What is blockchain technology?
Blockchain is an example of distributed ledger technology, in which independent nodes record transactions and come to consensus about a shared state without a centralized authority. The name blockchain refers to a particular type of data structure where each “block” represents a group of digital transactions and the “chain” refers to how each “block” is linked to ensure that transactions are recorded in a specific, unalterable order.
A blockchain “network” operates as a decentralized database that consists of a network of computers or devices that come to an agreement on a single version of a shared ledger. In a permissionless, public blockchain like Bitcoin, that blockchain network could consist of thousands of computers or devices — potentially even millions — operating as nodes. In a permissioned chain, only a few trusted nodes would operate a network between organizations.
Every time someone wants to make a transaction (say, an online purchase), a transaction is proposed to the network, which contains the details of the transaction, including what assets changed hands, and a digital signature of the person or entity conducting the transaction. These proposed transactions are collected into blocks by the computers operating the blockchain network. One computer (or node) in the network will be selected to propose a block of transactions as a new addition to the ledger. If the rest of the nodes agree that this node is authorized to propose a block and the block of transactions is valid, the network will come to consensus, and the transactions in that block will be added to the ledger.
Additionally, each block includes a cryptographic pointer back to the previous block in the blockchain ledger, linking the blocks together. With every block, a new group of transactions are added to the ledger, and the chain of blocks grows continually in this fashion.
But here’s where the real value of this new technology comes into play. Once the blocks are chained, the data in prior blocks cannot be altered or deleted by anyone without expending an impractical amount of computing resources. The design of blockchain creates a practically tamper-proof chain of data. Simultaneously, it creates an indisputable chronological history of transactions that anyone within the blockchain network can view. Essentially, you can look back into the past and see every transaction exactly as it occurred.
Blockchain: How and Why
What is a blockchain transaction?
What sets blockchain apart from other online transaction types is that the data is replicated, stored and verified across several nodes, rather than held by one central authority. When a user requests a transaction, the details of that transaction are broadcast to all those nodes in a peer-to-peer fashion. This prevents anyone from stopping or censoring the transactions by certain individuals. Each node then verifies that the transaction is valid and communicates with one another whether the transaction is confirmed.
Once confirmed, the transaction is transparent and permanent, and at any point any user of the system can query these transactions, eliminating the need to trust a central authority (such as a credit card processor or bank).
Blockchain transactions are not limited to the transfer of digital currency (such as Bitcoin); novel applications of blockchain technology are made possible via smart contracts (also called distributed applications or dApps). These smart contracts can facilitate a wide array of transactions such as domain name registries, asset exchanges, lending, insurance, gaming and social networks, to name a few.
How does blockchain work?
A blockchain can be configured to meet your precise needs and the requirements of a particular use case (from Bitcoin transactions to record-keeping to supply chain management). Blockchains can be public (like the Bitcoin network) or private, where only specific users and computers are allowed on the system. So, for example, if you were a nonprofit establishing a private blockchain network, you would first determine which devices, both internally and externally, to include in the network and which rules those computers must follow to verify and validate new transactions. Once those criteria are in place and the blockchain begins operating, the rest of the processes happen automatically, and the system self-audits at every proposed block to ensure everything is running smoothly.
After the devices within the peer network validate a transaction, the transaction is stored in a block and it receives a hash, a unique identifying code or digital signature that sets it apart from every other block. The block becomes part of the chain and is locked into place in the public ledger, distributed across the entire network so that it cannot be altered or deleted.
Once transactions are included in the blockchain, they cannot be changed. A user wanting to add data to the blockchain must create a new transaction. A new block and a new hash are created, and the information is included as a new entry at the end of the chain. In this way, a user can see any changes that were made at any point in time.
What happens if a phony transaction is attempted? Since each device on the network has a copy of the ledger, they can each individually determine that the transaction is invalid. If the majority of the devices on the network deem the transaction or modification as inaccurate or invalid, the transaction is automatically denied and no block is added to the digital ledger.
How does a blockchain guarantee that no centralized authority can control it? One of the core innovations of blockchains is the feature of decentralization, where many devices are free to contribute in a permissionless way to the security of the network.
What is the purpose of blockchain?
