Advantage Blog

If you haven’t heard much about blockchain, you’re about to. Even those who are generally skeptical of pronouncements about ‘the next new thing’ have developed a growing appreciation of the transformative nature of blockchain, especially its potential to redefine how commerce is transacted across an increasingly wide variety of sectors.

A common misconception about blockchain is that it is synonymous with Bitcoin, or other cryptocurrencies. Blockchain is the underlying technology that makes these possible. You can have blockchain without Bitcoin, but cannot have Bitcoin with blockchain.

Blockchain is a decentralized, shared public ledger that keeps a record of all transactions that take place across a peer-to-peer network. It contains the records of all the transactions or digital events executed and shared among all participating parties. All the records in Blockchain are decentralized, irreversible, and non-removable. Transactions cannot be later erased but can only be sequentially updated, keeping a never-ending historical trail. It creates a trust layer that facilitates transactions among parties. Trust is replaced by cryptographic proofs, and trust is maintained by a network of trusted computers (called honest nodes) that ensure its security, as contrasted with single entities (for example, a clearinghouse) that create overhead or unnecessary bureaucracy around it.

We can deconstruct blockchain into its tangible elements:

  • Back-end database that openly maintains a distributed ledger
  • Exchange network for moving value among peers
  • A transaction validation mechanism, without needing an intermediary

A key enabling technology is network transport. There are some estimates that financial services companies are expected to require a 60% annual increase in bandwidth in the first five years of deployment. A critical factor for blockchain operation is securely interconnecting blockchain nodes and delivering fast data exchange between those nodes.

Blockchain is also highly secure. The blocks in the chain record data in hash functions with timestamps so that the data cannot be changed or tampered with. Because data cannot be overwritten, data manipulation is extremely impractical, securing data and eliminating centralized points that cybercriminals can target. Any changes to the database are immediately sent to all users to create a secure, established record. With copies of the data in all users’ hands, the overall database remains safe even if some users are hacked.

As with any technology, new or old, some concepts emerge as to how it’s used, as well as invoking a new vocabulary. The blockchain utilizes a new set of concepts: consensus algorithms, oracles, digital wallets, and transaction blocks. One that is arguably the most interesting is smart contracts.

Smart contracts (or digital contracts) facilitate the exchange of money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman. A smart contract can enforce a functional implementation of a particular requirement, and can show proof that certain conditions were met or not met. These can be strict implementations: if a car payment is not made on-time, the car gets digitally locked until payment is received. Smart contracts are triggered as event-driven processes, and can apply to anything that changes its properties over time and could have value attached to it.

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In another blog post we will discuss where blockchain in used.

 

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