If you’re confused about blockchain technology – what it is, how it works and why it’s important – you’re not alone. We are in the early adopter phase of blockchain when many different industries are exploring the technology and its potential. Here, we offer a basic overview to give you a working knowledge of blockchain.
Blockchain is a technology that enables capturing, tracking and sharing of digital assets like bitcoin and other cryptocurrencies, in a distributed ledger across a decentralized network. In the most basic sense, blockchain operates like a network for a digital database. But instead of storing data in a table, blockchains store data in individual blocks that are linked together in chronological order.
Blockchain technology explained
Unlike traditional databases that store data on a single server, blockchain stores data simultaneously on multiple computers, or “nodes,” that chronologically record every transaction and distribute the records to the entire network. The information contained in a blockchain is visible to anyone with access to that network, at any time.
Each block in the network is securely linked to the one before and after it and remains in place even if the digital asset changes hands. Neither the order of the blocks or the blocks themselves can be altered, making the data contained irreversible, unchangeable and essentially immune to tampering.
While blockchain can be used to capture and share virtually anything of value including tangible (real estate, automobiles, cash) and intangible (intellectual property, branding, patents) assets, its most common application currently is to track digital assets such as cryptocurrencies and non-fungible tokens (NFTs).
The history of blockchain technology
The history of blockchain goes back to 2008, when it was introduced by Satoshi Nakamoto, a presumed pseudonymous individual or group of individuals, who authored a white paper, “Bitcoin: A Peer-to-peer Electronic Cash System.”
Nakamoto created the first blockchain database in early 2009, and the first bitcoin transaction was recorded shortly thereafter. While initially seen as an answer to the financial crisis and the ensuing distrust of the banking juggernaut, blockchain has evolved into a legitimate technology that more financial institutions are seeking to leverage in their offerings.
- Satoshi Nakamoto releases bitcoin white paper
- First bitcoin online purchase takes place using 10,000 BTC
- The bitcoin marketplace surpasses $1 billion
- Introduction of Ripple, a blockchain-based digital payment network and protocol with its own cryptocurrency
- Release of the Ethereum white paper, which provided a framework for using decentralized technologies across various industries
- Financial institutions begin to recognize blockchain as an enterprise solution
- Worldpay from FIS® processes the world’s first card-to-crypto transaction
- 15% of financial companies use blockchain technology
- 95% of companies are willing to invest in blockchain technology
- Bitcoin is added to CashApp
- The cryptocurrency market cap hit $2 trillion with >70 million crypto wallets in use
- The blockchain marketplace is forecasted to exceed $10 trillion by 2030
- Blockchain technology is expected to revolutionize almost all industries across all geographies with internet connectivity
The key elements of blockchain technology
Blockchains are designed to authenticate users, validate transactions and maintain a record of digital information in a manner that cannot be altered. The three key elements of a blockchain are:
1. Distributed ledger technology
The distributed ledger contains an immutable record of all the transactions that occur on the blockchain. Every transaction is recorded only once, which eliminates duplication of effort. The distributed network connects blockchain participants via nodes, which retain a copy of the ledger and update with every transaction.
2. Immutable records
Each transaction is cryptographically signed, time-stamped and sequentially added to the shared ledger. Entries cannot be changed after they are entered. If an error occurs in a transaction, a new transaction must be entered to correct the error and both transactions will be displayed in the ledger.
3. Smart contracts
A smart contract digitizes assets that are part of a contractual exchange and creates the basis for the agreement on a decentralized ledger. Smart contracts are executed immediately and are stored on the blockchain.
Here are a few more definitions that clarify blockchain technology.
The user is a person who participates in a blockchain ecosystem by either transacting or contributing to running the network.
A node is a computer connected to a blockchain network that chronologically records every transaction and distributes each transaction to the rest of the network.
Decentralization is key to blockchain technology – no one entity is in control of the nodes or dictates the rules for the blockchain.
A consensus (or general agreement) is met once all the nodes on the network agree about which blocks are valid and which ones are not.
What is blockchain technology used for?
Blockchain was developed during the financial crisis of 2008, when trust in traditional economic systems fell to an all-time low. The technology emerged as an alternative to – or perhaps a rebellion against – the traditional model of a centralized financial system. As the technology has matured and attracted more users, financial institutions and capital markets entities have begun to explore the value blockchain could bring to their own operations.