Above all else, blockchain functions as a security and accountability tool for businesses. In terms of security, because blocks of information are stored on and verified by multiple devices across the network, a blockchain can’t be controlled by a single entity. Altering any piece of information would require overriding the entire blockchain network, which consists of many devices and established rules. Data manipulation essentially becomes impossible. Additionally, because of the distributed nature of the technology, a blockchain doesn’t have a single point of failure, so the network is less likely to experience downtime. If a failure does occur, each device possesses a complete copy of the blockchain, so data is never lost.
Furthermore, blockchain creates an indisputable, immutable record of data that is secure and private and has been verified across the network. That information can help organizations ensure compliance with certain regulatory mandates or industry-specific guidelines, and it can be invaluable should the organization face an audit or lawsuit.
Perhaps as important, says technology futurist Ian Khan, is that “blockchain truly is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved.”
In other words, blockchain creates the highest level of trust in the data. That’s valuable not just to Bitcoin’s blockchain applications, but for many kinds of record-keeping or transaction data, for protecting and authenticating digital assets.
How does blockchain technology provide data integrity?
That’s where blockchain can be used to authenticate data. If you try to modify a blockchain or alter one piece of data, you create a new block, one which must be verified by all the devices within the blockchain network. The problem data, whether it was put there intentionally or not, will be flagged and invalidated before anyone has a chance to use it.
Blockchain authentication could be very valuable in a world of increasing cybersecurity attacks. In fact, data tampering has become a top concern. Imagine a hacker — or a disgruntled former employee — breaking into your network and altering accounting data to the point that you can no longer trust it. Worse, those changes could go unnoticed, causing you to make critical decisions based off of bad data. Even a change of data that’s an honest mistake could seriously damage a business.
Blockchain’s Use Cases and Sub-Use Cases
How does blockchain resist modification of data?
The inability to tamper with data in part comes down to blockchain’s hash function. As transactions are converted into blocks, each one is tagged with the hash of the prior block, which connects the blocks into chains.
The hash function is essentially an algorithm that converts raw input data into an encrypted code that represents that original data. A hash function can take any amount of data and convert it into a string of a fixed length. For example, the hash length for “7” would be the same as the hash length for “Blockchain is poised to change the way the industry does business.”
That makes it very difficult to decrypt the hash, because hackers will have no way of knowing how long or short the input is based on the length of the output. Additionally, even small changes to the input result in a different, unpredictable hash that again must be verified by the blockchain network.
Since these blocks and their related hashes are stored on a number of computers, a change to a hash on a single machine will immediately be spotted by the rest of the network. In this way, attempts to alter data in the blockchain are quickly uncovered and reversed.
What is blockchain’s role in security?
Blockchain can also be a game changer when it comes to reducing security threats and preventing data leaks and hacks, helping organizations across various industries to:
- Secure asset custody: Assets that have their ownership secured on blockchain are more secure because every transaction is confirmed by multiple devices on the network. These assets aren’t limited to digital currency; there are projects that are looking to extend asset custody to land registries, securities, futures, loans and even art.
- Secure smart edge devices: IoT platforms with interconnected smart products are targets for a wide range of attacks, making them hard to secure and manage. Blockchain’s hash-based security and verification process can strengthen authentication and help to resolve many of the issues plaguing the technology.
- Protect identity and personal data: Blockchain is being used to create decentralized identity solutions that would give users greater control of their personal data. Today, we rely on third parties to securely maintain records like our credit history or personal health data. Blockchain could give back control of that personally identifiable data to the individual.
- Secure audit trails: Blockchains function as timekeeping mechanisms that provide a provable data history, so they can essentially tell you everything that is happening — and has happened — with the data on your network.
- Reduce downtime: Because the technology doesn’t have a single point of failure, and multiple copies of the blockchain are maintained, the system will continue to operate even if some devices fail or are under attack.
- Increase customer trust: With blockchain, you can promise your customers a higher level of data security.
Late last year, the U.S. Department of Homeland Security (DHS) started investigating blockchain solutions to enhance anti-forgery and counterfeiting capabilities with a new solicitation called “Preventing Forgery and Counterfeiting of Certificates and Licenses.” The goal of the initiative, says the department, is to “ensure we are at least a step ahead of national security threats.”
Blockchain: Getting Started
How do you choose the best blockchain tool?
