Ever since its creation in 2009, blockchain technology has proven to be a powerful and disruptive technology with applications that go beyond the realm of cryptocurrencies. The list of applications for blockchain technology keeps growing, and more and more organizations are choosing blockchain technology for their software applications.
What is blockchain technology?
A blockchain is a distributed record on a shared open database that is maintained by a network of computers, which are called nodes, and is secured through consensus protocols of encryption and cryptography.
What makes up a blockchain?
A blockchain is made up of a series of blocks in chronological order according to when each block was created. Blocks contain:
- Data, also called a “payload”
- A time stamp marking the creation of the block
- An identifying hash value
- The previous block’s hash value
The payload can be any data, such as:
- A list of transactions, as in the case of distributed ledgers
- Code, as in the case of smart contracts
- Inventory and stock lists
- Music files
- Text or documents
- Sensitive information such as health data or personal identification
- Or nearly anything else.
A hash value is a string of numbers with a predetermined length that acts as an identifier, or fingerprint, for the data in the block. The block’s hash value of each block is created when all the data in the block is inputted into a cryptographic hash function (CHF). If the data is altered by even one character, a different hash is produced.
In the same way, if any of the data in the block is changed, even slightly, the hash value changes, and because each block must contain the previous hash value, all of the following blocks change as well.
In addition, CHFs have the special feature of one-way computation: while it’s easy to verify that the input is correct by plugging it into the function, reverse calculation — i.e. finding the input when only the output is known — cannot be done. (While it’s theoretically possible, in practical terms, it’s not feasible.)
In this way, each block is dependent and linked to the previous blocks, as well as those that come after it. This creates a highly-secure system, and is part of the reason why blockchain is often described as “tamper proof”, “immutable,” and “incorruptible”.
How are blockchains created?
How blocks within the chain are created is determined by a set of protocols agreed upon by the nodes. This set of protocols is called a consensus protocol.
There are many different types of consensus protocols, but the two of the most widely-used are Proof of Work (PoW) and Proof of Stake (PoS). No matter what protocol it uses, all blockchains are distributed, meaning that all nodes have the same copy of the blockchain. This creates a “single source of truth” that all nodes agree on and reference.
A blockchain can either be permissionless (public), meaning that anyone can create blocks and have access to the blockchain; or it can be permissioned (private), which means that only nodes allowed in the system can contribute to the blockchain. Permissioned blockchains may be a better choice for businesses and other closed networks that wish to reap the benefits of using blockchain technology, but do not wish for outsiders to have access to the chain.
The nodes of the blockchain can verify transactions and ownership through the use of public key (PK) and private key, also called secret key (SK), cryptography. The PK acts as an address that is publicly known, while the SK is private and only known to the owner. For example, in a cryptocurrency application, a user making a transaction uses the public key to encrypt the information and send it to the receiving party. The SK is then used to decrypt the data, and the transaction is finalized.
What are the benefits of blockchain technology?
Many applications can be built using blockchain technology, and the demand for local, outsourced, and nearshore software development in blockchain is growing. The benefits of using blockchain technology include:
- Decentralization, which allows peer-to-peer (P2P) transactions without going through a third party
- Removes the need for trust in individual parties because there is trust in the blockchain mechanism; in other words, transactions can be made even when individual parties are unknown to each other
- Security and protection against fraud
- Automatic execution of contracts
- Transparency, as all participating members share the same data
- Tracking goods, whether tangible or intangible
When a software development company is considering using blockchain technology, they should assess whether the project would benefit from any of these advantages. They should also consider whether a permissioned or permissionless blockchain is more appropriate for the project.
11 Ways a custom software development company can use blockchain technology
1. Cryptocurrency software and blockchain development
In 2008, the unknown person or group under the moniker of Satoshi Nakamoto created blockchain as the underlying technology for Bitcoin. While different cryptocurrencies have different protocols, the blockchain is the underlying technology for all of them.
In the case of cryptocurrencies, that data carried within the blockchain is a ledger of cryptocurrency coin transactions. For example, one line may declare that Person A sent 100 Bitcoins to Person B.
Each line is verified with PK and SK, which act as digital signatures. Digital signatures, like hash values, change depending on the data, and are one-way computed. In this way, Person A cannot copy the signature of Person B, and vice versa, ensuring that all transactions are legitimate.
When Person A wants to send coins to Person B’s wallet, they send out a request to all nodes asking that their transaction be completed by being recorded on a block. Those nodes are called miners. Miners verify the transactions by:
- Verifying that the transaction is indeed from Person A by checking the signature via the PK
- Using the PK to unlock Person B’s address
- Checking that Person A has unspent coins available to them
Miners choose which transactions to include in a block, and then they must solve a cryptographic puzzle (generally through massive “farms” consisting of thousands of specialized computer servers)–essentially finding the input (which can only be found by guessing) that will produce the desired hash output.
