What Is Blockchain Technology?
Today’s businesses are turning to enterprise blockchain for transparency and security. Organizations are searching for a simple blockchain definition to help them understand this emerging, “distributed ledger” technology. Here’s what savvy companies need to know about what it is, why it matters, and how it works.
Blockchain explained: What is it?
Blockchain is often referred to as a real-time, immutable record of transactions and ownership. But what does that mean? Basically, it is a reliable, difficult-to-hack record of transactions – and of who owns what.
Think of a database with information stored in blocks. These blocks can be copied and replicated on individual computers. All of these are identical and synced with one another. When someone adds or subtracts data, it changes the information across them all.
Each one is just as secure as your online banking portal – nearly unhackable. Blockchain ledgers can incorporate a wide swath of documents, including loans, land titles, logistics manifests, and almost anything of value. Big Data information can be shared in a multi-verification environment that is perfect for real-time, secure information sharing.
Because the technology is advancing, use cases are evolving. As the number of business verticals using blockchain expands, adherence to data privacy laws becomes paramount.
Blockchain-as-a-service (BaaS) folds the blockchain distributed ledger platform into the cloud-based software delivery and licensing model already popular with enterprises looking to cut costs while increasing security and efficiency. BaaS supplies the accountability, transparency, and security of blockchain already noted without using in-house resources, as service providers maintain the BaaS network in the cloud.
Momentum for blockchain technology is clearly building with Gartner estimating blockchain generating 3.1 trillion in business value by 2030.
Why is blockchain important?
Blockchain is important to security. Here’s why. New blocks (with new information) are always added to the end of the chain. Each addition has its own digital signature or hash that is a series of numbers and letters. Think of a secret math code of sorts. Change an amount or number in the block once it’s been added and these signatures change too.
Hackers would need to correctly change all the information up and down the blockchain to be successful.
This technology also cuts out the middleman to help companies save money – and make more of it. Blockchain allows enterprises to validate and carry out safe transactions more directly. Theoretically, deals get done without lawyers, bankers, brokers, and other middlemen. And they get done in a more interactive way since data changes can be made by anyone in the chain, and then viewed and validated by other participants.
How does blockchain work?
How blockchain works is explained best by understanding the communal aspect. It is based on what’s called distributed ledger technology. Everyone in the peer-to-peer network making up these ledgers can look at the same information in individual blocks.
A transaction that gets recorded on one computer or node is visible to each of the computers in the digital network. Everyone can see the same data. What’s more, they can reject or verify what they see. The information is then communicated to every other block in the chain.
This is what makes the technology very difficult to hack. No one computer controls the data and to change it in one block would mean the entire chain needs to follow suit. Everyone has a copy that is automatically updated; alterations need to be verified by everyone in the network. And with the addition of programmable code (first suggested by Russian-Canadian Vitalik Buterin, co-founder of the Ethereum Network) the technology can be used to create “smart contracts” that can execute agreements when certain conditions are met.
What are the key benefits of blockchain?
The transparent and unalterable nature of blockchain technology lend it to a number of advantages for organizations:
- Transparency: Information in blockchains is viewable by all participants and cannot be altered. This will reduce risk and fraud while creating trust.
- Security: The distributed and encrypted nature of blockchain mean it will be difficult to hack. This shows promise for business and Internet of Things (IoT) security.
- Fewer intermediaries: Blockchain is a true peer-to-peer network that will reduce reliance on some types of third-party intermediaries. This makes processes more efficient and means fewer opportunities for data entry errors as well as fewer transaction fees.
- Traceability: Because blockchain data is unalterable, it’s ideal for tracking and tracing items or provenance through complex supply chains, for example.
- Greater efficiency and ROI: Distributed ledgers will provide quick ROI by helping businesses create leaner, more efficient, and more profitable processes.
- Faster processes: Blockchain can speed up process execution in multi-party scenarios – and allow for faster transactions that aren’t limited by office hours.
- Automation: Blockchain is programmable which makes it possible to automatically trigger actions, events, and payments once conditions are met.
- Data privacy: While information is verified and added to blockchain through a consensus process, the data itself is translated into a series of letters and numbers by a hash code. Participants in the network have no way of translating that information without a key.
What are the four types of blockchain networks?
There are four main types of blockchain networks, each suited for different purposes:
- Public blockchains: The earliest and most prominent examples of blockchain networks, Bitcoin and Ethereum, are public networks. Anyone can read a public blockchain, send transactions to it, or participate in the consensus process. They are considered to be “permissionless.” Every transaction is public, and users can remain anonymous.
- Semi-private blockchains: Semi-private blockchains are run by a single company that grants access to any user who satisfies pre-established criteria. Although not truly decentralized, this type of “permissioned” blockchain is appealing for business-to-business use cases and government applications.
- Private blockchains: Private blockchains are also controlled by a single organization. It determines who can read it, submit transactions to it, and participate in the consensus process. Since they are 100% centralized, private blockchains are useful as sandbox environments but not for actual production.
- Consortium: Of the four ways to establish a blockchain network, currently, consortium is the most accepted model for business. In a consortium blockchain, the consensus process is controlled by a pre-selected group – a group of corporations, for example. The right to read the blockchain and submit transactions to it may be public or restricted to participants. Consortium blockchains are considered to be “permissioned” blockchains and are best suited for use in business.
What is blockchain used for? Use cases and examples
Blockchain is being leveraged by a growing number of companies across lines of business and industries, from healthcare to banking and accounting. Here are some of the areas with the most promise:
Blockchain in the supply chain
Blockchain technology is improving transparency and accountability across the supply chain. Companies are using applications to track and trace materials back to the source, prove authenticity and origin, get ahead of recalls, and accelerate the flow of goods – in nearly every sector.
