What is Blockchain Technology and How Does it Relate to My Business?
Blockchain technology is a modern, currently-evolving, revolutionary decentralized digital ledger-system that was originally created for the Bitcoin (cryptocurrency) system. While blockchain technology is often synonymous with Bitcoin and other digital financial systems (cryptocurrency that rely on the digital ledger-platform), developers and researchers have been able to devise a myriad of potential uses for the system. Such uses have the opportunity to radically alter how many digital systems operate, from banking and economic systems, to health and business records, to intellectual property records, to the way contracts are carried out, to the way the Internet itself operates.
The Blockchain is a radical departure from current systems mainly due to its decentralized nature, where the network is distributed across volunteer nodes which are typically run by “miners.” This allows for decentralized verification of financial transactions by those running the nodes, and - in conjunction with strong cryptographic measures - due to its decentralized nature, the network is difficult to hack. That said, Blockchain technology is a brilliant conception that is perfect for all types of record-keeping protocols (including financial spreadsheets, databases, and ledgers) - which on the blockchain becomes “shared data” that is decentralized and distributed in the blockchain network - along with a myriad of peer-to-peer systems. Such P2P systems can include contract systems, payment systems, and data transfer/sharing systems (e.g. Internet Relay Chat, and the Internet itself).
With the latter, replacing certain centralized, client-server data communication systems with a global, decentralized system can allow for an upgrade of the Internet, into the Web 2.0.
Despite being such a powerful platform for digital databases and other uses, the actual inception of Blockchain technology is shrouded in mystery. Remembering that the blockchain was originally created as an open-source platform for Bitcoin, the whitepaper describing the platform for Bitcoin was published in October 2008 by a person (or group of people) using the pseudonym Satoshi Nakamoto. The paper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” elaborated on how individuals could utilize a decentralized peer-to-peer payment system without any intermediary financial institutions. The open-source code was released in 2009, while the identity of Nakamoto - to this day - was never confirmed.
Bitcoin is a decentralized cryptocurrency which is “mined” by using powerful GPUs to solve complex, cryptocurrency Hash-based problems (SHA-256 based). As noted by Audrey Watters of HackEducation (2016), Satoshi was the first miner when Bitcoin went live in 2009. By 2011 Satoshi’s presence - regarding code, forums, papers, etc. - disappeared. Mining and verification processes require cryptographic signatures with keys, which (regarding Satoshi’s PGP keys) has been used by some to falsely attempt to indicate authorship of the Blockchain and Bitcoin systems.
As a decentralized currency, Bitcoin has no central authority, and - instead of being an actual coin - is really a shared financial database (i.e. a spreadsheet) recording all transactions or transfers of the digital asset, which is backed by the large amounts of electrical power that are used to solve the hash problems. Without a central authority (such as a bank), Bitcoin is not controlled by anyone and has no permanent, global regulatory body - other than the volunteer miners who run the nodes, but act as a collective to mutually verify transactions via the system.
How Does Blockchain Work?
Bitcoin - like fiat currency - is a digital asset that is used as legal tender. Due to having value specifically for trading (for goods/services), bitcoin is significant and unique in that it is based on a system that is publicly available, has no intermediary party, is secure, and is immutable. Regarding the latter, data written (distributed) to the blockchain is, for the most part, read-only and cannot be copied.
That said, the blockchain (as it applies to Bitcoin) is the digital-ledger system for all financial transactions. Like a shared spreadsheet/database, all transactions are verified by the volunteers that run the nodes of the blockchain. Transactions and data are written in groups called blocks, which are added to previous transactions/blocks, creating a timeline (or chain) of blocks: hence, the blockchain. This time-based system is important for establishing agreement (between nodes) of when a transaction occurred so as to prevent fraud.
To use the blockchain users require a digital wallet (located on the network at a particular wallet address), which requires the use of asymmetric cryptographic keys (a public key for encryption and a private key for decryption). There are a very large number of possible wallet addresses, allowing for near-complete anonymity when using Bitcoin/Cryptocurrency. In addition to this, the network checks past transactions associated with a specific wallet address to determine how much Bitcoin is available for transactions (that is, how much Bitcoin is unspent), which - with the time-based system - solves the double spend problem. For a block to be added to the chain, miners (those running the nodes) must solve complex mathematical problems which requires the values of the previous block. The miner who solves the problem adds the block to the ledger/chain and is rewarded with a certain amount of BTC (Bitcoin).
