10 Things You Should Know about Blockchain

Posted January 25, 2017 By  Cynthia Harvey
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    Blockchain quote

    10 Things You Should Know about Blockchain

    This distributed database technology could revolutionize the way business is done — but that transformation is going to take a while.
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    Blockchain definition

    1. What is blockchain?

    One of the easiest-to-understand definitions of blockchain comes from a recent Harvard Business Review article written by Marco Iansiti and Karim R. Lakhani. They wrote, "blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way."

    A more detailed definition is available from Gartner's website, which says, "Blockchain is a type of distributed ledger in which value exchange transactions (in bitcoin or other token) are sequentially grouped into blocks. Each block is chained to the previous block and immutably recorded across a peer-to-peer network, using cryptographic trust and assurance mechanisms."

    The key points are that data stored in a blockchain is distributed (as in Git repositories or file-sharing networks), highly secure, easily accessible and impossible to change. Those characteristics make blockchain ideal for recording financial transactions, but it could also be used in other ways.

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    2. Developed for Bitcoin

    Blockchain was invented in 2008 by Satoshi Nakamoto, the enigmatic creator of the bitcoin digital currency. Blockchain is the digital database that keeps track of all bitcoin transactions and prevents bitcoin users from spending the same money twice.

    First released in 2009, bitcoin has become the most well-known digital cryptocurrency. Although it still isn't as widely used as some early advocates predicted, experts estimate that several million people now own bitcoin. And well-known retailers like Microsoft, Subway, Tesla, Whole Foods and Home Depot will accept it as payment.

    At the time of writing, 1 bitcoin is worth about 891.87 USD.

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    3. Designed to be secure

    Within blockchain, individual time-coded transactions are grouped together into blocks. Those blocks are then hashed to protect the raw data. Each hashed block also includes the hash of the block that came before it in time. As a result, the blocks become linked together, forming chains. Hence, the name blockchain.

    The important thing to realize here is that, unlike encryption, hashing only works in one direction. If, for example, you encrypt a file on your PC, anyone can decrypt that file if they have the key. But hashing doesn't work that way. Once you have hashed your data, you can't go back again; you can only put new data into the hashing algorithm to see if it matches the other hash. That makes it really difficult to change any data once it has been saved to a blockchain ledger.

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    4. Blockchain for smart contracts

    One of the more interesting applications of blockchain is to create "smart contracts." Today, most payments go through an intermediary like a bank or a credit card issuer or an online transaction service like PayPal. With blockchain, companies could cut out this middle men and enter into smart contracts that would automatically deduct money from one digital wallet and add it to another when certain conditions are met, like goods being delivered from one company to another.

    Importantly, blockchain transactions also happen instantaneously. Currently, if you write a check or pay with your credit card, it can take a while — hours or days — for the financial system to process and reconcile those payments. With blockchain, the reconciliation happens immediately, dramatically speeding the flow of money.

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    5. Programmable blockchain

    Smart contracts are made possible by a type of blockchain known as programmable blockchain or blockchain 2.0. It can eliminate the whole process of invoicing and sending and receiving payment. For example, utility companies could use programmable blockchain to allow customers to pay their bills automatically. As you used electricity over time, the programmable blockchain would automatically deduct the appropriate amount of money from your account and move it to the utility's account without any need for a monthly bill. Obviously, customers would need to be convinced of the security and reliability of the blockchain technology before an implementation like this could go live.

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    6. Industries investigating blockchain

    Most of the examples in this slideshow so far relate to banking or retail transactions, but a lot of other industries are also investigating the technology. For example, healthcare providers could store medical records in a blockchain database, which would help patients make sure that doctors and hospitals have a complete and accurate record of their past treatment. Local governments could use blockchain to create a permanent and unalterable record of who owns a particular piece of property and whether taxes have been paid. Media companies could use blockchain to help with digital rights management, enabling them to track and limit the digital sharing of a particular piece of content. And other industries like manufacturing, insurance, legal, logistics and accounting are also considering new ways to use the technology.