From a retail banking perspective, blockchain technology integrated into core banking offerings can enable bitcoin trading through customer accounts. By serving as the facilitator of the trade, traditional financial institutions become part of the value chain, mitigate disintermediation and reduce their risk when a custodial partner is working behind the scenes. Customers can purchase bitcoin as well as manage their checking and savings accounts – all from the bank’s mobile app. In terms of payments, blockchain technology has the potential to ultimately make real-time and cross-border financial transactions more efficient, helping banks and their commercial clients expand their geography and offerings.
Making the digital value of a payment or remittance available instantly on the chain provides immediate liquidity. With blockchain technology, a transaction can be initiated from anywhere in the world by adding a node to the distributed ledger. The transaction can then be picked up by any other node on the blockchain to instantly make the transfer. An additional benefit of most digital assets is that currency conversion is not required in the middle of these transactions.
Applications of blockchain in other industries
Aside from financial services and cryptocurrency exchanges, the potential use cases for blockchain span any industry or business requiring instant, secure and traceable exchange of assets or information. According to Gartner, blockchain could generate as much as $3.1 trillion in new business value by 2030 and will support the secure global movement and tracking of $2 trillion of goods and services annually by 2023.
- Supply chain management
Blockchain can offer full visibility into a product’s status and location at any moment in time, improving coordination between all entities involved in the supply chain and enabling more efficient delivery.
- Healthcare services
Blockchain-based medical records can increase patient privacy and ease access to healthcare by facilitating a secure exchange of sensitive data between providers.
- Criminal justice system
Blockchain could be used to improve the integrity, security and transparency of criminal records for better coordination among all parties involved in law enforcement.
- Government elections
Since entries cannot be changed once they are submitted, blockchains could be used to bolster security in elections by preventing the duplication of voting records. Some countries are already exploring the possibilities; Indonesia used blockchain verification in their 2019 elections.
Key benefits of blockchain
Blockchain facilitates a direct, secure and immutable exchange of value in digital environments without an intermediary to validate the transaction. Because it is the next evolution of digital technology with significant impacts on how business is conducted, blockchain is often referred to as “Web3.” Blockchain represents the internet-plus, facilitating point to multi-point transactions with inherent traceability and immediacy.
While the use cases for blockchain will differ by industry and application, the primary benefits are portable across all business types and include the following.
Any activity that occurs happens instantly and is immediately visible to all participants in the blockchain.
Blockchain provides a virtually un-hackable database, and one that if compromised, leaves a good audit trail.
Since each block of information is connected to the previous and the following block, blockchain provides complete transparency and traceability of information.
The blocks of the blockchain cannot be altered, preventing duplication of records and making related illicit activity virtually impossible.
What’s the future of blockchain?
Looking ahead, the question for organizations to consider is not whether blockchain works – it’s how blockchain will work for them. Following are five things to be aware of when evaluating how blockchain technologies can benefit your organization.
1. Merging technologies
Blockchain has the potential to enhance the capabilities of applications that utilize internet of things and artificial intelligence by enhancing security, transparency and accountability of data. By helping organizations address some of the stability and scalability challenges inherent to IoT and AI, blockchain brings new value to business offerings.
2. Greater influence
Blockchain’s influence extends beyond finance to virtually any industry involved with recording and overseeing the exchange of assets or information. Real estate and the legal field are just two of the many industries exploring the benefits of blockchain, and 81 of the top 100 public companies are incorporating blockchain technology into their products.
3. Different approaches
Startups and legacy organizations are approaching blockchain differently and can benefit from collaboration. While legacy organizations are attempting to fit blockchain into existing operations, startups are taking a bigger picture approach and experimenting with new applications of the technology. Together, they can leverage each other’s strengths and drive more rapid change and adoption.
4. Regulatory considerations
The regulatory environment is shifting rapidly to address new threats and issues that arise as blockchain takes hold. For example, the General Data Protection Regulation (GDPR) applies to personal data stored or transmitted on a blockchain platform, but it does not define how the data is protected, who the data controllers and processors are and who is liable for data breaches.
5. Disintermediation is a threat
Blockchain poses a threat to financial institutions because it gives consumers the opportunity to access specific financial services without them. But institutions that engage blockchain can streamline their services, provide better transparency and greater fraud protection – and offer access to the cryptocurrency opportunities consumers are interested in.
To take a deep dive into the world of cryptocurrency, check out our recent webinar series, FIS Perspectives.
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