Understanding blockchain and its business implications

Blockchain is a secure database shared among participants, offering real potential for revolutionary changes. Blockchain technology has gained notoriety over the past decade as a major tech story, yet there is often confusion surrounding its fundamental principles. Despite its reputation for complexity, the basic idea of blockchain is relatively straightforward. Moreover, this technology can potentially transform industries in a major way.

Blockchain technology enables secure information sharing. Data is stored in a database, and transactions are recorded in a ledger. What distinguishes blockchain from other databases or ledgers is that it is a distributed database or ledger. In other words, the power to update a blockchain is distributed among the nodes, or participants, of a public or private computer network. This is known as distributed ledger technology (DLT). Nodes are incentivized with digital tokens or currency to make updates to blockchains.

The advantages of blockchain technology are numerous. It enables the permanent, immutable, and transparent recording of data and transactions, making it possible to exchange anything of value, whether a physical item or something less tangible.

There are three key attributes of a blockchain database. First and foremost, it must be cryptographically secure. To access or add data to the database, one must possess two cryptographic keys: a public key, which is essentially an address in the database, and a private key, which is a personal key that the network must authenticate. Secondly, a blockchain is a digital log or transaction database that exists solely online. Lastly, a blockchain is a shared public or private network database. One of the most prominent public blockchain networks is the Bitcoin blockchain, on which anyone can create a Bitcoin wallet or become a node on the network. Other blockchains may be private networks, which are more applicable to banking and fintech, where it is crucial to know who is participating, who has access to data, and who has a private key to the database. Other blockchains include consortium and hybrid blockchains, which combine different aspects of public and private blockchains.

According to research by McKinsey, blockchain-enabled transactions could account for up to 10 percent of global GDP by 2027. However, it is important to distinguish between what is real and what is mere hype in the blockchain world. Companies should carefully consider using blockchain to improve efficiency and create value.

How does blockchain work?

Blockchain is a digital ledger that records transactions securely and transparently. When data is added to a blockchain, it is stored in a block encrypted with a unique hash code. New blocks are appended to the chain rather than overwriting old ones, creating a permanent and immutable record of all transactions.

Consensus mechanisms, such as proof of work or proof of stake, ensure that new data is verified and confirmed by the network before being added to the blockchain. In a public blockchain network, miners are rewarded with an economic incentive for being the first to prove the legitimacy of a transaction.

One practical example of blockchain in action is decentralized ticket exchanges, where each ticket is assigned a unique and verifiable identity tied to a real person. Before purchasing a ticket, most nodes on the network validate the seller's credentials to ensure the ticket is legitimate.

Overall, blockchain provides a secure and transparent way to store and transfer data without a centralized authority or intermediary.

How to utilize blockchain for your business?

Blockchain and DLTs offer various opportunities for businesses, including decreased risk and compliance costs, cost-efficient transactions, automated and secure contract fulfillment, and increased network transparency.

One significant advantage is the reduction of risk and lower compliance costs. Banks spend up to $500 million annually on outdated know-your-customer (KYC) processes. Implementing a new DLT system with once-per-customer KYC verification can drive efficiency gains, cost reduction, and improved transparency and customer experience.

Another advantage is cost-efficient transactions. By digitizing records and using a universal ledger, significant time and costs can be saved. For example, two companies used blockchain to trade nearly $100,000 worth of butter and cheese, reducing a process that took up to ten days to less than four hours.

Smart contracts can also enable automated and secure contract fulfillment. These are instructions coded into tokens issued on a blockchain that can self-execute under specific conditions. For example, a retailer records all processes and actions from vendors to customers and codes them into smart contracts on a blockchain. This effort made it easier to trace the provenance of food for safer consumption, required less human effort, and improved the ability to track lost products.

Overall, blockchain and DLTs provide a range of benefits that can lead to increased efficiency, cost savings, and improved customer experience.

Blockchain technology has numerous use cases beyond just cryptocurrency transactions. One such example is creating an unchangeable audit trail through the sequential recording of transactions, which can be used to maintain records of static assets like land titles or dynamic assets like the exchange of goods.

In addition, blockchain can help companies track transactions and data down to their current status, providing enhanced security and preventing data breaches. The technology also supports smart contracts, automatically triggering transactions when certain contract criteria are met.