One area where blockchain has really taken off is in the food chain where it’s being used to track perishables from farm to table. Through a permissioned blockchain, food manufacturers can invite whomever they want to participate in the network, such as food aggregators, sustainable farmers, or even individual growers. At harvest, the produce is assigned a QR code that contains information, such as its origin, the name of the grower, and whether it’s organic or from a fair-trade company. The data is encoded into the blockchain and updated with new information as it moves through the supply chain.
That way, if there is a product recall, manufacturers can use the blockchain to zero in on which batches were affected, reducing the waste and cost of a broader-scale recall. And once delivered, retailers and consumers can use the QR code to view key information about products – even for multiple fruits in a smoothie say.
Besides food, tracing medical supplies is another area that holds promise. There are already blockchain-based tracking systems that allow healthcare providers, pharmacies, and pharmaceutical sellers to authenticate drug shipments. Global pharmaceutical company Boehringer Ingelheim is using one such system to authenticate pharma products and help combat counterfeits.
Blockchain in the public sector
The public sector is looking at the potential of blockchain to serve as the official registry for government and citizen-owned assets like buildings, houses, vehicles, and patents. Blockchains could also facilitate voting, reduce fraud, and improve back-office functions like purchasing. The technology is ideal for public sector use cases because of heavy regulations that need to be vetted and verified – and the blockchain makes these processes entirely “trustless.”
In the Italian Province of South Tyrol, the government is fighting bureaucracy on multiple fronts using blockchain through partnerships with the Hyperledger Project and the Blockchain Research Institute. The project allows them to create, authenticate, and maintain people’s data indefinitely. Citizens no longer have to fill out forms every time they engage with the government. And civil servants can combine four steps into one to simplify the process. The technology also helps them comply with European data sharing regulations. Besides simplifying citizen engagements, it’s also bringing greater trust, transparency, and protection against corruption because transactions can’t be disturbed once recorded.
The Tyrol government also plans to expand functionality to vet applications for telco companies that want to set up new towers in the Dolomites, a UNESCO protected site. Blockchain will then be used to trace workflows that show they’ve hired the right experts and environmental agencies to show that their equipment will not impact the environment.
Blockchain in utilities
Blockchain software solutions are being tested for a wide range of applications in the utilities industry: peer-to-peer (P2P) solar energy sales between neighbors, energy trading among utility conglomerates, automated billing for autonomous electric vehicle charging stations, and more.
In Australia, there are a number of utility companies using blockchain-enabled technology. Global energy-tech company GreenSync, in partnership with the Australian government, created a decentralized energy exchange (deX). It acts as an online marketplace that facilitates payment to households and businesses with rooftop solar and battery storage systems, allowing other businesses to access their stored electricity and, ultimately, strengthen the grid. AGL has also created a P2P solar energy exchange program. And LO3 Energy created a microgrid platform that allows organizations, schools, and individual households to choose where to buy their energy and renewable products – as well as to sell and share energy locally.
Blockchain in HR
Verifying candidates’ qualifications and experience can be a time-consuming process, especially now – when candidates may work for multiple employers, take on gig assignments, and move between jobs more frequently. A single blockchain for recording education levels, certifications achieved, employment history, and other qualifications could provide a way for HR professionals to verify career credentials more efficiently.
The non-profit Velocity Network Foundation is building a blockchain-powered solution with this goal. The vendor-neutral, open source platform will give individuals control over how their data is shared and used while making sure it is protected and compliant with regulations, such as the GDPR. And it will also provide organizations with a source of accurate, compliant, and verified information to reduce hiring risks – much faster than if done the traditional way. Employers, academic institutions, certification agencies, and other credential issuers will upload achievements to the blockchain directly to prevent people from padding their resume or adding misleading skill sets. The Velocity Network Foundation will establish a common framework, promote global adoption, and support research and development of applications and services to ensure objectivity.
Blockchain in finance
Blockchain technology can be used to streamline accounting processes and banking services. For example, accounts payable departments can make payments directly to transaction partners, bypassing banks. The identity of the payer is baked into the chain and encrypted with private keys before being validated by other computers in the network. AP will no longer have to update their records showing when the payment has been received, as the blockchain is updated by the receiver. This is also being used to make royalty payments through a much faster, more automated process.
A distributed ledger is a database of transactions that is shared and synchronized across multiple computers and locations – without centralized control. Each party owns an identical copy of the record, which is automatically updated as soon as any additions are made. Blockchain is one type of distributed ledger.
Smart contracts – self-executing agreements based on blockchain technology – automatically trigger actions or payments once conditions are met. In the near future, they will use real-time information, such as asset GPS data, to trigger an event, such as a transfer of ownership and funds.
Blockchain-as-a-service (BaaS) is a cloud-based offering that software vendors provide to organizations that don’t want the complication of building their own blockchain solution. Basically, it’s a type of software-as-a-service, which may help spur blockchain adoption.
Getting started with blockchain
While distributed ledger technology is still relatively new, it’s already helping businesses streamline multi-party processes, prove authenticity, reduce costs, and more. And the future of blockchain is bright.
Ready to start testing or using blockchain to solve some of your challenges? There are a number of roads to adoption. You can:
- Join a blockchain consortium.
- Hire talent to build a network or solutions in-house.
- Use blockchain-as-a-service (BaaS).
- Leverage existing blockchain solutions.