Blockchain provides a functional and efficient tool for recording business transactions, contractual agreements, and private records. A blockchain can be described as an encrypted digital recording of transactions that is duplicated and distributed to computers that are part of the blockchain network. This form of communicating and sharing recorded data is extremely difficult to hack or alter.
The use of blockchain is continuing to spread beyond finance, with its applications being used in health care, online voting, data management, e-governance, energy, and other industries.
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Although blockchain has been around for a while, it gained significant recognition in 2009 as a platform for the bitcoin cryptocurrency. As a technology (and a new form of currency), blockchain and bitcoin seemed risky and unproven to many. That situation began to change roughly five years ago, when the open-source community started to develop and share complete blockchain platforms.
Open-source blockchain platforms allow developers to build dApps (decentralized applications) to solve various problems.
These open-source blockchain algorithms will scale and increase storage as needed and can be adjusted to perform various tasks in a few different industries. The primary benefit of blockchain, however, is the trust it fosters because of its built-in privacy, security, and transparency. Four features unique to blockchain technology are:
- Consensus: Shared ledgers get updated only after transactions have been validated by all relevant participants.
- Sharing: When “a block”– the recorded transaction or event – is approved, it is automatically downloaded to the ledgers for all participants. Each participant shares a trusted copy of the transaction.
- Permanence: Although more blocks can be added, blocks cannot be removed or simply inserted, supporting a permanent record of each transaction and, in turn, increasing trust among stakeholders.
- Security: Only authorized individuals can create and access blocks. Only trusted partners and individuals should be given access permission.
There should, however, be some caution regarding expectations when using blockchain. Many new technologies move through a hype stage – artificial intelligence being a classic example – and come with exaggerated claims about their strengths and abilities.
The New Uses of Blockchain
Some particularly useful benefits of using blockchain are transparency, visibility, and traceability. These benefits, combined with its affordability, are already impacting even the smallest suppliers (for example, fishing operations, coffee growers, and mining operations). Some other new uses are:
Health care: Currently, most hospitals work as isolated systems and, if out of beds or equipment, must call other hospitals for assistance. Blockchain can be used to develop and provide a network of hospitals sharing information about their equipment and empty beds. It can also be used to track the use of prescribed drugs that might be sold illegally. (BurstIQ has become a popular blockchain platform for these purposes.)
Supply Chain Management: Blockchain can be used to monitor and coordinate changes in a supply line. Supply chain management is a crucial necessity for many businesses, and a major weakness in the traditional process is traceability. Blockchain technology provides transparency for the supply chain process and gives organizations the ability to track their goods from the source to their delivery address. (IBM Food Trust provides an example of tracking food within a supply chain using unique barcodes.)
Real Estate: Agencies dealing with real estate have found blockchain useful in optimizing profits. Currently, there is a lack of transparency, which slows down the transaction process and allows for fraud. (Papers of real estate ownership can be forged.) Blockchain can provide a trustworthy, verifiable trail of ownership. It can also be used for property management and construction.
Power Distribution: Electricity is a primary form of energy powering many tools and devices around us. Blockchain technology has the potential to improve the wholesale distribution of electricity, peer-to-peer energy trading, and the homeowner’s sale of renewable energy to the power grid. (Grid+ is using blockchain technology to support wholesale energy distribution and peer-to-peer energy trading.)
Banking and Finance: The industries of banking and finance have taken the lead in implementing blockchain technology. Banks can use blockchain technology to refine banking processes and can automate the process to provide a seamless end-user experience. Decentralized finance (DeFi) is an open-source movement that has dramatically changed how financial applications operate.
Government Services: Many governments are not flexible when making changes. Politicians who have maintained their positions for a number of years become comfortable with the status quo, and fear change they don’t understand. And then there are the politicians who represent the wealthy, who also fear change. Switzerland has, however, overcome those obstacles and has begun to utilize the strengths of blockchain platforms. In 2018, they began using it for online voting. The city of Zug, Switzerland, has started putting its residents’ identities, tax returns, and other valuable data into a blockchain system that is readily available to the appropriate people and cannot be manipulated by outside sources.
