There is a good chance that you have already heard about cryptocurrencies and the blockchain technology they are based on. Throughout 2017 and 2018 Blockchain has become a popular topic as cryptocurrencies continue to grab headlines and there are more and more events for crypto enthusiasts available.
But what is Blockchain, really? Well, to put it simply, it is a public ledger, a record of transactions that are accessible to anyone on the Blockchain network. This record was created with an aim to decentralize money exchange and financial transactions on the markets by the means of cryptography – and it is the basis for cryptocurrencies like BTC (Bitcoin) and ETH (Ethereum). So think of Blockchain as of a network with a database that allows you to send and receive digital information such as currency payments without any of the said information being copied or duplicated.
This ingenious invention was created by Satoshi Nakamoto (an anonymous person or people whose true identity is yet to be revealed). Its purpose was to enable the transfer of digital currency on a peer to peer network that would not allow double spending. As a result, Nakamoto created Bitcoin, which is a cryptocurrency that runs on top of the Bitcoin Blockchain. Every Bitcoin transaction – including the very first one – is recorded on the Blockchain and is accessible to anyone on the Bitcoin network.
How does Blockchain work?
We have already established that the Blockchain is more like a public ledger recording transactions on a peer to peer network. Now, picture those records on a spreadsheet that is accessible to every other computer on the network, and here you have an understanding of how Blockchain works in reality. Essentially, it allows anyone to write entries to the records. Everyone can verify the changes made to the records to ensure accountability, and these changes are immutable. Immutability simply refers to the irreversible nature of the changes made to the records. This is how Blockchain guarantees that each entry is unique.
To allow an access to the records for everyone on the network, a Blockchain distributes the ledger on all nodes connected to the network. Therefore, there is no single location where the records are stored. This makes it harder for an individual actor to manipulate the records. To do so, the manipulators would have to change all the records on the network at the same time which is practically impossible. Instead of having multiple databases to reconcile, Blockchain provides a distributed point of access for verification of information on the network.
What are some of the main advantages of Blockchain?
Peer to Peer transactions
By definition, a peer to peer network allows participating computers to share files and information between one another without going through a central server and relying on the third parti such as central banks to verify the transaction. As a result, each computer on the network becomes a server. Blockchain takes this concept to a whole new level by adding an element of digital trust through a hashing function that establishes identity or authentication. Through the hashing function of this technology, every piece of information is given a digital thumbprint that acts as a sample that identifies the data. Once the hash is uploaded to the Blockchain system, the transactional data becomes immutable. By this process, it becomes easy to establish digital trust since you would need to change the hash so as to change the data on the network.
Supply chain management
Since every transaction on the Blockchain is immutable, supply chain managers can benefit from this technology as it offers cost-effective traceability. Goods can be recorded on the Blockchain so that every step of production is recorded for accountability. That way, everyone on the supply chain network can verify and authenticate transactions, tracing the process from the manufacturer to the customer. This can be a cost-effective way of eliminating counterfeits in the supply chain.
Reducing costs by eliminating the middleman
Most businesses are required to go through a middleman to verify the legitimacy of each transaction. Whether it’s the bank or other private institution, the truth is that it can get costly when you have to go through a middleman. Blockchain cuts cost by eliminating the middleman since the coins are transferred directly between end-users’ wallets, it only requires to pay transaction fees that are much smaller than the costs imposed by third-parties. This way, companies and individuals can verify transactions without going through the middleman. As a result, Blockchain enables every stakeholder to review documents and even complete a trade without a middleman. In the same way, this applies to decentralized applications that are typically created as alternatives to huge centralized services.
Efficient quality assurance
There are some markets and industries (e.g. food or medical industry), where quality assurance is simply a must. However, it gets harder to identify irregularities along the supply chain if all actors are not on board. With Blockchain, businesses in such sensitive industries can easily achieve quality assurance by tracing the point of origin to verify an important detail.
One of the biggest issues in accounting is a human error. Imagine a database that cannot be changed or altered once the entries are uploaded and you get yourself a Blockchain-based accounting system. You can easily get rid of all human errors and bad actors in an organization with the help of Blockchain and cryptos. Since everyone is given equal access to the accounting records, accountability is achieved with every entry to the ledger.
Elimination of electoral Fraud
Even with the digitization of the voting process, most governments are still struggling with the issue of establishing trustworthy results during elections. Implementing blockchain at this level would be a really great use case. Already, there are government projects working on an initiative to implement Blockchain in the local election process. With Blockchain technology, every vote will have an immutable digital thumbprint that can help avoid fraud during elections and voting processes.
To put it simply, a smart contract is a computer program stored inside the Blockchain with the purpose of verifying, enforcing and performing the roles of an actual contract. Thanks to smart contracts, you can eliminate the middleman and also get rid of bottlenecks that come with time-consuming contractual business transactions. In fact, the idea can be stretched a bit further to larger organizations, where autonomous smart contracts are built to consolidate every individual’s agreement to the company.
Can you trust a smart contract? Since they are built into the “chain”, smart contracts will inherit the immutable and distributed nature of this technology. Therefore each contractual agreement is accessible and public. And once the requirements of the contract are achieved, the smart contract performs the tasks of the contract automatically.
Smart contracts were first introduced by Vitalik Buterin on the Ethereum block chain and do not work for Bitcoin or any of its hard forks and derivatives, such as Bitcoin Cash and other cryptocurrencies. Most of the ICOs (initial coin offerings) that have been launched after that base on the same principles and allow investors get access to their digital assets without tons of paperwork.
Blockchain technology started off with Bitcoin and since then, there has been an increase in the number of ICOs and cryptocurrencies that have come up. However, there is more to Blockchain than cryptocurrency. Most experts believe that this technology’s future will spread out to multiple industries that require accountability, traceability, and smart contracts as the possibility to transfer values without any central authority to govern the transaction. Since Bitcoin price remains pretty volatile the chances of its mass adoption are low, but the technology that it bases on has really good potentioal.