Once a miner finds the correct input, they have achieved Proof of Work (PoW). As a reward, they receive coins as payment. The block then is distributed and verified by other nodes, and ultimately added to the blockchain. Miners can also earn coins via transaction fees.
Blockchain solved the problem of double spending, which occurs when a person makes a copy of a digital currency and spends it twice. How does blockchain help make double-spending impossible? Imagine that Person A wants to send one Bitcoin to both Person B and Person C’s wallets. Both transactions would go out to all the nodes for verification. Once one transaction is verified, that transaction would be recorded on a block. However, the second transaction, through the same method, would be rejected as the cryptocoin would already be recorded in the chain. Once the double spending problem was solved, people were able to use cryptocurrencies of all kinds without fear of fraud.
While cryptocurrency software and blockchain development are closely related, there are a multitude of other applications in various industries and operations.
2. Smart contracts
The payload of a smart contract is a contract written in code, which can be automatically executed once the input demands are met.
A common metaphor used to describe a smart contract is that of a vending machine: when purchasing a soda from a vending machine, you’ll need to enter the correct amount for the item you selected. Once the correct amount of money has been introduced via cash or credit card, the vending machine releases the soda. Like vending machines, smart contracts are automatic, as long as the input requirements are met. They are also independent, since no third party, e.g. a cashier to verify the amount, is needed in order for the transaction to be executed.
Historically, two parties agree to a contract via a third party, like a lawyer or bank. They have also relied on third parties, e.g. judges, to execute or uphold those contracts when the terms are not met. Smart contracts remove the need for the third party, because the contract will automatically and independently perform. And once placed in the blockchain, the contract cannot be changed. Smart contracts can also be more cost-effective as well as faster to execute than traditional contracts.
One example of how this might work is flight insurance. If you’ve purchased an insurance policy that dictates that you’ll be reimbursed if your flight is canceled, and this contract is signed and stored on a blockchain, the smart contract can automatically reimburse you in the event that the flight is canceled.
Smart contracts could be leveraged in any industry or context that would benefit from automatic, independent, and immediate execution of agreed-upon contracts.
3. Dapps (distributed apps)
Distributed apps, or dapps, are applications that run on a decentralized network. They differ from traditional web apps in that the backend code does not run on a centralized server, but are distributed on a network of peer-to-peer (P2P) computers. However, like web applications, the front end code and user interfaces can be written in any code.
Ethereum was the first blockchain platform that used dapps, and the majority of dapps development is still concentrated there (although there are now other platforms, such as EOS, Polkadot, and Near). Powered by smart contracts, Ethereum allows developers to program and run apps that are immutable and autonomous on their virtual machine (EVM).
4. Supply chain management & logistics
Blockchain technology has a lot to offer when it comes to supply chain management and logistics. Permissioned blockchains are ideal in these scenarios, as businesses will want all participating nodes to be known and trusted. Permissioned blockchains also allow for a higher level of privacy–for example, if participating organizations are concerned about revealing their prices or costs, that information can be kept private, while details like the number of goods shipped or received can be shared.
Blockchains that act as digital ledgers can track inventory, recording data such as:
- Production dates
- Shipment/Delivery dates
- Expiration dates
- How much is in stock
Goods like medical drugs, produce, or mail could be tracked and traced as each line in the ledger records every transaction associated with the items.
Manufacturers could also share their inventory lists through a blockchain. This would increase transparency, and allow businesses to make faster and more accurate decisions based on what is and isn’t in stock.
Blockchains can also be used to record product orders, bank loans, and shipments. For example, if a retailer makes an order to a supplier, that order would be recorded on the chain. The supplier then might make a request to a bank for a loan in order to produce the items . The bank could see proof of the order on the blockchain and approve the loan, which would also be documented on the chain. Once the supplier ships the product, that too would be on the chain.
These systems could also be automated if smart contracts are used.
5. Personal identity security and management
The ability to prove your identity is vital to receiving services, owning property, buying and selling in the marketplace, and many other day-to-day activities like visiting the doctor or driving a car. Those who cannot prove their identity when necessary are left out of the system and barred access from anything to buying alcohol to voting.
As more of our lives are moving online, our personal identity becomes more and more vulnerable: identity theft and hacks into personal accounts present very real and serious security threats. There are also growing discussions about who owns and benefits from our personal data–for example, many companies track, buy and sell personal data. In other words, personal data has value, but rarely do the individuals reap the rewards of that value.
Blockchain technology has the potential to provide secure and decentralized identification, separate from centralized entities like government organizations or banks. It can also create systems in which people can fully own their data, and benefit financially from that data.