How Blockchain Works
Blockchain uses a unique data format. It is a distributed ledger or database shared within the nodes of a blockchain system. A blockchain collects and stores data in groups called blocks. Blocks have limited storage capacity and, when filled with the necessary information, close and link to the preceding “filled” block, in turn forming a chain called a blockchain.
Traditional databases save data using rows, columns, and files, while blockchain saves data in blocks linked together and encrypted.
Each block within a blockchain contains a hash (a unique identifier). Blocks will record and verify the transaction’s time and sequence. These are included within the blockchain. The previous block hash will link the blocks, preventing changes from being made to any block or the insertion of a block between two existing blocks.
Mathematically speaking, it is nearly impossible to hack and alter a data block with its transaction-verification mechanisms, or to disrupt its transactions. (But see information about vulnerability through a “51 percent attack” later in this article.)
The four key concepts supporting blockchains are:
- Shared ledgers: A shared ledger allows transactions to be recorded only once, eliminating any duplication of effort, which is common in traditional business networks.
- Permissions: These ensure transactions are secure, verifiable, and authenticated. This also makes it easier to comply with data protection regulations (for example, HIPAA and the GDPR).
- Consensus: Blockchains use various consensus mechanisms (such as proof of stakes and multi-signatures) that require all parties agree to network-verified transactions.
- Smart contracts: An agreement or a set of rules that are used to govern business transactions, which is stored in the blockchain and executed automatically.
Blockchain removes middlemen from financial transactions and automates much of the transaction process.
One of the most important current uses of blockchain for business may be smart contracts. Smart contracts (not to be confused with smart “legal” contracts) are programs stored in a blockchain that will run when certain predetermined conditions have been met. They are normally used to automate the implementation of an agreement, and to make payments.
Smart contracts can completely automate the transfer of money and the delivery of services, providing access to digital content and enforcing privacy protections.
For example, Walmart Canada employs a blockchain freight-invoicing application that uses smart contracts to pull shipment data in real time for invoices. It then automatically sends preapproved payments after the terms of the agreement are met. This process is quick and efficient and minimizes human labor costs and human error.
Smart contracts fall under the category of “best practices” for blockchain transactions.
The Challenges of Blockchain
Using blockchain presents a total shift from traditional ways of doing business and, more recently, of storing and sharing information. It requires placing your trust in a decentralized network instead of people in positions of authority.
For some, dealing with this new way of doing business or handling information may be a little frustrating in the following ways:
- Selecting the right platform: A major risk in working with blockchain comes at the start and involves choosing the wrong platform. This horrific mistake can result in cost overruns and delays and reduce returns on the investment.
- Limited participation: A lack of partners is also a significant problem. To fully realize blockchain’s potential and keep it cost-effective, many organizations need to participate. Currently, only a small percentage of organizations are using blockchain. Many are unfamiliar and distrustful of its unfamiliar security processes and data integrity mechanisms.
- Lack of technical experience: A lack of trained technicians for blockchain can also be an issue. There is a shortage of technical experience with blockchain, though that is changing fairly quickly. As the need has increased, training and certification has also increased. (I’m a big fan of training in-house staff. Here are some free courses to start their training.)
- Security: The claim of unbreakable security is hype. Many people believe blockchains are unhackable, but this is not true. It is incredibly difficult but still doable, as shown by what is called “the 51 percent attack.” This form of hack takes place when a group of data miners successfully gain control – by renting or purchasing enough hash power – of over 50% of a PoW (proof-of-work) blockchain’s mining hash rate. This organized group of criminals then takes control of the blockchain. This form of hack is a complex process, however, and difficult to organize. (And then, there is the issue of a partner becoming sloppy with passwords and verifications.)
The Future of Blockchain
Ai-Blockchain has developed a new form of AI, called artificial general intelligence (AGI). Artificial general intelligence, because of its ability to apply machine learning algorithms that can recognize patterns, predict future outcomes, and learn from its mistakes, has the potential to improve blockchain’s cumbersome verification and consensus processes, while simultaneously improving security. This has the potential to increase blockchain’s popularity.
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