The blockchain is ongoing so that all transactions are verified and written immutably, while the records remain publically available (in being decentralized/open source) and accessible to the public. This transparency is very valuable when it comes to business transactions and contracts, along with being significant when it comes to public records and records associated with licenses, intellectual property, etc.
What is the Purpose of Blockchain?
Bitcoin was made to be a decentralized, peer-to-peer financial payment system that does not require a middleman for trust, guarantees or legalities. This system helps to reduce current and past reliance on banks and lawyers with regards to contracts and all methods of payment protocols. With past systems, centralized authorities stored all financial data and were required to verify all financial transactions, while the funds of end-users were largely in the hands of (and under the control of) third parties, such as banks and credit unions. The blockchain stores all financial data across a distributed network, creating a decentralized system run by - and verified by - a global network of miners, so no one person (and no central location) controls the financial system.
As an open-source, transparent and public system, all contracts and peer-to-peer payments become secure and no longer require a neutral, third party. If person A needs to pay person B, they can trust one another, use a neutral third party to verify that the payment has been completed according to an initial agreement (i.e. contract), or use the decentralized, public blockchain for the payment/contract, where a network of miners verify the required payment and all records are accessible, open and immutable. To highlight the political significance of such a system (regarding democracy) - instead of a single, centralized authority handling the monetary affairs of end-users, a collective network (that is distributed and decentralized) verifies the transactions and updates the digital ledger accordingly. With that, instead of trusting central banks and credit unions with funds, users can put their trust in a network that securely and collectively verifies and process all transactions. Such a system puts the power not in the hands of governments or banks, but in the hands of the people, which can help to mitigate political corruption and undemocratic policies.
Blockchain vs Blockchain Technology - What is the Difference?
The original blockchain was designed specifically for the Bitcoin cryptocurrency, while blockchains today are also used for the myriad of altcoins that exist as well. That said, since the blockchain source code was originally published as open-source C++ code - and the premise of a decentralized digital ledger-system can be used for a myriad of purposes - many blockchain technologies have been developed to take advantage of the Bitcoin system’s original model. Such custom blockchain platforms were built based on the original open-source Bitcoin blockchain - some run the development of apps and/or digital-ledger based contracts (smart contracts). That said, blockchain technology is simply any non-bitcoin, blockchain platform that is based on the general premise of the decentralized platform/network. To this end, many banks, financial systems, health institutions, tech companies, educational enterprises, and research organizations have developed their own digital-ledger system (i.e. blockchain technology) for financial transactions, health records, data collation, information distribution, etc.
After the rise of Bitcoin, many alternative coins - or altcoins - arose, while several notable blockchain platforms were developed to form development environments with the specific altcoin(s) as “fuel.” Two notable mentions are Etherium (which runs smart contracts and Decentralized apps/Dapps), and Neo/Antshares, commonly referred to as the “Etherium of China.”
Is Blockchain Only Useful for Crypto Currency?
As noted before, digital ledgers (specifically, the blockchain) is not limited to simply recording financial values and/or transactions. Decentralized ledgers can be used in the same way that any database is used - to write records, information, and all types of data. However, virtually any network system that works via data communications (e.g. client-server models, the TCP/IP internet protocol) - which typically use centralized servers - can be made into a decentralized, immutable system built on a custom-blockchain. This includes an upgraded internet, cloud storage, Internet of Things (IoT) devices, decentralized voting systems, systems for recording Intellectual Properties (IPs), messaging systems, IP proofing mechanisms, app development, and more.
In fact, regarding the latter, one of the most prominent uses of blockchain technology associated with business workflows is the use of smart contracts via Dapps, which run off of a custom blockchain and use a specific altcoin as “fuel” for payments/contracts. Such is the case with the Etherium and Neo platforms, as noted previously.
Specifically, smart contracts are business or peer-to-peer contracts that are based on, verified/signed by, and run via the Etherium (or alternative) blockchain, which usually includes automatic payments (in the form of the native altcoin) after the contract is verified as complete based on the conditions stipulated. Such contracts are stored on the blockchain and run via specially engineered software that operate in the same way as centralized computer programs - yet such decentralized apps (Dapps) run via the decentralized blockchain. Etherium is the most well known blockchain platform that utilizes smart contracts and Dapps.
