Market Basics

Technology analysts have said that blockchain may do for value exchange what the internet did for information exchange. That’s because blockchain technology combines the internet’s openness with cryptography security to provide a potentially safer way to record, share and verify data.

What is a Blockchain?

A blockchain often uses distributed ledger technology. A distributed database structure is used to record and verify digital transactions. Today, most financial transactions are administered by a central authority – like a company, bank, or government. These organizations typically maintain databases with a client-server network model, where communication flows to and from a central server. Blockchains can be public, private, or hybrid and as a result, take a different approach. By leveraging peer-to-peer computing, a blockchain distributes tasks across potentially hundreds of devices, called peers or network participants. These participants share resources, such as processing power and network bandwidth, eliminating the need for a central server. A blockchain distributes the transaction approval process across many users to reach consensus. With some public blockchain networks, network participants are typically rewarded with new amounts of the blockchain’s native cryptocurrency and small transaction fees for validating and broadcasting transactions over the network. Lastly, the end-users of a blockchain can often transact directly with each other – without an intermediary.

How Secure is Blockchain?

Most public blockchains are decentralized, meaning that a blockchain does not store information on a central server in a central location. Instead, typical blockchains diffuse transaction data across an entire network, removing what technologists call a single point of failure. Computer-based cryptography – which includes secure hashing algorithms, cryptographic keys, and consensus models – provides the key ingredients for securing a blockchain. As a group, these cryptographic tools, along with the network’s computing power, work together to secure the blockchain and create a ledger of transactions that preserves a tracked digital assets’ integrity and history.

Bitcoin, the most widely known cryptocurrency, runs on a public, decentralized blockchain. Since its launch in 2009, the Bitcoin network has proven to be secure. In fact, it has been impenetrable thus far. There are no known instances where the Bitcoin network has been successfully breached. While Bitcoin has remained impervious to hacks since its inception, there are a handful of cases where cryptocurrency exchanges and wallets have been compromised, resulting in the loss of Bitcoin for the parties involved.

Cryptocurrency participants should understand the differences between the two. For example, you can own a secure cryptocurrency but still be susceptible to the exploitation of an unsecure exchange and vice versa. Or, if you are not careful, a nefarious actor can steal your private wallet key and gain access to your cryptocurrency holdings.

What is the Difference Between a Public and Private Blockchain?

The key differentiator between private and public blockchains is that private blockchains have a centralized authority that requires authorization to gain access to the network. Today, private blockchains are being leveraged by a broad spectrum of companies to make improvements in efficiency, transparency, and accountability in industries like healthcare and financial services. Considerable strides have also been made in improving supply chain economics by using the technology. While many real-world benefits exist, network security is often subject to the controls put in place by the network administrator.

When Was Blockchain Invented?

Ledgers are not new. Bookkeepers have used them since the 15th century. Ledgers organize transactions in debit and credit columns and provide beginning and ending balances. For approximately 500 years, each accountant recorded transactions with pen and paper – and kept their own set of books. With the rise of the computer industry in the 1970s, ledgers shifted to digital databases. Still, there was massive duplication of effort, along with paid third parties. In 1982, computer scientist David Chaum proposed a peer-to-peer system and block and chain protocol for electronic cash transactions. In 1991, cryptographers Stuart Haber and W. Scott Sornetta conceived a chain of transaction blocks secured with codes and timestamps. And, of course, it was Satoshi Nakamoto, who combined these ideas to launch Bitcoin and blockchain in 2009.

Is Blockchain Only for Cryptocurrency?

After the Bitcoin blockchain operated successfully for several years, many developers wondered whether blockchain could improve other sectors. Today, blockchain supports a range of applications across many industries – not just digital currencies. For example, Walmart uses blockchain across food traceability systems. The retail giant employs digital ledger technology to trace the origins of mangoes sold across U.S. stores, along with pork wholesaled to Chinese outlets. Walmart has reported that blockchain reduced product tracing time from a week to less than three seconds from an efficiency standpoint. Anheuser Busch InBev uses blockchain to help its African suppliers more accurately track their agricultural sales. The system enables overseas farmers to gain a complete view of their barley and sorghum harvests and sales – and receive faster payments by way of a related mobile application.

Satoshi Nakamoto’s invention of blockchain is most often synonymous with being the cornerstone of the Bitcoin network. However, the future of blockchain may hold a plethora of alternate applications. One such application may be the Triple-Entry accounting system, which looks to disrupt traditional accounting practices. To understand the Triple-Entry accounting system, one must first understand its predecessor, the Double-Entry accounting system. In the Double-Entry accounting system, accountants on each side of a transaction maintain ledgers. Like the name implies, the Triple-Entry system adds one more component beyond the accountants on each side – blockchain. With the addition of the blockchain element, the Triple-Entry system becomes cryptographically sealed and immutable. By having these characteristics, the method looks to ensure that data cannot be tampered with, and fraud cannot occur. Furthermore, the inherent automated quality in blockchain allows for both parties to easily review and verify transactions. Perhaps someday, Triple-Entry accounting will lead to drastically less reliance on auditors.

Is Blockchain Creating New Business Models?

Like the internet, blockchain has spurred a wave of startups that are seeking to reinvent business. For example, Decentralized Finance (DeFi) is a borderless financial movement that came of age with Ethereum and its advanced blockchain, making cryptocurrencies programmable and creating smart contracts. Decentralized Finance uses a piece of code that can automate transactions, smart contracts, autonomously operate across blockchains, and automate determinable interactions on the network. For example, a smart contract can automatically release payment to a seller after delivery – or send funds to a recipient on a set day each month. Smart contracts are optimizing the tracking of property titles and transfers in the real estate industry – a notoriously inefficient process. Another blockchain project, Filecoin (FIL), is a distributed file storage system where users monetize their excess hard drive space. Blockchain-based startup Miota (IOTA) is a shared Internet-of-Things (IoT) network where users earn digital assets by hosting a home network router for IoT devices.

Why is Blockchain Considered Transformative?

A high-speed digital economy necessitates modern ways of transacting. Someday, the advances in blockchain technology may compare to prior technological advances that triggered industrial revolutions like the steam engine and the internet. Blockchain may provide a far more efficient way to collect, secure and track data, so everyone is always on the same page. Distributed ledger technology can transparently track the movement of nearly anything, whether it is currency, data, goods, payments, or services. With this broad utility, blockchain technology has the potential to change how we buy and sell, interact with governments, and verify the authenticity of everything from property titles to produce.

Three Takeaways

• A blockchain looks to achieve security through a cryptographically distributed ledger among networked computers and can operate without intermediaries.
• Blockchain rose to popularity with cryptocurrency, but global brands are now using the technology across many industries.
• With the potential to improve cost-efficiency, security, and transparency, blockchain technology has the potential to change how the world processes transactions and data.