Blockchain is a shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible — a house, a car, cash, land — or intangible like intellectual property, such as patents, copyrights, or branding. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. You can gain a deeper understanding of blockchain by exploring the context in which it was developed — the need for an efficient, cost-effective, reliable, and secure system for conducting and recording financial transactions.
The shortcomings of current transaction systems
Throughout history, instruments of trust, such as minted coins, paper money, letters of credit, and banking systems, have emerged to facilitate the exchange of value and protect buyers and sellers. Important innovations, including telephone lines, credit card systems, the Internet, and mobile technologies have improved the convenience, speed, and efficiency of transactions while shrinking and sometimes virtually eliminating the distance between buyers and sellers.
Still, many business transactions remain inefficient, expensive, and vulnerable, suffering from the following limitations:
»»Cash is useful only in local transactions and in relatively small amounts.
»»The time between transaction and settlement can be long.
»»Duplication of effort and the need for third-party validation and/or the presence of intermediaries add to the inefficiencies.
»»Fraud, cyberattacks, and even simple mistakes add to the cost and complexity of doing business, and they expose all participants in the network to risk if a central system, such as a bank, is compromised.
»»Credit card organizations have essentially created walled gardens with a high price of entry. Merchants must pay the high costs of on boarding, which often involves considerable paperwork and a time-consuming vetting process.
»»Half of the people in the world don’t have access to a bank account and have had to develop parallel payment systems to conduct transactions.
Transaction volumes worldwide are growing exponentially and will surely magnify the complexities, vulnerabilities, inefficiencies, and costs of current transaction systems. The growth of ecommerce, online banking, and in-app purchases, and the increasing mobility of people around the world have fueled the growth of transaction volumes. And transaction volumes will explode with the rise of Internet of Things (IoT) — autonomous objects, such as refrigerators that buy groceries when supplies are running low and cars that deliver themselves to your door, stopping for fuel along the way. To address these challenges and others, the world needs payment networks that are fast and that provide a mechanism that establishes trust, requires no specialized equipment, has no chargeback’s or monthly fees, and provides a collective bookkeeping solution for ensuring transparency and trust.
The emergence of bitcoin
One solution that has been developed to address the complexities, vulnerabilities, inefficiencies, and costs of current transaction systems is bitcoin — a digital currency that was launched in 2009 by a mysterious person (or persons) known only by the pseudonym Satoshi Nakamoto.
Unlike traditional currencies, which are issued by central banks, bitcoin has no central monetary authority. No one controls it. Bitcoins aren’t printed like dollars or euros; they’re “mined” by people and increasingly by businesses, running computers all around the world, using software that solves mathematical puzzles.
Rather than rely on a central monetary authority to monitor, verify, and approve transactions and manage the money supply, bitcoin is enabled by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent and Skype.
Bitcoin has several advantages over other current transaction systems, including the following:
»»Cost-effective: Bitcoin eliminates the need for intermediaries.
»»Efficient: Transaction information is recorded once and is available to all parties through the distributed network.
»»Safe and secure: The underlying ledger is tamper-evident. A transaction can’t be changed; it can only be reversed with another transaction, in which case both transactions are visible
The birth of blockchain
Bitcoin is actually built on the foundation of blockchain, which serves as bitcoin’s shared ledger. Think of blockchain as an operating system, such as Microsoft Windows or MacOS, and bitcoin as only one of the many applications that can be run on that operating system. Blockchain provides the means for recording bitcoin transactions — the shared ledger — but this shared ledger can be used to record any transaction and track the movement of any asset whether tangible, intangible, or digital. For example, blockchain enables securities to be settled in minutes instead of days. It can also be used to help companies manage the flow of goods and related payments, or enable manufacturers to share production logs with original equipment manufacturers (OEMs) and regulators to reduce product recalls.
The takeaway lesson: Bitcoin and blockchain are not the same. Blockchain provides the means to record and store bitcoin transactions, but blockchain has many uses beyond bitcoin. Bitcoin is only the first use case for blockchain.
Revolutionizing the Traditional Business Network
With traditional methods for recording transactions and tracking assets, participants on a network keep their own ledgers and other records, is traditional method can be expensive, partially because it involves intermediaries that charge fees for their services. It’s clearly inefficient due to delays in executing agreements and the duplication of effort required to maintain numerous ledgers. It’s also vulnerable because if a central system (for example, a bank) is compromised, due to fraud, cyberattack, or a simple mistake, the entire business network is affected.
