Blockchain: the possibilities beyond cryptocurrency
As Bitcoin has become a household name, the concept of a digital currency existing outside of government or institutional control is equal measures thrilling and perplexing. Mentioning Bitcoin at social gatherings usually produces a mix of responses: grimaces, enthusiastic thumbs up, and shrugged shoulders. We are quite possibly on the brink of the next technical transformation, and it’s not just Bitcoin itself, but rather the technology powering this cryptocurrency that has technologists so excited. This innovation is called blockchain technology, and it’s the reason Bitcoin emerged as a successful digital currency and solved the double-spending problem that has plagued digital currencies since their development in the 1990s.
As businesses and financial institutions are scrambling to adapt to the idea of Bitcoin as a new disrupter, they are also seeing the potential to leverage the underlying technology to solve problems and improve efficiencies. Over the past 20 years, digital solutions have helped streamline processes and improve innovation across many industries, but many bottlenecks still remain that slow down progress. For example, in business and finance, creating and recording transactions still involve manual tasks that are arduous and time consuming, requiring paperwork trails, chains of approvals, and red tape. A simple stock trade could take a week to approve and record. These deliberate procedures still exist in order to try to protect and secure sensitive records. So far, no digital solution has come along that can absolutely guarantee the highest level of security. Enter blockchain. In 2009, Satoshi Nakamoto implemented Bitcoin and the first blockchain database, starting a chain of events that could eventually lead to a transformation in the way value and information are transferred and recorded. Blockchain technology is poised to clear bottlenecks and obstacles and has the potential to foundationally change transactional operations.
So, what is Blockchain? Blockchains are defined as digital, public ledgers (or databases) for managing transactions and information. This may sound mundane, but the way these databases operate is quite remarkable. The easiest way to understand how blockchains work and why they are so unique is to visualize how a single record is inputted and stored in a blockchain.
How Blockchain Technology Works
• Step 1: Transaction requested
Anyone can request a transaction to be included in a blockchain. This could be anything from record of a monetary transaction (e.g., Bitcoin transaction) to a record of a stock purchase to record of a donation to a nonprofit. The possibilities of blockchain are endless.
• Step 2: Node network verifies and validates the request
The blockchain’s network of computers and servers (i.e., nodes) located all around the world instantly and collectively verify and validate the request for the "block". The network uses collective consensus based on algorithms and pre-approved rules to stay in sync and run smoothly.
• Step 3: Request accepted, and transaction recorded
If the transaction is accepted, it is encrypted using cryptography and becomes a record stored in a “block”. The block is connected to the previous block by a link (aka, “hash function”), which then builds a secure and chronological chain. At this point, the record is permanent and cannot be edited or reversed.
• Step 4: The blockchain is updated across the network
Not only are the records linked together creating a secure, relational chain, but the entire blockchain is also constantly being updated and duplicated across all the nodes on the network.
Blockchain technology has a simple architecture, but relies on powerful systems to create a robust solution:
• Peer-to-Peer (P2P) Technology
Who would have known that after Napster’s demise, P2P technologies would rise again to become big players (Venmo, Uber, Spotify, etc.)? Blockchains take advantage of P2P technology by providing a platform where two parties can exchange or record information, without an intermediary institution overseeing or controlling the transaction.
• Consensus Network
There is power in numbers, and blockchain’s node networks prove that. These networks, comprised of an unstructured collection of localized computers and servers spread out across the world, replace the function of centralized institutions in creating ledgers. These are collective communities formed in the shared interest of keeping databases independent, secure, and transparent by housing localized, live copies of the blockchains.
Blockchains use this military-grade, complex mathematical algorithm encryption over multiple points of the chain. In order to decode a record, users need a secure pin that identifies them as a valid user.
Advantages of Blockchains
Banks and financial institutions, especially, have already recognized the power of blockchains, and many are already exploring how to implement this technology to improve efficiency. So, what are the advantages to using blockchain technology over more traditional digital solutions? Blockchains are:
Remember those bottlenecks that are dragging down efficiency across all industries? Blockchains are the solution that can automate repetitive administrative tasks and eliminate the need for intermediary approvals in order for transactions to occur. The are also instantaneous, eliminating long wait time that other regulatory systems require.
Blockchains reject the notion that security is only possible through a centralized entity. As we have seen, institutions are sitting ducks for hackers. Because of the framework of blockchains, cryptography at multiple stages, and the connected network overseeing the blockchain, it has multiple levels of security. Hacks and corruption to any one copy of a blockchain become extremely and immediately obvious.
• Permanent, Transparent, and Anonymous
Once a transaction is recorded into a blockchain, it is permanent and can’t be altered. The record can be later be appended with a new record, but the first record always exists, created a digital paper trail. Blockchain ledgers are also transparent and viewable to all interested parties, whether that be the general public or a private entity (depending on the purpose of the blockchain and how it is implemented). One of the most amazing features of blockchains are the anonymity they provide. Transactions are not linked to a user’s personal information, but rather their digital identity, which is void of the heaps of personal information traditionally provided to institutions during most transactions.
Possibilities of Blockchains Beyond Cryptocurrency
Blockchain technology is still in its infancy, but the functional possibilities of blockchain are endless-its applications extend well beyond crytocurrency. It’s application in the financial world is already beginning to make transactions of all kinds instant. In the tech industry, blockchains are becoming the preferred way to store all the incoming data from IoT devices. Despite their vast potential, blockchains are not easy to develop and implement. Not to worry, though, tech giants and startups have already been hard at work developing tools to make blockchain technology cost-effective and accessible to single users and businesses of all sizes. Companies like IBM, Microsoft and Amazon are starting to offer blockchain as a service (BaaS) solutions, while start-ups are developing blockchains for specific needs. The opportunities exist for blockchains to transform the way business is conducted on a global scale.
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