Blockchain – What is It and What Does It Mean to Me?
There has been a lot of buzz lately about “Blockchains”. You may have heard about them in association with Bitcoin or referring to them as “the new internet” or a “disruptive technology”. Over the next few weeks we will take a look at what they are and where they may fit into your company’s future.
For those of you not completely familiar with it, Bitcoin is a virtual or cryptocurrency that has no intrinsic value and unlike the Dollar or Euro, there is no government or commodity that acts as redemption base for it. It has no physical form and exists only in the decentralized Bitcoin network. The obvious question is “how does it have any value?” The answer is that there is a sector of the population that has gained a level of trust in how Bitcoin is administered and the level of risk it carries in terms of holding its value. A second question is “how do I ensure that this cryptocurrency has not been double spent?” With paper currency it’s simple – you either have a dollar in your wallet or you don’t. With a payment card, you either have the money in your account (or available credit) to be able to cover the transaction or you don’t. However, each of these methods has a cost and some level of inefficiency to them. If I pay in cash there is the risk that someone may mug me before I get to the store or that I might lose my wallet. With a payment card there is the risk that someone may have skimmed my information and is making unauthorized transactions out of my account. These are some of the problems that a Blockchain is designed to minimize.
Don and Alex Tapscott, authors of Blockchain Revolution (2016), have referred to a Blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Let’s just take a minute to let that sink in. This is saying that a Blockchain could be used anywhere that a current database is used, especially anything of value that needs to display a level of trust and value. But as one of my former professors used to say – “so what” – we all have invested large amounts of capital into various database applications that run our operations, accounting, payroll, etc and for the most part they are working just fine, thank you. Why would I want to change? To figure that out, let’s take a look at how a Blockchain works.
Consider a spreadsheet with all of your transactions on it. Now picture that spreadsheet duplicated across all of the computers on your network in a way that each spreadsheet is continually updated each time a transaction is made. At a very basic level, this is what a Blockchain looks like.
Information in a Blockchain exists as a shared and continually reconciled database. The Blockchain is not stored on any one computer, allowing for instant mitigation against a single piece of hardware failing. Because it is not stored in a single location, the transactions are public and instantly verifiable. Because it is not centralized, there is nothing for a hacker to corrupt. Further, by being hosted by multiple computers the data is easily accessed by all users.
Going back to the spreadsheet example, today most databases are like an Excel spreadsheet in that you can’t have two users making changes to it at the same time. One person “locks” the spreadsheet, makes their changes and then sends it to the other party and has them make revisions. The first party has to wait until they receive it back so that they can make any further revisions. That is how standard database technologies work – the record has a lock put on it and no other user can make changes to that record until the lock is removed. A Blockchain is more like Google Docs (or Google Sheets) in that both parties have access to the same document at the same time and that single version of the document is always visible to both of them.
Think of all of the applications where this sort of sharing could create huge efficiencies. In our industry, just think of how many times your employees have to wait for a customer to send them revised orders when a stop location or a quantity is changed or if you got waiting time charges out of them. How much more efficient would it be to just have one “living” document so that changes can be seen instantaneously? You don’t need a Blockchain to get that sort of sharing, but they do provide a number of advantages towards facilitating it.
A Blockchain has a built in robustness due to the storing of blocks of information that are identical across the network. As a result, a blockchain can’t be controlled by a single entity and it has no single point of failure. TEDx speaker Ian Khan has said that “as revolutionary as it sounds, 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. Above anything else, the most critical areas where Blockchains help is to guarantee the validity of a transaction by recording it not only on a main register but a connected distributed system of registers, all of which are connected through a secure validation mechanism.”
Blockchain networks live in a state of consensus as it automatically checks in with itself every 10 minutes and reconciles every transaction that happens within that interval. Each of these groups of transactions is called a block. Two important things come out of this. First the data is transparent because it is imbedded within the entire network. Second it eliminates corruption as altering any unit of information on the chain would require a huge amount of resources to override the entire network. Every transaction gets a timestamp record that is “hashed” into a chain of proof of work that can’t be changed without redoing the proof of work. This “hash” is a link to a previous block. To alter a block means you have to alter all of the subsequent blocks because of the ties between them. It would also require the collusion of the majority of the network. This results in a transaction ledger that is effectively permanent.
There are two different types of Blockchain that can exist. First is a public or permissionless one similar to what Bitcoin uses. Alternatively you can have a permissioned (or private) Blockchain. A private Blockchain does have a few limitations such as reduced transparency due to the validators being vetted by the network owner. They also have a reduced network effect because they are by definition of a finite size as the network owner only allows the users that they want to access the network. A potential risk of a private Blockchain is that it reduces the number of machines that a hacker would need to take control of to achieve a network majority for any changes.
Each computer on the network becomes a node and automatically gets a copy of the blockchain. This allows the node to validate and relay transactions. This feature is what makes it a decentralized technology. As a result, transactions are done on a user to user (or peer to peer) basis. This allows for mass collaboration – in effect think of a Google Doc that has thousands or millions of people using it simultaneously. How one can leverage that ability is what we will look at next week.