The blockchain network is economical and efficient, because it eliminates duplication of effort and reduces the need for intermediaries. It’s also less vulnerable because it uses consensus models to validate information. Transactions are secure, authenticated, and verifiable. The participants in both transaction systems are the same. What has changed is that the transaction record is now shared and available to all parties.
A blockchain network has the following key characteristics:
»»Consensus: For a transaction to be valid, all participants must agree on its validity.
»»Provenance: Participants know where the asset came from and how its ownership has changed over time.
»»Immutability: No participant can tamper with a transaction after it’s been recorded to the ledger. If a transaction is in error, a new transaction must be used to reverse the error, and both transactions are then visible.
»»Finality: A single, shared ledger provides one place to go to determine the ownership of an asset or the completion of a transaction.
Recognizing the key business benefits
For business, blockchain has the following specific benefits:
»»Time savings: Transaction times for complex, multi-party interactions are slashed from days to minutes. Transaction settlement is faster, because it doesn’t require verification by a central authority.
»»Cost savings: A blockchain network reduces expenses in several ways:
- Less oversight is needed because the network is self policed by network participants, all of whom are known on the network.
- Intermediaries are reduced because participants can exchange items of value directly.
- Duplication of effort is eliminated because all participants have access to the shared ledger.
»»Tighter security: Blockchain’s security features protect against tampering, fraud, and cybercrime. If a network is permissioned, it enables the creation of a members-only network with proof that members are who they say they are and that goods or assets traded are exactly as represented. Not all blockchains are built for business. Some are permissioned while others aren’t. A permissioned network is critical for a blockchain for business, especially within a regulated industry. It offers
»»Enhanced privacy: Through the use of IDs and permissions, users can specify which transaction details they want other participants to be permitted to view. Permissions can be expanded for special users, such as auditors, who may need access to more transaction detail.
»»Improved auditability: Having a shared ledger that serves as a single source of truth improves the ability to monitor and audit transactions.
»»Increased operational efficiency: Pure digitization of assets streamlines transfer of ownership, so transactions can be conducted at a speed more in line with the pace of doing business.
Building trust with blockchain
Blockchain enhances trust across a business network. It’s not that you can’t trust those who you conduct business with; it’s that you don’t need to when operating on a blockchain network. Blockchain is particularly valuable at increasing the level of trust among network participants. Because every transaction builds on every other transaction, any corruption is readily apparent, and everyone is made aware of it. This self-policing can mitigate the need to depend on the current level of legal or government safeguards and sanctions to monitor and control the flow of business transactions. The community of participants does that. Where third-party oversight is required, blockchain reduces the burden on the regulatory system by making it easier for auditors and regulators to review relevant transaction details and verify compliance.
Blockchain builds trust through the following five attributes:
»»Distributed and sustainable: The ledger is shared, updated with every transaction, and selectively replicated among participants in near real time. Because it’s not owned or controlled by any single organization, the blockchain platform’s continued existence isn’t dependent on any individual entity.
»»Secure, private, and indelible: Permissions and cryptography prevent unauthorized access to the network and ensure that participants are who they claim to be. Privacy is maintained through cryptographic techniques and/or data partitioning techniques to give participants selective visibility into the ledger; both transactions and the identity of transacting parties can be masked. After conditions are agreed to, participants can’t tamper with a record of the transaction; errors can be reversed only with new transactions.
»»Transparent and auditable: Because participants in a transaction have access to the same records, they can validate transactions and verify identities or ownership without the need for third-party intermediaries. Transactions are time-stamped and can be verified in near real time.
»»Consensus-based and transactional: All relevant network participants must agree that a transaction is valid. This is achieved through the use of consensus algorithms. Each blockchain network can establish the conditions under which a transaction or asset exchange can occur.
»»Orchestrated and flexible: Because business rules and smart contracts (that execute based on one or more conditions) can be built into the platform, blockchain business networks can evolve as they mature to support end-to-end business processes and a wide range of activities.
Choosing a Blockchain Provider and Platform
Choose a provider and platform that are the best fit for your industry and business needs. As you compare the suitability of different providers and platforms, seek answers to the following questions:
»»Do you require a permissioned network?
»»Do you need to know the identities in your business network? For example, to adhere to regulations such as anti-money laundering (AML) or know your customer (KYC)?
»»Do you have frequent exchanges with others that could be automated and pre-programmed, freeing up valuable time and resource?
»»Would you benefit from transaction resolution in minutes rather than days or weeks?
Fulfilling the above questions you may choose your platform & provider of Blockchain.