Blockchain Explained: An Introduction for Beginners

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The understanding of blockchain is not necessary to use the technology. However, if you are planning to invest in blockchain projects, a basic knowledge can help in your investing decisions.

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With cryptocurrency, one of the applications of blockchain, it’s easy to raise money for a venture. Anyone can launch an Initial Coin Offering (ICO) today and ask people’s money. Then, disappear on the next day.

Scammers are making a lot from investors who do not know how the technology works. Sure; it can create a clear layer of trust between interested parties. Yet, it is risky to trust an undertaking you don’t understand.

Blockchain Hype

Entrepreneurs, marketers, enthusiasts, and believers created a blockchain hype due to Bitcoin’s popularity, its first use case. The hysteria reached its peak in late 2017 and slowed down afterward.

Many believe it’s the solution for everything. The rise of new blockchain projects was seen in the past few years. The buzz continues to attract more investors thinking that they have found the latest digital gold.

Blockchain is indeed a brilliant innovation. However, it is not the solution to all problems. In fact, some businesses may not need it at all.

To make the story worst, Satis Group LLC says nearly 81% of ICOs become scams according to its study.

What is Blockchain Technology?

The blockchain is an electronic ledger. As a ledger, it records transactions and tracks anything of value. In a blockchain, the ledger and the transactions in it are shared across interested parties.

Cryptography keeps transactions secure. Blockchain provides a decentralized database of exchanges which everybody within the network could see. This network is a chain of computers that must all agree on a transaction before it can be validated and recorded.

A blockchain can be in a public or private network. In an open blockchain, transactions are revealed to the public, but the parties do not have to reveal themselves. In a private network, blockchain is permissioned among participants with known identities.

How Blockchain Works

Blockchain keeps transaction data in the form of blocks. These blocks are linked together to form a chain. Each block has a hash (a digital fingerprint or unique identifier), timestamped batches of latest valid transactions, plus the hash of the previous block.

The previous block hash links the blocks together and avoids any block from being modified or a block is inserted between two existing blocks. That way, each following block strengthens the verification of the previous block and the entire blockchain. This procedure makes the blockchain hard to tamper.

blockchain explained how it works

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An essential feature of the blockchain is its capability to secure each “block” of information for a unique hash output. This hash is also placed to the next block, building a chain of continuous data which is then validated via a consensus of activity throughout a network of participants.

The process works together with digital signatures to prove identity, authenticity and implement data access rights.

The blockchain is shared to network validators whose computers can access the transaction information and make additions to the shared ledger.  This procedure creates the blockchain a decentralized network of database.

The proof of work mechanism is used as consensus in public blockchain where participants are anonymous. People can join the network by sparing their computing resources to encrypt and verify blocks. In bitcoin blockchain, the term for this is mining.

Proof of work is not necessary for a private network where all participants are known.

Is Blockchain Safe?

Blockchain reduces the risks that come when data are centralized because information is stored on its network.

Although no system is immune to hackers, the technology’s infrastructure is safer compared to the computers we have today. To hack the network, you must hack each computer on the blockchain.

Changing a record in a block will need a change of all data afterward. This procedure requires much computing power to succeed.

Blockchain Applications

Bitcoin is the first use case of blockchain application. It disrupted the finance industry because of its underlying technology. Other cryptocurrencies also use blockchain. The technology provides the means to record and store their transactions.

However, blockchain has many uses beyond digital currencies. Some of its applications include fintech, healthcare, supply chain, intellectual property, internet of things (IoT) and real estate.

FinTech

Accenture and McLagan claimed that blockchain technology could save $8 billion-plus in infrastructure costs of the eight largest investment banks. According to its research report, the figures translate to more than 30% average estimated potential annual savings.

Blockchain’s components – such as cryptographic hashes, distributed databases and consensus building – are not new. But when combined, they create a very powerful new form of data sharing and asset transfer, capable of eliminating intermediaries, central third parties and expensive reconciliation processes”, according to Accenture and McLagan.