Non Currency Related Uses for Blockchain Technology
As mentioned above, there exists a potential myriad of possible uses of blockchain technologies. Essentially, any industry, process or service that can leverage a digital ledger-system, and transform a currently-used centralized platform into a decentralized one, can take advantage of blockchain technology. Thus, as previously stated, blockchain technology is far bigger than Bitcoin, altcoins and cryptocurrency as a whole, and can be used in multitudes of ways outside of the financial industry:
- Cloud storage: Data storage in online, centralized systems via cloud servers is an important and significant step forward in the tech industry. However, contrasting current methods of cloud storage - and cloud computing - decentralized digital-ledger systems could offer transparent, secure, non-centralized data storage for end-users worldwide. This same type of system (decentralized servers with data distributed in the global network) could upgrade the internet and all P2P (peer-to-peer) communications and data sharing.
- Decentralized voting: In an era where even voting uses technology - and political voting scandals make headlines - the use of a transparent, decentralized, immutable system for national voting could all but eliminate voting fraud, corruption and other political issues surrounding democratic elections. The use of centralized systems - where data is kept in a central location and a small number of individuals are responsible for its control - contrasts such a decentralized system, where the power is put in the hands of common people, possibly decreasing corruption and enhancing democratic, political procedures.
- IP Proofing: Blockchain technology has the potential to easily be applied to the industry of product copyrights and intellectual property management, proofing, licensing, sales, etc. This could also include using the decentralized, distributed ledger as a record-keeping system, which - due to being both transparent and immutable - would make it easy to manage and keep track of copyright licenses, and the legal process of proving authorship/ownership of products. In an age of DRM (digital rights management), such a novel system could help to prevent the unauthorized distribution of digital products, while doing so in a transparent, open/public manner.
- Messaging systems: With the advent of P2P systems, such as Internet Relay Chat (IRC) and encrypted messaging systems, directly connecting end-users via a distributed network could help strengthen security, stop hacks and illegal data-tapping, and create a transparent, trustworthy system of data communications.
It is important to note the significance of blockchain technology being decentralized. For instance, one of the major issues with the TOR network is the possibly-unsavory nature of whoever controls the exit node. However, this still represents a centralized authority, whereas the blockchain is a distributed network among many volunteers that run each node, where all must mutually work together for verification, thus no one person controls any part of the network.
What Could Blockchain Mean for Small to Medium Sized Business?
Blockchain technology can have a profound impact on both large, medium and small businesses. While the blockchain was originally created with financial systems in mind - and thus could serve as a powerful, transparent system of payment for business contracts (i.e. smart contracts), the blockchain can also be used as a distributed record-keeping system, as a way to verify and prove the integrity of business data for licensing and sales. Business-based Blockchains can also be used as a peer-to-peer communication protocol, whether that be an intra-business internal communication system, or an inter-business telecommunications model. This could allow for more transparent, secure and simple business workflows and models, and could even allow expansion and the targeting of demographics which, previously, were not attainable. For instance, certain economies worldwide have grown - and do business internationally - only when digital currency was adopted. Additionally, because bitcoin (though volatile) resists inflation, it could become a safety currency in the event of a global crisis, much like gold is.
Yet another way that the blockchain is transforming businesses is by the use of Initial Coin Offerings (ICOs). ICOs are essentially digital forms of publicly-traded Initial Public Offerings (IPOs), which allow investors to buy “shares” of a company in order for the business to raise funds. The ICO system is usually used to offer new, underlying altcoins (tokens) in exchange for investor’s Bitcoin or Ether (regarding Etherium, for the latter). With the initial tokens, such investors essentially have “shares” in a company, which is based on the overall value of the company and its coins, which essentially gives the coins its value as a digital, tradeable asset. Using an ICO can be used as opposed to utilizing traditional IPO and stock/bond options, all while helping to both fund the company and give the underlying coin more value.
The blockchain, cryptocurrency, and blockchain technology has the potential to radically alter the global economy, financial systems, and virtually all technology that uses a network. Transforming record-keeping systems, banking systems that use fiat currency, the Internet, and peer-to-peer payment and communication systems, etc. will ultimately impact both businesses and day-to-day end-users. It is imperative that businesses, executives and managers understand how blockchain technologies are evolving, how they can be used and leveraged, and what novel business models and ventures they offer for future innovation.