Blockchain for Dummies: A Beginners Guide

A Blockchain Primer

If you’re unfamiliar with blockchain, it might seem a little like something from an old Ronco commercial – “It slices, it dices, it makes julienne fries!”

The way it is portrayed make blockchain seem like the band-aid to every business problem in existence. And, in truth, there is a multitude of business applications where the technology’s use can improve operations, security, and even transparency.

It’s difficult, however, to grasp the full scope of blockchain’s potential – and its potential shortcomings – without understanding what it is and where it came from.

What is Blockchain?

If you’ve seen other references to blockchain, you may know that it is a distributed general ledger system that stores information. It can store transaction details, medical records, security data and much more. It can contain the path the beef you buy in the grocery store took, from farm to table. It can hold contract details and execution information. But the more we talk about examples, the further we get from what blockchain is. Each example is only an application of the technology, not the technology itself.

The technology is about how the data is held and validated, not what it can hold.

So instead of thinking about the applications, imagine a set of data stored together in a box. When that data needs to be changed or appended, a new box is added that contains the data with any new or changed information. That’s the basic idea of what a block in the blockchain is.

Unfortunately, that’s the point where an example of using physical objects starts to fall apart. Because boxes can only be stored in one place at a time, where entries on a blockchain are stored on computers all over the globe. Or, more specifically, exact copies of those data blocks are stored all over the world.

This distributed nature of storing the chain is where blockchain gets its security from. If one instance of a block is changed, and the others don’t agree, that entry is considered invalid. This makes it nearly impossible to change or corrupt data in the chain.

But because it’s distributed it needed to be initially defined with a guiding set of principles that would assure the data it stored was secure and transparent:

Blockchain is append-only

The records on a blockchain are immutable. In other words, new records are added on to the chain, instead of changing old records. That way the entire history of the data is kept and can be referenced and that data can’t be changed.

Blockchain can provide privacy

That might seem like an odd statement when you understand that the database that is blockchain is saved on many thousands of computers. But because each transaction or exchange of data is secure and verifiable, it can be authenticated without the need for identities to be traded between the transaction participants.

Blockchains are verifiable

For a record to be considered valid on the blockchain, 51 percent of the chain’s participants must agree that the information is correct. Because the computers storing a blockchain are distributed across the world, it’s difficult if not impossible to gain control of a majority of those machines.

Blockchain can record provenance

The origin of anything – regardless if it’s money or car parts – can be tracked and stored by the chain. This makes it possible to verify with certainty where a product or a bitcoin came from.

Current Uses of Blockchain in Business

Blockchain was initially developed by a person or entity (no one knows for sure) named Satoshi Nakamoto. It was built to serve as the backbone for what was, at the time, a new cryptocurrency called Bitcoin. It’s because of its genesis that many people confuse bitcoin and blockchain, but they are actually two separate things.

It didn’t take long for developers and businesses to realize the value of blockchain as a technology separate from bitcoin. From there, blockchain was adopted for use in applications across business functions. Today, those business use cases are varied and growing. Here are just a few way blockchain is being used currently:

Smart Contracts

A smart contract is a self-executing agreement between parties. For instance, if you wanted to rent a vacation property, and the terms of the agreement were that you would receive the keys when payment was made, a smart contract could text you the security code for the front door when your payment processed. The contract is unbreakable because the network holds the data that shows that each party completed their part of the agreement.

Employee Pay

For companies that employ workers across the globe, payroll can be expensive due to fees associated with international money transfers. It can also be time-consuming. Using bitcoin and blockchain makes the payments transparent with fewer fees.

Cross Border Payments

As with international payments to employees, cross border payments are also made faster, more secure, and with fewer fees thanks to blockchain cryptocurrencies. Plus, in places where payment infrastructure is sparse, like in developing countries, blockchain payments can open up potential vendor contacts where before payment for services was difficult.

Food Safety

When food goes through a recall, thousands of pounds of products are destroyed because they may or may not be from the location that caused an issue. When farmers, wholesalers, shippers, and retailers use blockchain to record every step of the supply chain, problems can be quickly identified and traced back to the source. More importantly, contaminated food can be quickly removed from store shelves. The FDA is trying to do this now for many products, however, the data is still spread across many companies and systems which makes it hard to use since it’s often incomplete.

Acknowledging Blockchain’s Shortcomings

The problem with much of the news covering blockchain to this point is it makes it sound like the technology is the perfect solution to every problem. Yet it’s just a tool, and like all tools it has limitations.

CPU Expense

Each step of the chain must be encrypted and processed. This slow and CPU intensive process means that far fewer transactions can be processed as compared to traditional centralized software systems.

The 51% attack

One of the strengths of blockchain is that no one can alter a single entry and have it recognized as valid. The other nodes must also agree on the data, and if they don’t the odd man out is considered unreliable. However, only 51% of the nodes must agree for the data to be considered true. So even if something is entered incorrectly – or more insidiously, if 51% of the nodes are changed at the same time – a lie can become truth in the eyes of the blockchain.

Blockchain is a complex technology with a lot of unrealized potentials. Gaining a rudimentary understanding of what it is, and what the drawbacks are, will help organizations develop informed opinions on the potential uses of the technology. Like all tools, enterprises must review the pros and cons before committing to the use of a tool. Blockchain is no different, and wrapping your head around it is crucial to fully evaluate up and coming tools and services that leverage the technology.