Blockchain Explained: A Simple Overview of How It Works

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The term blockchain may be confusing at first read. It covers a lot of ground and much of what’s written on the topic often assumes that you already know what blockchain is and what it does. Blockchain is most widely associated with cryptocurrencies like bitcoin and is sometimes used to refer to cryptocurrencies.

But blockchain is far more than cryptocurrency. And even though the terms are often used interchangeably they aren’t the same thing. Blockchain is the technology that most cryptocurrencies are built on, and it’s now also being used for many other applications. Here’s how blockchain technology works, where it got its start, and how big and small businesses can use the technology today and in the future.

The Basics of Blockchain

Blockchain is a decentralized public network that allows people and companies to store and securely transfer information and currency instantly. The term blockchain also refers to how the data is stored in ”blocks” of information and then linked together in a permanent “chain.” When a new block is added to the chain, it makes the previous blocks even harder to modify, which helps each block become more and more secure over time. There are several facets that make blockchain technology unique and valuable for many different types of business applications.

Blockchain Is Accurate

Blockchain is highly accurate. Every action in a blockchain is recorded and there is nothing left out. Once the action is recorded and stored in an information “block,” each block has a timestamp and is secured. The entire record is available to anyone in the decentralized system.

Blockchain Is Decentralized

Blockchain is decentralized and not stored on a single master computer or controlled by one company, bank, or organization. Rather, it is distributed over many computers that are in the network. Think of the way Google Docs work and how you can share a single document with multiple users and all users can view the changes simultaneously. This is very similar to how the decentralization of blockchain works.

Blockchain Is Permanent and Secure

As each block is completed, it joins the other blocks on the chain creating a permanent record of every transaction that is available to all the users of the blockchain in real time. This combination of features creates a high degree of security and makes the blockchain very difficult to change.

What Makes Up a Blockchain?

There are three basic parts to every blockchain.

  1. The record: This can be any type of information.
  2. The block: A bundle of different records.
  3. The chain: This contains all the blocks linked together.

When Was It Developed?

The idea of blockchain technology was first introduced in 1991 by researchers Stuart Haber and W. Scott Stornetta. In their white paper “How to Time-Stamp a Digital Document,” Haber and Stornetta explain the use of a continuous chain of timestamps to record information in a secure way. However, it wasn’t until the creation of bitcoin in 1998 that the technology was put into play. Bitcoin was created to be a decentralized form of money, rather than money that was government controlled and created (referred to as fiat money). To create a decentralized system that functioned and that people could trust, the founder of bitcoin (Satoshi Nakamoto, now also known as Craig Steven Wright) created decentralized ledgers called blockchain.

The Steps in a Blockchain Transaction

Each blockchain transaction, no matter what industry the blockchain is being used for, goes through the same steps.

  1. The trade or transaction is recorded in a record. The record of the transaction lists the digital signatures from each party and other relevant details.
  2. The trade is checked to make sure it’s valid. The computers in the network look at the trade and make sure that it is a real trade or transaction. This is a decentralized process that occurs among the different nodes of the network.
  3. As each transaction is verified and accepted as being real, it’s added to a block. Each block contains a code called a hash that is unique to that block. The block carries its own hash and the hash of the block before it so that users always know where the block should be located in the chain.
  4. Once the block is complete—blocks can contain many transactions—it is added to the chain. The hash that it carries ensures that it is in proper chronological order.

What Industries Are Using Blockchain?

No matter what you think of cryptocurrency, the underlying blockchain technology has many different uses and businesses are experimenting with its implementation at a rapid pace. For example, streamlining supply chains is one of the more interesting uses of blockchain and it may start to affect small businesses quickly as they interact with larger companies pursuing this technology. Here are a few companies that are testing the use of blockchain.

  • Industrial and Commercial Bank of China: This bank is using blockchain in a similar way to what the developer intended: to verify digital transactions in a non-centralized way.
  • Berkshire Hathaway Inc.: Warren Buffett’s company is exploring ways to use blockchain in its supply chains for both its railroad and fine jewelry businesses.
  • Bank of America Merrill Lynch: This large bank patents quite a bit of blockchain technology and is collaborating with Microsoft to try and automate the processes used in trade finance transactions.
  • Wells Fargo & Company: The bank is piloting its own digital currency which will run on blockchain technology and make international payments and transactions easier.
  • Apple Inc.: This giant tech company is using blockchain to securely timestamp data.
  • Toyota Motor Corp.: The car company that gave us the Prius is looking to use blockchain to help enable self-driving cars.
  • Walmart: The company is partnering with IBM to move its supply chain onto blockchain technology, which will help improve its food safety measures.

Businesses are using blockchain technology for many different applications, but some of the more common uses are for banking and supply chains. If it’s not already an option, then you can expect blockchain to pop up anywhere you need secure data with a record that is accessible to a group of people.

What Blockchain Means for Small Business Owners

Some small businesses, like tech startups, may develop blockchain technology themselves. Other small business owners may use blockchain technology that has been developed for the broader market.

Much like how Square and Stripe created easier access to credit card processing for small businesses, blockchain technology has the potential to make running a small business easier and smoother. Two of the ways this can happen include:

  • Smart contracts: Blockchain technology can be used to create, verify, and enforce contracts between users. It can be used to pay bills and employees, invoice customers or clients, create insurance policies, handle inventory fulfillment, or any other transactional activity. Companies like Confideal and dApp Builder have already developed the infrastructure to create smart contracts that businesses can then use in their own operations.
  • Data compliance: With new rules and regulations surrounding data compliance and data breaches, blockchain offers the ability to verify transactions without having to know the identity of the user. This can create a user experience that is more secure and less prone to hacking.

The commercialization of blockchain technology is still early. In the future expect more and more blockchain-based services to be offered to small businesses as alternatives to current record-keeping and transaction processes. 

The Bottom Line 

Blockchain was originally developed as the platform that bitcoin was built on. Now, it’s more transparent, decentralized, and secure as it grows and develops in new areas of business, such as banking and supply chain management. This technology can drive innovation for new ways of doing business and may be especially useful for companies where transparency and security are important.

In particular, small businesses can leverage platforms built on blockchain to streamline processes and payments. There are a few companies already offering this type of technology now, so expect to see many more in the future.

Article Sources

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