The term ‘blockchain’ was first introduced 10 years ago when Satoshi Nakamoto released the now famous paper Bitcoin: A Peer-to-Peer Electronic Cash System. Ever since, blockchain technology has been growing in popularity and has come all the way from an idea to a real-life solution, enhancing operations in companies, institutions and open networks worldwide.
What is blockchain?
The first thing that comes to mind when most people hear the term “blockchain” is Bitcoin. However, they are not the same thing – one is a technology, while the other is its application. Bitcoin is a digital asset (a cryptocurrency) that can be traded and used as a payment method. Blockchain, on the other hand, is the underlying infrastructure that powers not only Bitcoin but numerous other cryptocurrencies and networks worldwide.
Blockchain is a digital record of information, copied and stored across a wide network of computers, instead of on a centralized server. The public record of information is secured and verifiable which guarantees that no user can change, corrupt or control the data.
The original idea of a cryptographically-secured, incorruptible system dates back to 1991. Satoshi Nakamoto then refined it with his concepts. What he did differently tough, was to find a way to make the system a self-sufficient unit. He did that by figuring out a method of adding new records of information (blocks) to the chain without the need of a 3rd party authorization.
How does blockchain work?
Blockchain works in a similar way to our DNA. Whereas DNA is a record of your genetic data and mutations, blockchain is also a record, but one of transactions. Both are complex structures that change over time. These changes, however, do not happen easily and consist of multiple complicated and strictly-aligned steps. Today, there are numerous different blockchains (Bitcoin, Ether, etc.), just like there is a variety of species with specific DNA structures (humans, gorillas, sharks, etc.).
In order to understand how the blockchain works, let’s start with the blocks. Blocks are digital units that store information (up to 1 MB per block which is more than enough to store details for thousands of transactions). The stored data relates to transaction details such as date, time, value, and participants. Each block is unique and is distinguished from the rest by a digital code called “hash”.
In order for a new block to be added to the network and continue the chain, there must be a transaction. When a transaction happens, the data is added to the network to be verified by all the nodes on the network. After the network verifies the transaction details (who is the buyer; who is the seller; what is the amount, etc.) and authorizes it, it is then added to a block, alongside thousands of other transactions. After the capacity of the block is reached and all included transactions are verified, the block gets its hash number and is added to the blockchain. The information then becomes public and accessible from everyone on the Internet.
Practical blockchain applications
Blockchain has brought unique advantages to businesses and organizations worldwide. The decentralized ledger technology is now applied in a variety of fields, such as finance, manufacturing, law, health care, etc.
Distributed ledger technologies are employed by companies to streamline the accounting services, payment processing, collateral management and asset registers, as well as to ensure seamless anti-money laundering (AML) compliance procedures. This allows banks and institutions to benefit from easier transaction verification as well as optimize their regulatory reporting processes.
Blockchain also contributes positively to the order settlement in stock trading. Settlement arrangements (for cross-border transactions particularly) are usually expensive and risky, due to the participation of multiple parties (brokers, custodians, settlement managers, etc.). Blockchain helps by reducing the costs for authorization and settlement, while at the same time increases security and minimizes the risk of errors by encrypting all stored records.
In the insurance sector, the technology is used to optimize the claim processing activities. Tasks such as identifying fraudulent claims require handling of large volumes of fragmented data which leaves a large room for errors. Blockchain solves this by allowing insurers to quickly and accurately identify the ownership of a certain asset.
As blockchain is a nearly-flawless alternative to cloud-storage services, it easily became a preferred solution for data management within governments and oversight authorities. Due to its decentralized and highly-secure nature, the technology is capable of handling complex tasks like identity verification, transaction authorization, electronic voting and so on and so forth.
The adoption of blockchain is eased also by smart contracts. Smart contracts are basically a digital version of a real contract and are used to monitor whether the different sides comply with the contractual terms. Smart contracts are widely popular in the health care sector where they ensure that patients’ information is stored under a private key and help to build an easily accessible medical history record. Smart contracts also streamline the communication between healthcare facilities, their patients and insurance companies. This helps in cases where a patient goes through a surgery and the accompanying information should be forwarded to the insurer as a proof-of-delivery. The digital contracts are used also to streamline tasks such as regulatory compliance, supply management, result testing, drugs supervision and general management issues.
Smart contracts are a very popular solution in the music industry as well as they help to solve some of the most popular issues such as royalty distribution and copyright infringement, by creating a decentralized music rights database.