In 2017, there was a massive rise in the value and price of Bitcoin, a digital currency based on blockchain technology. However, the sentiment suddenly turned sour in 2018 and now people are beginning to question the true value of blockchain. The problem is that blockchain is often misunderstood, preventing quicker adoption by companies.
Let’s clear this up for once and all.
Simply put, Bitcoin is not blockchain. More accurately, Bitcoin runs on blockchain technology. If Bitcoin is a computer program, then blockchain is the operating system on which Bitcoin runs.
Before we dive into the business benefits of blockchain, we need to first understand what it is, and what types of blockchains are available.
What Is Blockchain Technology?
Blockchain is a distributed ledger technology containing permanent and tamper-proof records. Its defining characteristics is that it is decentralized, permanent, and requires consensus to validate transactions. With low trust levels in our societies, blockchain is an emergent technology that aims to restore trust when doing business with others.
Imagine a spreadsheet to which many people have access. Instead of storing this spreadsheet on a single and centralised server, access to this spreadsheet is distributed—or decentralized—as each person has a copy of the same spreadsheet. If a person wants to update a spreadsheet entry, every other person with the same copy must reach consensus and approve this update. This is done automatically without any middle intermediaries.
The problem with centralized data storage or with using third parties is that there’s nothing stopping these intermediaries from behaving maliciously. A company running a centralized server could tamper with the stored data. An intermediary might play favorites or get corrupted by opportunists. It’s no wonder many have issues trusting other parties when doing business.
Blockchain solves this problem by tamper-proofing all records, eliminating single points of failure, and removing the need for intermediaries. People could do business with each other using smart contracts on the blockchain. A smart contract is a digital contract that automatically executes once pre-agreed conditions have been met.
Data exchange on the blockchain involves digital currency transactions, legal agreements, or valuable information between two or more parties. Instead of a single authority, blockchain uses a peer-to-peer network of computers (or nodes) to verify transactions using consensus mechanisms such as Proof-of-Work (PoW), Proof-of-Stake (PoS), or a hybrid of the two. The purpose of these consensus mechanisms is to prevent tampering and to ensure that all nodes are in sync.
There are several subtypes of blockchain:
Each has their pros and cons, with the consortium blockchain incorporating the best features of both public and private blockchains.