What Is It?
Even if you haven’t heard of blockchain technology, it’s likely you’ve heard of bitcoin. So let’s start there.
According to the Bitcoin website, Bitcoin is:
‘a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen’.
It’s used by businesses and individuals but is still relatively new in the broad scheme of things. Cryptocurrencies such as Bitcoin – money systems that use cryptography (complicated mathematical proofs which provide high levels of security) – rely on networks called blockchains.
In ‘The Truth About Block Chain’, Marco Iansiti and Karim R. Lakhani describe blockchain technology as ‘an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way’. There are both public and private blockchains and these facilitate the transference of data or money between users on the ledger. Bitcoin operates on an entirely public blockchain, which essentially means that everyone using the Bitcoin network can see the transference of money on the blockchain.
However, one of the main benefits – and selling points – of Bitcoin, and blockchain technology in general, is that they offer an entirely new level of security. The people with access to the blockchain can see that data or money has been transferred, but they don’t know where it’s going or who transferred it. No personal details are stored on the ledger; instead every user is given a unique 30+ character alphanumeric address which they use when making a transaction. Bitcoin users are advised to only use addresses once and to create a new address when required.
Bitcoin also provides each user with a ‘wallet’ that has its own private key: ‘a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature’. People don’t see your private key; it is what gives you access to your wallet.
To summarise: blockchain is the technology behind Bitcoin and Bitcoin is the reason it’s started gathering attention. However, blockchain technology is moving out from beneath Bitcoin as people are becoming more and more interested in the freedom offered by blockchains, including the option of private ledgers.
Now that you know the basics, let’s consider the pros and cons of blockchain for business.
The foundational element to blockchain technology is its decentralisation. A blockchain has no single point of failure and is therefore, innately incorruptible. A distributed ledger means that everyone has equal access to the blockchain. Consequently, blockchains are engendering an entirely new level of financial transparency that is extremely beneficial for consortiums and company groups. It gives businesses independent control over their finances without the need for a transactional intermediary, such as a bank.
Can’t be Altered
The ‘chain’ part of blockchain essentially means that the network makes transactions in a chronological order and that every transaction is linked to the one that came before it. Blockchain databases cannot be changed or corrupted, an attribute which provides better security for businesses making regular, large transactions.
Private and Public Blockchains
Whilst Bitcoin uses a solely public blockchain, private blockchains are growing in popularity. IBM describes private blockchains and their usefulness for business:
‘A private blockchain network requires an invitation and must be validated by either the network starter or by a set of rules put in place by the network starter. Businesses who set up a private blockchain, will generally set up a permissioned network. This places restrictions on who is allowed to participate in the network, and only in certain transactions. Participants need to obtain an invitation or permission to join. The access control mechanism could vary: existing participants could decide future entrants; a regulatory authority could issue licenses for participation; or a consortium could make the decisions instead. Once an entity has joined the network, it will play a role in maintaining the blockchain in a decentralized manner.’
Businesses can use public blockchains, like Bitcoin, or set up their own private blockchains. Some argue that private blockchains are more secure as they enable more privacy and more control for businesses; think of private blockchains as a business intranet.
This does not mean that public blockchains are not secure. They follow the same, decentralised aesthetic and are therefore incorruptible. They also protect the identity of the transaction makers however they do reveal the amount of a transaction to the entire network.
As blockchains do not rely on an intermediary, such as a bank, there is no waiting period beyond a general, 10 minute delay (which is necessary for each node –computer device- to figure out a computational algorithm and continue the flow of the chain). There is little differentiation between sending a transaction overseas to sending one down the road.
Blockchain networks do not require PCI compliance as they rely on their own currency. This saves businesses money on overseas transfers and other fees.
Transparency and Pseudonymity
An open ledger provides equal access to everyone using the blockchain. This enforces transparency of transactions that is extremely useful for large businesses. What’s more, each user shares no personal information when they make a transaction, merely the alphanumeric address I mentioned earlier. Users can choose to share their address with the recipient of the transaction, as would be likely in a private blockchain, so that they know the right user has made the transaction.
No central management
The defining characteristic of decentralisation is both a benefit and a drawback of blockchain technology. If, something does go wrong with the system, there is no official intermediary to monitor the situation. Private blockchains rely on a system operator who gives permission to access to the blockchain, rather than an impartial third party.
Blockchains systems are relatively new. They, as with all technology, are constantly in development which means that companies are not always fully aware of the security preparations they need to take to ensure the safety of their blockchain use.
Businesses must adapt and essentially overhaul the way in which they conduct their finances or transfer data, if they choose to adopt a blockchain system. This is true regardless of whether they implement a public or private network. The necessary period of adaptation may prove problematic and take up a lot of time that could affect work productivity.
Where Does That Leave Us?
Blockchain technology holds a lot of potential for businesses. It gives businesses more control over their finances and data as well as better protection from outside attacks. However, tremendous research must be carried out before a business takes this step; research that includes consideration of the business’ individual needs and whether making the change to a blockchain system would make a positive impact worth the hassle.