Understanding The Blockchain In Plain English: It’s Not Just About Cryptocurrency

“As promising as cryptocurrencies may seem, what lies beneath is all the more promising.The blockchain made Bitcoin…”

by Paul Sciglar

The Business of Blockchain

 Positive sentiment for bitcoin surges and wavers. All cryptocurrencies emanate a certain hope, but also a certain danger. At present, we rely primarily on speculation in relation to the value of any digital alternative to fiat currency. As promising as cryptocurrencies may seem, what lies beneath is all the more promising.

The blockchain made bitcoin, and all other cryptocurrencies based upon its open-source code, possible. Essentially, blockchain can be thought of as a kind of global ledger that operates on a distributed database.

Communication is peer-to-peer and all changes to the digital ledger are immutable. No single party has total control, and all parties are needed to validate changes within it. This eliminates the need for an intermediary to validate changes within the ledger.

In the specific case of bitcoin, blocks are formed in a chain — hence the name blockchain. These blocks are records of transactions between users. The blocks are made from the mining process. Users mine bitcoin by solving complex cryptographic puzzles. Miners “race” to solve the next puzzle. The solved puzzle creates the next block on the blockchain.

“The blockchain, the underlying technology, is the biggest innovation in computer science: the idea of a distributed database where trust is established through mass collaboration and clever code,” Tapscott Group CEO Dan Tapscott told Mckinsey, “rather than through a powerful institution that does the authentication and the settlement.”

Blockchain is, when compared to previous ledger systems, air tight. It’s a form of bookkeeping that can, and is, revolutionizing how we track, store, and exchange any single thing of value. Although the blockchain was made with the original purpose of eliminating the need for banks and other institutions to help validate payment, the technology can be used for much more than tracking money.

“If we have a global, distributed database that can record the fact that we’ve done this transaction, what else could it record?” Tapscott continues, “It could record any structured information.”

Blockchain then has the potential to change how we track anything of value at vastly lower costs. Usually, because most businesses lack any sort of master ledger for all their transactions and activities, these transactions have to be tracked, cross-referenced, and validated by other parties. The problem with the current system is that is inefficient, costly, and error-prone. Instead of having several records of transactions that intersect with each other, it’s possible, with blockchain to have a single, transparent, and immutable record.

In fact, companies are already utilizing the technology to make their supply chains more efficient. Currently, for companies operating with complex supply chains, there isn’t a way to pinpoint weaknesses as effectively as they wish. Because records aren’t transparent or transferable between organizations, supply chains can completely break down at the cost of everyone involved with no way to trace inefficiencies.

Blockchain could do more than change finance and supply chains. It has business applications for artists as well. Filmmaking, for example, is a craft that relies heavily on intermediaries. Distributors, streaming rights, and movie theaters all take a large slice of profits from film studios.

While there is nothing inherently wrong with this system, Blockchain platform could make sharing artistic works much less costly and more transparent. Digital rights management, financing, and distribution could be vastly more efficient through the use of smart contracts and a decentralized ledger system.

Because of blockchain’s immense potential, Hyperledger, a Linux Foundation project, is gaining traction. In the words of the mission statement of the project itself: “Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing and Technology.”

At the moment, fear that tampering with blockchain, one unregulated by some sort of intermediary keeps the technology from suddenly supplanting existing ones. So, blockchain as a disruptive technology is not likely.

However, the ability for blockchain to improve transactions and transfers between businesses is one reason some businesses are beginning to experiment with it in powerful ways.

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Paul Sciglar is a columnist interested in international policies and economic affairs. Certified Accountant with broad experience in strategic analysis, FP&A, investment banking, and investment management. You may connect with him on Twitter.