One example would be storing personal health data on a blockchain. Patients could give permission for researchers to use portions of their data. Smart contracts could then be used for researchers to “purchase” that data by sending the patient coins to their wallets. These coins could then be used to pay for health related costs or services.
6. International money transfer
Although new fintech apps such as Square, Venmo, Mercado Pago, and Ant Group have made peer-to-peer buying, selling, and lending easier, international money transfers can still cost a lot of time and money. Current banking systems are centralized, meaning that data is stored in a central database rather than distributed, and each bank may follow different rules and regulations. Most international transactions carry high fees, and can take hours or days to process.
Companies like RippleNet and IBM World Wire are trying to change that status quo by utilizing blockchain technology. A financial institution can join their blockchain network, and through their own consensus-building protocol, make transactions using cryptocurrency.
For example, if Person A would like to send $100 USD to Person B who lives in Japan, the bank would convert those dollars into cryptocurrency and then submit the transaction to the nodes in the network to verify. Once completed, Person B’s bank would receive the coins, and then could convert those coins into whichever currency the recipient desires. Once completed, the entire transaction is stored on the blockchain and cannot be changed or destroyed.
Both RippleNet and IMB World Wire boast that their transactions happen in real time, cut down costs, and are highly secure. The underlying belief is that things of value (such as cryptocurrency ) should be able to be shared and transferred as easily as PDFs or spreadsheets.
Companies like Follow My Vote are using blockchain technology to create a new system for voting that would solve concerns related to security, fraud, identity, corruption, and lack of access to physical voting sites.
One concern with current systems of voting is trust in the entities that hold and count votes. As a decentralized database, tracking voting on a blockchain would mean that votes wouldn’t be stored by one centralized entity. As a transparent and shared database, blockchains would allow everyone to view and count votes.
This would make certain types of voter fraud impossible, as each vote would be associated with one ID and could not be copied. Also, as a digital technology, blockchains allow people to vote on their personal devices, eliminating waiting in long lines or transportation issues.
8. NFT sales
Non-fungible tokens (NFT) are items that are unique and cannot be copied or replaced by something else. For example, bitcoin is fungible — one bitcoin is the same as any other bitcoin, and has equal value if replaced. However, a painting is non-fungible because it can only be replaced with an entirely different painting that may have different attributes or a different value.
Some examples of current NFTs are:
- Digital art
- An essay
- In-game item
- A domain name
- Digital sneakers
NFTs give power to content creators to own and control their content. They can determine the scarcity of their product, as well as the rights and permissions. They can also earn royalties.
Like dapps, most NFTs are part of the Ethereum blockchain, but other blockchains can and are implementing their own versions of NFTs.
NFT sales are a growing and lucrative market. Earlier this month, Forbes reported that NFT sales have topped 1.2 billion dollars in July, much of which came from demands for blockchain online games.
Using blockchains for NFT sales is revolutionizing the way we conceptualize value, while also giving more security and control to all types of content creators and entrepreneurs.
9. Secure sending of medical information (PHI)
The current system for tracking, maintaining, and accessing personal health information contains a number of flaws and inefficiencies. For one, patient health data isn’t stored in a centralized location — each person’s medical records are dispersed among many different health care providers, which makes it difficult to get the whole picture of a patient’s health history. There may also be concerns about security breaches, as each entity is responsible for designing and implementing their own security policies and procedures.
Blockchain technology could solve these issues. The blockchain could store notes from consultations with physicians, prescriptions, MRI images, surgical procedures, and any other manner of health-related data. Different healthcare organizations could send patient data to other organizations via the PK. Patients could then also access that information with their SK, and grant access to providers when needed.
10. Real estate processing
Blockchain technology could impact how real estate is bought and sold in a variety of way:
- Smart contracts could replace traditional contracts, and remove the need for third parties to be involved (such as lawyers and real estate agents).
- New platforms such as Property Club and The Bee Token are disrupting how properties are rented, bought, and sold.
- Sellers could tokenize their assets, allowing for the division of assets into smaller pieces and made available to small investors.
- Buyers or renters could pay for real estate with cryptocurrencies.
Blockchain technology could potentially offer higher liquidation opportunities and investment opportunities, as well as transforming the systems that are currently in place for renting and property sharing.
11. IoT applications
Blockchain technology allows for smart devices to interact with each other on a secure and distributed network, which could have far-reaching effects on Internet of Things (IoT) development. The distributed and decentralized features of a blockchain would allow smart devices to integrate and communicate with each other more efficiently than before.
For example, Chronicled combines IoT and blockchain to serve the pharmaceutical and food industries. Smart shipping containers and sensors provide real-time information about any particular shipment. Blockchain technology is then used to record and track that information, and since every node has a copy of the ledger, they can easily refer back to the chain to settle any disputes.