and pass on new transactions, which are then added to the chain as a new block once they’ve been validated by enough nodes. By distributing the validation process across many different nodes, blockchains make it extremely hard for any individual bad actor to get a fraudulent transaction into the chain.

Blockchain and Bitcoin

To get a sense for what makes blockchain special, it’s helpful to know a little about bitcoin and how it works. As you may know, the idea behind bitcoin was to create a digital currency that’s not controlled by any central authority. That means there’s no Central Bank of Bitcoin dictating the supply of bitcoins and no need for banks to store them. Instead, bitcoin is enabled by a massive peer-to-peer network. At the center of that network is the blockchain, which serves as the distributed public ledger that records and verifies every bitcoin transaction. A distributed ledger has a number of advantages over traditional systems of recording and processing transactions:

1. It’s frictionless, since there are no intermediaries like banks or credit card companies.
2. It’s authoritative, since there’s only one authoritative, publicly accessible ledger.
3. It’s secure against errors and fraud, since every alteration to the ledger is recorded.

Because they were developed simultaneously, blockchain and bitcoin are closely related. That doesn’t mean they’re the same thing, however. In the same way that Wikipedia is the most prominent example of the wiki framework, bitcoin is currently the most widely known application of blockchain. In the next section, we’ll look at some other ways blockchain is being implemented, as well as potential future applications.

Blockchain Beyond Bitcoin

Many of the same features that allow blockchain to record and guarantee transactions without a central authority also make it an attractive solution for many businesses and industries. From a business standpoint, blockchain’s two major advantages are its efficiency and reliability compared to traditional accounting methods.

Take a hypothetical supply chain, for example. A typical supply chain for a modern car company includes a huge number of parts from many different suppliers in multiple countries. If there’s a major problem with the finished car, it can be enormously costly and time consuming not just to fix the problem, but even to identify where the problem originated so that it can be fixed. A major part of this complexity is the profusion of different records, many of which may be incomplete or incorrect, and all of which will need to be reconciled across the various manufacturers, subcontractors, suppliers, shippers, etc. Imagine, though, if these records all existed on a blockchain distributed across the relevant parties: the chain would be an authoritative record that all parties could access and agree on, with complete provenance information so that defective parts or inefficiencies can be precisely identified and corrected. Taken together, these advantages could potentially confer major benefits in efficiency and quality across the supply chain.

Let’s consider a few other examples. In the healthcare sector, blockchain can be used to manage patient records across doctors, hospitals, pharmacies, and insurers. Privacy permissions and encryption can be configured so that the system complies with HIPAA and other regulatory mandates.

In the banking and financial sectors, blockchain can dramatically reduce the time required to process transactions and settle disputes by providing a highly visible record during negotiations and the execution of complex deals. It also dramatically reduces the likelihood of fraudulent activity as all parties rely on the same authoritative source which can also function as an audit trail for regulators.

Of course, current regulatory mandates still require governments to maintain their own ledgers and conduct their own oversight. That said, it often takes legislation and regulation some time to catch up with new technological developments, and resistance from certain stakeholders can be immense. (For a timely example, just observe the way ISPs have fought the FCC’s efforts to reclassify the Internet as a utility.)

Should You Build Your Own Blockchain?

Keep in mind that it’s still very early days for blockchain, and we’re still figuring out new use cases. As of now, blockchain is really just a concept that can be implemented in any number of ways–there aren’t yet universal standards or best practices in many cases. If you’re interested in starting your own blockchain, it’s important to clearly define your use case. Does a blockchain solve a real problem for your organization? Do you have the in-house development and IT resources to invest in it, or will you need to bring in freelance experts?

If you don’t want to code your own blockchain from scratch, there are both enterprise and startup options available. Hyperledger is an open-source blockchain project with contributors from IBM, SAP, Airbus, Deutsche Bank, and other major companies to both encourage the adoption of blockchain while advocating for a common set of standards. The Hyperledger project includes a number of open source implementations of the blockchain framework geared toward different use cases. Alternatively, Ethereum and Multichain are two open platforms for building blockchain applications designed to help teams get a blockchain up and running relatively quickly. It’s designed to be developer friendly and highly customizable.

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