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    Blockchain vendors

    7. Vendors developing blockchain

    A whole host of startups are trying to capitalize on the emergence of blockchain technology, and some bigger companies are also getting into the act. The Blockchain Technologies website claims that more than 200 companies are building products and services based on blockchain and that investors have poured more than $1 billion into these efforts. Microsoft has already rolled out one blockchain-related product — its Blockchain as a Service cloud computing offering available through Microsoft Azure. IBM also offers blockchain through its Bluemix cloud platform.

    Somewhat confusingly, there's also a company called Blockchain which offers digital wallets based on blockchain technology.

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    Hyperledger definition

    8. Hyperledger — the open source blockchain project

    In addition to developing their own products, organizations are also collaborating on an open source blockchain effort called Hyperledger. Hosted by the Linux Foundation, Hyperledger has more than a hundred corporate members, including Accenture, Airbus, Fujitsu, IBM, Intel, J.P. Morgan and many others. Hyperledger encompasses five smaller projects: Fabric, Iroha, Sawtooth Lake, Cello and Blockchain Explorer. The group also regularly hosts Hackfests designed to advance development of the technology.

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    9. A long-term shift

    While some experts are very enthusiastic about blockchain's potential, most of them also caution that it will take years before the technology can really take hold. Before that can happen, some additional technological problems will need to be solved. In addition, it will likely take a long time for users to feel comfortable with blockchain based technologies and for financial organizations to convert from their current methods of processing and tracking transactions. Last summer, Gartner's Ray Valdes, vice president and Gartner Fellow, said, “Gartner clients in industries beyond financial services are asking whether it is too late to join in the contagion of ‘blockchain fever’ that has struck the financial services sector. If anything, it is too early.”

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    Blockchain predictions

    10. Blockchain predictions

    So how long will it take before blockchain is part of your daily life? Probably at least five years and perhaps more than a decade. PwC has said, "By the 2020s, PwC expects that blockchain-based systems used by leading enterprises will have reduced or eliminated many categories of validation and verification friction for simple transactions: anyone will be able to exchange a wide range of digitized or digitally represented assets and value with anyone else."

    And a World Economic Forum report predicted that by 2027, 10 percent of the global gross domestic product (GDP) will be stored on blockchain technology. For reference, when the report was written in 2015, "the total worth of bitcoin in the blockchain is around $20 billion, or about 0.025% of global GDP of around $80 trillion."

If you read technology publications, blogs and analyst reports on a regular basis, you've undoubtedly come across some mentions of blockchain technology. Many experts say blockchain could revolutionize the way business is conducted. For example, James Wester, research director at IDC Financial Insights, said blockchain "represents a complete shift in the way electronic transactions have been handled for decades, and participants in the market should begin thinking about how they will adapt to it." And Microsoft predicts that blockchain "will fundamentally change the way we think about exchanging value and assets, enforcing contracts, and sharing data across industries."

Blockchain has made several analyst lists of the most promising new technologies, and some of the world's largest tech companies have announced either products based on blockchain technology or research projects to investigate its uses. And blockchain advocates say it could be just as transformative as the advent of the Internet.

Still, despite all that hype, it's sometimes difficult to find people who are actually using blockchain today. In fact, a lot of people who work in IT or the tech industry don't really understand what the technology is all about, how it works or why it has people so excited.

Perhaps that's part of the reason why Gartner placed blockchain near the top of the "Peak of Inflated Expectations" in its Hype Cycle for Emerging Technologies, 2016. Similarly, IDC also referred to blockchain as "one of the most hyped topics in 2016."

All the conflicting opinions about blockchain can be confusing, to say the least. This slideshow attempts to cut through the clutter and provide an overview of what blockchain is and why could become important.

Image courtesy of Shutterstock

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