BlumiX

True !

You’ve probably heard of Blockchain. It’s hard to navigate much of the web today without running across some kind of reference to it. After a while I thought, “Could I really explain Blockchain to someone if asked?” and if you’re in the same boat as I was, this post is for you.

The Problem

Any technology is useful only if it solves some business problem, and Blockchain is no exception. There are several problems Blockchain solves.

Trust

When two parties execute an agreement, there are several moving parts. But what makes the transaction efficient is trust. If you agree to buy X number of widgets from me at a certain price, and we have established trust, the transaction goes smoothly. If not, then it gets complicated at best, and litigious at worst. There are many factors that establish an inherent trust like

•    Reputation – If you are a reputable vendor, I am more likely to trust you.

•    History – If we’ve been able to trust each other in the past, we are more likely to trust each other in the future.

Establishing trust between two parties can be very difficult, time-consuming, and largely subjective (you can’t really quantify “reputation” for example), and the larger the network involved in a transaction, the more difficult it is.

Transparency

In our fictional deal, you have your ledger to record various aspects of the transaction and I have mine. But I don’t see your ledger and you don’t see mine. Thus by its nature the deal is opaque, so we will probably have a contract to govern the terms of the deal. And other than the terms of the contract, that’s as transparent as the deal gets.

Since there is no transparency, it’s difficult to tell how things are going until the deal is done.

What happens if something goes wrong? Let’s say I don’t hold up my end of the deal (or vice-versa)?

Accountability

To ensure the deal goes smoothly, you and I will probably deal with middlemen:

•    Lawyers – To draw up a contract, and if necessary provide legal services should things get litigious.

•    Accountants – To keep the ledgers, and ensure the exchange of goods (and money) goes according to the contract, and is properly recorded.

•    Government – In some industries, there are government regulations and oversight mandates and other guidelines that have to be followed.

What Blockchain is NOT

If you’re like me, the first time you ever heard about a “block chain” it was in the context of Bitcoin. So it’s important to understand that Blockchain as a transaction enabling tool is not Bitcoin. Bitcoin is an electronic currency. It was created to solve the problems of trust, transparency, and accountability between two parties in exchanging money for goods and services over the internet.

The bitcoin blockchain is a public, distributed ledger of all Bitcoin transactions that have every taken place. This ensures that everyone who participates in the Blockchain network has access to all transactions, and thus everyone agrees on how every one of those transactions took place. Furthermore, the ledger (blockchain) is immutable so nobody can change it.

Since the Bitcoin blockchain is distributed among all participants in the Bitcoin network, it relies on no centralized authority. And through the use of cryptographic technology, all transactions are anonymous.

The Solution

Bitcoin is a disruptive – and arguably revolutionary – technology that relies on a block chain. But the Blockchain we are hearing about nowadays takes it much further. While Bitcoin is a crypto-currency ensuring transparency and accountability of financial transactions, Blockchain technology can be applied to many other types of transactions to solve the problems inherent in any transaction.

Blockchain technology is used in a peer-to-peer network of parties, who all participate in a given transaction.

At its core Blockchain technology uses a distributed ledger that is visible to all parties involved in the transaction. Through a consensus network, the ledger is guaranteed to be consistent. Because the ledger is distributed so everyone involved can see the “world state” at any point in time, and can monitor the progress of the transaction.

Through the use of cryptographic technology, the ledger is encrypted so that only parties allowed to view it may do so.

By its very nature, Blockchain tackles all of the problems inherent in a business transaction:

•    Trust – Through the use of Blockchain, all the parties involved in a transaction only have to trust the technology.

•    Transparency – Because the ledger is distributed, all peers involved in the transaction network can view it (subject to security rights, of course).

•    Accountability – Since all parties in the transaction can view the distributed ledger, everyone can agree on how the transaction is progressing while it is ongoing, and how it went once it is complete.