This article aims to provide a simple explanation and real world examples of blockchain in action.
Blockchain is a distributed record of transactions or other data, maintained by a network of computers on the internet without the need for approval from a central authority. The blockchain creates a shared record of data that is virtually tamper-proof.
Blockchain’s distributed record of transactions is called a distributed ledger. In some cases a distributed ledger offers many benefits compared to the traditional centralized ledger. However, there are many cases where the centralized ledger is superior.
What are scenarios that favor a blockchain approach? Here are four- when a “single version of the truth” is needed by multiple parties; when transparency is desired by non-trusting parties; transfers of digital property; and cases when lock tight security is required.
Blockchain is in its early, formative years. The first commercial examples of blockchain began to surface in 2017-2018. Experts predict full blockchain adoption will occur during the 2020-2022 period, with adoption varying by industry. By 2027 blockchain is expected to be a pervasive technology. The World Economic Forum predicts 10% of the global GDP will be stored on blockchains in 2027.
What is the architecture of a blockchain and how does it operate? (Note: provide graphic)
All members have a copy of a shared database. When a member wants to send an asset to another member, a data “block” is created to represent the transaction.
The block is shared with the group yet remains cryptographically private. The network recognizes the block because its secret digital signature is linked to a public signature.
Once a block is confirmed, all members add the block to their copies of the database.
Complex math ensures a consensus among database copies which prevents tampering.
One area that blockchain can revolutionize is the back office operations of companies. Currently the absence of a common record is a very costly problem which results in the need for back office teams to perform extensive reconciliation and back checking.
The health care, financial services and supply chain industries are businesses with extensive duplication of information and large back office operations. Blockchain’s distributed ledger provides a common record which virtually eliminates the need for reconciliation.
The absence of a common record also creates a lack of trust. Errors and fraud drive this lack of trust. Consequently, expensive systems of reconciliation are built. The transparency provided by a blockchain solution will win the trust of all parties and provide significant efficiency gains and cost savings.
DHL, the global logistics company, created a blockchain prototype to track pharmaceuticals across a supply chain. The ledger tracking these medicines may be shared with stakeholders including manufacturers, warehouses, distributors, pharmacies, hospitals and doctors.
As many as one million lives are lost each year due to counterfeit medications. It is estimated that up to 30% of pharmaceutical products sold in emerging markets are counterfeit. By utilizing the irrefutability within blockchain technologies DHL can make great strides to reduce tampering, reducing the risk of counterfeits and saving lives.
Using blockchain’s common, indelible and secure ledger, the supply chain industry can achieve higher safety standards from the factory to the patient at much lower cost.
Here is a sampling of other blockchain opportunities that could reduce cost and complexity-
- Property title ownership transfer
- Post-trade clearing and settlement
- Cross border payments
- Store and transfer ownership of goods and track them through a supply chain
- Digital media rights management
- Digital identity (passports, health records, citizenship, etc.)
- Fraud detection
- Image authentication
- Regulatory compliance
What are some of the drawbacks of blockchain? Blockchain is relatively young and there is much fragmentation in the technical community. There is currently a lack of universal standards and interoperability. Most current blockchains are not yet able to scale their transactions per second to the levels required for very large adoption. Once something is recorded in the blockchain it is usually there forever even if there is a mistake.
These items are being addressed by a large worldwide community of open source software developers working collectively to improve blockchain and make it a force for the future.
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