Understanding Blockchain Technology
Blockchain is the underlying technology behind the exchange of cryptocurrencies like Bitcoin. However, blockchain’s applications go beyond crypto. As this technology continues to expand, it’s important to understand what blockchain technology is, how it works and why it’s important for businesses and nonprofit organizations.
What Is Blockchain?
Blockchain is a method of recording data or information that makes it difficult or impossible for the system to be altered, manipulated or hacked. This is achieved by creating an immutable ledger that enables secure transactions across peer-to-peer networks. The data cannot be modified or deleted without consensus from the network.
Blockchains can make information or data in any industry immutable, not just cryptocurrency. The use of blockchain has exploded since the introduction of Bitcoin in 2009.
A blockchain is made up of blocks, each comprising several transactions. Each ledger receives a copy of transactions on the blockchain network, and once each block is confirmed to be true, it’s added to the end of all preceding blocks — making it a blockchain. This system or sequence is known as distributed ledger technology (DLT). In addition, the blockchain is decentralized because several users govern the entire database.
Features of Blockchain Technology
Blockchain technology has the following features:
- Decentralization: Blockchain is not controlled by a single individual, group of people or organization, making it different from banks and traditional financial institutions.
- Immutability: No participants can alter or modify recorded transactions in the blockchain. If you enter a transaction with an error, you must add a new transaction to correct or reverse the mistake. Both transactions are visible to the network.
- Consensus: Participants in the network must grant you consent before you can record a transaction.
How Blockchain Works
Understanding blockchain technology means dissecting its intricacies and how it operates. In some ways, a blockchain is similar to databases or spreadsheets that store information you enter. The main difference between a blockchain and a spreadsheet is how the data is organized and accessed.
A blockchain has scripts that perform the typical tasks in a database, such as entering, accessing and storing data. A blockchain is also distributed, which means several copies are stored on many machines. All the copies must match for the data to be valid.
A blockchain collects information about a transaction and enters it in a block, the same way you’d enter information in a spreadsheet cell. Once the block is full, the information is run through an encryption algorithm, which creates the hash. The hash is a cryptographically generated code — hexadecimal number. The hash is entered into the next block header and is also encrypted. This process creates a series of blocks chained together.
Types of Blockchains
There are four main variations of blockchains:
- Public blockchains: These are permissionless blockchains, and anyone can join them. Members of the blockchain have equal rights to read, edit and validate the blockchain. Examples of public blockchains are cryptocurrencies like Bitcoin, Litecoin and Ethereum.
- Private blockchains: Private blockchains, also called managed blockchains, are partially decentralized permissioned networks controlled by a single organization. The organization decides who can be a member and what specific rights they have in the network. The digital currency exchange network Ripple is an example of a private blockchain.
- Hybrid blockchains: These blockchains combine elements of both private and public blockchain networks. A company can set up permission-based private systems alongside a public system. This arrangement enables the organization to control access to specific data in the blockchain while keeping the rest of the data public.
- Consortium blockchains: These are blockchains controlled by multiple organizations. The organizations decide who can access the data or submit transactions. This is the ideal type of blockchain for businesses when all participants have a shared responsibility for the blockchain and need permission.
Benefits of Blockchain
The main benefits of blockchain technology include:
- Increased accuracy and transparency: Blockchain provides a single source-of-truth ledger, making transactions on the platform transparent. Immutable transactions are recorded chronologically, and there is no human involvement in verification, reducing the potential for error.
- More security: Digital signatures or hashing algorithms make it possible to conduct fraud-free transactions. Only authorized users can unlock data meant for them, and the data stored on blockchains cannot be changed.
- Higher efficiency: Blockchain technology streamlines operations by reducing bottlenecks and eliminating intermediaries. It also enables reliable cross-team communication. Automatic verification processes in smart contracts reduce transaction costs, optimize data integrity and enable timely processing times.
Challenges of Blockchain
These are the main drawbacks of blockchains:
- Concerns about regulation: Blockchain regulation varies by jurisdiction and is still uncertain in many countries. For example, blockchain technology allowed overseas voters to vote in the November 2018 midterm elections in West Virginia.
- Transaction limitations: The number of transactions for each node is limited.
- High energy costs: The computational power needed to perform certain functions consumes large amounts of electricity, leading to high operational costs and environmental concerns.
Why Blockchain Is Important
Blockchain is a reliable technology for delivering accurate information more quickly. The data is stored on an immutable ledger that can only be accessed by permissioned network members. A blockchain network can track payments, orders, production and accounts. Because of its capabilities, several industries apply blockchain technology in their operations.
Banking and Finance
Check processing in banks can take up to three days. Integrating blockchain technology into banks allows consumers to enjoy faster transaction processing in minutes or seconds. The blockchain transaction timeframe is the time it takes to add a block to the blockchain, regardless of the time of day, whether it’s a weekend or not, and even on holidays. Banks can also share transactions with other institutions securely and quickly.
Cryptocurrency
Cryptocurrency is the most widely known application of blockchain technology. People can buy, exchange or spend cryptocurrencies through blockchain technology, which operate without a central authority. In contrast, the Federal Reserve controls the U.S. dollar.
Smart Contracts
Smart contracts are self-executing contracts that enact automatically once conditions are met. For example, a product is automatically released to the buyer once the seller and buyer have met all specific parameters for a transaction or deal.
Health Care
Health care providers can use blockchain technology to store patient data securely. In addition, the patient records stored on blockchains cannot be changed and can only be accessed by authorized individuals.
Get Blockchain Technology Advice
As a business owner, you’re always looking for ways to serve your customers better. Faster and more secure transactions or record-keeping through blockchain technology could be one way of improving your business operations. You can also use smart contracts for efficient transactions. Contact Marshall Jones for advice on blockchain. We are certified public accountants and financial advisors serving Atlanta businesses and nonprofits.
