WHAT ARE BLOCKCHAINS AND HOW TO USE THEM

Blockchain and cryptocurrencies are the latest buzzwords in the tech and investment worlds. They have been getting a lot of attention due to their industry-disrupting capabilities. Blockchain may have gained popularity as the technology that provides infrastructure for Bitcoin. Ever since Satoshi Nakamoto published this invention called Bitcoin in 2009, it has gone through numerous ups and downs. Earlier Bitcoin was considered as a controversial currency used for black market activities. Today people have recognized the countless possibilities that it presents for businesses. CoinDesk (the news site specializing in bitcoin and other digital currencies) reported an explosion in the number of global crypto-focused funds by the end of 2017. 

Blockchain

So, what are block chains and cryptocurrencies?

Blockchain is a record of unchangeable and time-stamped series of data that is decentralized (not owned by any single entity). These data ‘blocks’ are bound to each other (i.e chain) and are secured by encryption. A decentralized database (i.e. ledger) is used in this technology which serves as a registry of transactions. This ledger is shared and owned in part by the members of a peer-to-peer network unlike those of traditional centralized databases. The members of the blockchain compete to encode transactions and then add blocks to the existing record of transactions (i.e chain) when a solution is found. This addition is done in a way that is permanent and unalterable. 

Cryptocurrencies can be called as digital money that is created from code. They are just encrypted strings of data that are encoded to signify one unit of currency. When Satoshi Nakamoto tried to build a digital cash system without a central entity, he stumbled upon Bitcoin – the very first cryptocurrency. In traditional systems, you have a central server that keeps a record of all transactions. However, in a decentralized network, you do not have this server.  In the network of peers, every single entity needs to have a list of all the transactions to check if they are valid. A particular transaction, when carried out is broadcasted across the entire network. Once a miner confirms the transaction, it is unforgeable and becomes part of the immutable record of transactions i.e blockchain. For this work, miners get rewarded with a token of cryptocurrency such as Bitcoin. Blockchains are secured by strong cryptography and hence are highly improbable to be compromised. 

Bitcoin cryptocurrency
Data mining

Objective of blockchains

The main objective of blockchain technology is simplification. Blockchain technology basically helps exchange objects of value between organizations or peers in a trusted way. People who don’t know each other can transact without the need of a central governing authority. Since the blocks are secured not by trust or people but by math, the system becomes entirely transparent. There are no intermediaries and this ensures trust among unknown or untrusted participants. Since blockchains are impossible to hack, it has the potential to change the way we handle financial transactions and business as a whole.

What makes blockchain technology so attractive?

  • Blockchain is a more efficient way of storing information. 
  • It is more powerful than any other file-sharing service since data is stored from every concerned party in common consensus.
  • All peers in the network will access the exact same copy of the information at all times.
  • It creates an audit trail that can be viewed on a real-time basis.
  • Blockchain-focused projects have begun to attract top talents from leading internet companies. 
  • Blockchain can be the basis of inexpensive community-owned and government practices. 
  • It can create a new asset class that is completely unrelated to commodities, equity markets etc.

Thus blockchain has the capability to improve efficiency and transparency in businesses. All these factors have piqued the interests of corporations, making them invest strategically in blockchain technology.

How can businesses use blockchain technology?

  • Better supply chain management:

Earlier, supply chains were simple since commerce was mostly local. However, they have grown incredibly complex with time. It has become exceedingly difficult for customers to truly know the value of products due to the lack of transparency in the current system. Use of blockchain can increase the efficiency and transparency of supply chains. By using blockchain, a small-business owner can know who’s on the other end of the transaction. Such information is vital in the event of a product recall or counterfeiting. Since consensus is an important part of a blockchain, there’s no question of a dispute in the chain. 

  • Smart contracts:

These are self-executing contracts. The t. terms of the agreement in smart contracts are written as codes which exist across a blockchain network. The computer protocol can then digitally facilitate, verify or enforce the performance of the contract. Because of its decentralised nature, smart contracts help to avoid intermediaries (middlemen) thereby saving time and conflict. Credible transactions can be conducted without the need for a third party. Smart contracts enable the implementation of agreements between disparate, anonymous parties without an external enforcement mechanism. Thus transactions are made irreversible and transparent. 

  • Decentralized Cloud Storage:

Today, cloud storage is controlled by a few large providers like Google, Microsoft, Amazon and so on. Hence countless questions are raised regarding data protection, privacy, licensing, control and ownership of data. Decentralized cloud storage aims to solve this problem. So, instead of running storage through a single company with central control, a decentralized blockchain network stores the data. It is an open source technology with significantly lower prices to store the data. The data that you store in such decentralized cloud storage systems is encrypted. The users themselves control their own encryption keys making the system unhackable. STORJ, Sia, Filecoin, IPFS are examples of such decentralized blockchain cloud storage services. 

  • Easier and Faster Payments:

Traditional payment systems like banks can control all your actions. They have access to your information and can even share it with anyone without your consent. Blockchain payment systems are more secure and transparent. Once the transaction is coded into the system, there is no need for any extra security. On the other hand, banks have to spend large amounts to secure customer data. Cross-border payments are made easier, faster and with low conversion fees through blockchains. Large institutions like Visa and Mastercard are now resorting to blockchain for their cross-border transactions and data storage. 

Does your business really need blockchain?

cryptocurrencies

Due to its industry-disrupting capabilities, blockchain technology has been getting a lot of attention. Many industries are desperate to incorporate blockchain technology into their processes. So, is this technology suitable for everyone? Before falling victim to FOMO, companies must introspect whether blockchain is suitable for your business. Since it is a relatively new technology, blockchain is still the subject of research and development. Most companies using this technology are simply dealing with the unknown. 

So when should you think about incorporating a blockchain? Following are some questions that you may ask to find out:

  • Are the existing trust mechanisms in your system so inefficient that you need a decentralized system? 
  • Does your company depend upon a third party for most of the operations? 
  • Do you have to spend exorbitant amounts of money because of this third party? 
  • Do you have a hard time maintaining a clear audit trail?  

If the answer to these questions is yes, then blockchain is a good idea for you. But, if you deal with high amounts of data and carry out complicated transactions, then blockchain may not be the best solution for your company, as of now.

Another important factor that cannot be overlooked before jumping the wagon is cost. Cryptocurrencies use a lot of power. Hence, energy costs are bound to shoot up with an increase in transaction volume. The storage costs are also bound to rise exponentially with time since blockchain is an ever-growing database. Each node in the network has to download all the data continuously. Thus, the long term storage costs will be beyond expectations.  

So, can blockchain be cost effective ever? Yes, but not in the current scenario. Most of the blockchain initiatives are in the POC phase. Hence it requires more time to develop and be useful for industries.