First, evaluate the needs of your business and develop a clear picture of how blockchain might improve your operations. Look for tools that offer:
- An existing network:Blockchains provide strength in numbers. If there’s an existing blockchain project that meets your needs, it’s more secure and beneficial to work to join an existing network than try to build your own.
- Scalability: Because of their consensus-driven nature, blockchains are less scalable than traditional databases. Different blockchain implementations offer different tradeoffs between security, decentralization and performance. Examine your requirements closely; more performance often means sacrificing decentralization or security.
- Tooling and documentation: Blockchain frameworks are still a rapidly developing technology, and often the expected maturity of tooling and documentation does not exist yet. Take a look at the tools and ecosystem for your blockchain framework before making your choice.
- Confidential data: Public blockchains store data in the open for all to see — which may not be what you want for your business. Most enterprise blockchain frameworks allow sharing of private data between parties; you’ll want to make sure that these features meet your requirements.
- Support: Most blockchain frameworks are open source and have a diverse ecosystem of resources and support. Other blockchains are built as proprietary networks, and you’ll want to make sure you’re able to get proper support through piloting, deployment, transition and beyond.
There are a number of proprietary and open-source blockchain platforms, including Ethereum, an open-source distributed computing platform and operating system; Quorum, an enterprise-oriented version of Ethereum, Ripple, an enterprise platform for global payments; Hyperledger Fabric, with a B2B focus; and R3 Corda, for financial services.
How do you get the most value from blockchain technology?
Ensure you fully realize a return on your blockchain investment by following these four best practices before you decide on a tool:
- Establish your internal skill set: A big obstacle for blockchain is that there just aren’t many experts well-versed with the technology yet. You may need to train existing staff or hire new employees to deploy and manage the technology. That can be costly, and for many businesses, hiring a company to take on the work is more cost-effective.
- Establish use cases for transactions: Very early in the process, you must determine which transactions will be submitted to the blockchain network, so you can establish the validation rules and criteria rules that will be used to verify transactions.
- Decide who will be part of the network: Who will be involved in building the network, who will have oversight (e.g., IT department, CFO, third-party vendor), and what devices will be allowed on the network? Many projects revolve around the use of a private network, which means you will need to develop a method for granting permission for current and future users. Ensure that your protocols don’t make it difficult to add participants as needed.
- Solve a real business challenge: How do you get started with blockchain? Forbes contributor and supply chain management consultant George Bailey says you shouldn’t test the technology on an existing process at all. Why? Because it works, he says. Instead, he recommends eschewing practices like duplicating an existing process and instead says you should pilot a project in an area that actually needs improvement — so you can experience the value of the technology quickly.
Blockchain technology offers organizations a safe and private way to maintain records of critical data while boosting efficiency and even cutting costs in the long run. That said, it is a complex new technology, and adopting it won’t be without challenges.
The bottom line: Look into blockchain
Blockchain exploded into public consciousness when "Satoshi Nakamoto" conceived of Bitcoin in 2008. The concept of using a blockchain system beyond digital currency was expanded with the creation of the smart contract platform Ethereum in 2015, and the real-world potential is promising for most industries. With blockchain, the banking and financial services industries could see a dramatic reduction in transaction fees while also increasing security and accessibility of financial services, especially to underserved communities.
With blockchain, healthcare providers can securely store patients’ medical records, make them accessible to specific people as needed, while protecting patients’ personal information. Better yet, they can almost guarantee that patient data won’t be manipulated.
Insurance companies can use the technology to verify the authenticity of insurance claims. The real estate industry could benefit from blockchain-based smart contracts, allowing property titles to be recorded on the blockchain. Property sales could close more quickly, and fewer issues would arise along the way.
The retail industry, manufacturers and suppliers and essentially any business that wants to protect the integrity of its data and digital assets can use blockchain to improve customer satisfaction and confidence, cut costs, reduce human error and operate more securely.
Blockchain also has prominent detractors, and you should consider any downsides as well as the advantages. The global blockchain market is expected to reach $60 billion by 2024, and the technology is likely to become more mainstream as the need for better data security continues to rise. A lot of human ingenuity and computing power is being unleashed; a blockchain revolution is in the offing. Make sure you’re on the forefront.
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