Cost saving estimates on central finance reporting are 70% due to streamlined and improved data quality, transparency and internal controls.  The potential cost reduction on compliance is around 30-50% because of enhanced transparency and audit trail of financial transactions.

Due to robust digital identities and mutualization of client data among participants, cost on centralized operations is expected to decrease by 50%. Moreover, expenses for business operations will decline by 50%.

J.P Morgan, together with Royal Bank of Canada and Australia and New Zealand Banking Group Limited, created the Interbank Information Network (IIN). The new initiative allows JP Morgan to exchange information with other banks to resolve compliance issues in cross-border payments.

Processing global payments are not easy. It needs various layers of communication between payment participants to confirm and handle transactions. Using the blockchain technology, IIN can minimize the number of participants necessary to respond to compliance and other data-related inquiries that delay payments. Thus, recipients can receive the funds quicker.

Healthcare

According to Deloitte, a blockchain powered healthcare information exchange could unlock the true value of interoperability. Blockchain-based healthcare systems can reduce or cut the friction and costs of the middleman.

When healthcare providers share data across the network, it will result in a highly accurate diagnosis, more effective treatments, and cost-effective care.

Blockchain stores the complete medical records for each patient. The technology will allow doctors, hospitals, regulators, insurers and other interested parties to access the comprehensive medical history of a person.

A physician can recommend the precise drug when it can obtain the individual’s complete medical history. Blockchain will also shorten the processing time of insurance claims.

The technology can easily track the movement of drug from the manufacturer to the patient. It promotes traceability and prevents counterfeit medicines.

The MediLedger Project, led by The LinkLab and Chronicled, aims to solve the counterfeit problem to protect patients using blockchain. They believe that technology can improve compliance to track and trace regulations, improve patient safety and drug supply security and enable easier reconciliation of exceptions.

Blockchain in pharma industry can also provide a platform for further business transformation for processes associated with the transfer of ownership of prescription medicines, according to MediLedger Project.

Supply Chain Management

Many supply chains are now using blockchain technology. In a blockchain, distributed ledgers are updated and validated in real time with each network participant.

The technology enables interested parties in the supply chain to know where the good is at any point in time. Moreover, one can easily know the condition of the item and who owns it.

When a product changes hands, the exchange can be documented, creating a permanent history of a product, from production to sale. The process can reduce time delays, extra costs, and human error that affect transactions presently.

Walmart, Maersk, British Airways, UPS, and FedEx are few companies employing blockchain technology in their supply chains.

Intellectual Property

Today, it is so easy to copy and distribute copyrighted content. Thanks to the internet. Intellectual property owners lose their control over their creative work and financially suffer once it is put online.

Smart contracts can protect and automate the sale of artistic creation. It protects the content from file copying and redistribution. Based on Ethereum blockchain, smart contracts will execute automatically when the conditions are met.

Mycelia, founded by singer-songwriter Imogen Heap, use the blockchain technology to create a peer-to-peer music distribution system. Using Mycelia, musicians can directly sell its composition to their audience.

The application also allows to distribute license samples to producers and divide royalties to songwriters and musicians through smart contracts.

Internet of Things (IoT)

The IBM Watson IoT platform allows IoT devices to send data to a private blockchain ledger. It blockchain stores these data for inclusion as shared transactions with distributed records kept by consensus and secured using cryptography.

IBM says distribution of records in a blockchain enables business participants to add IoT data without the need for central control and management.

Blockchain for IoT builds trust, minimizes costs and speed up transactions. Due to the enhancement of the security of the blockchain network, trust is built between parties and devices.

The technology also reduces the risk of collusion and tampering. It cuts the need for intermediaries, thus reducing overhead costs. It lowers settlement time hence accelerating transactions.

Commercial Real Estate

According to Deloitte, blockchain in the commercial real estate will improve property search processes and hasten pre-lease due diligence. Managing cash flows is easier using smart contracts.

Blockchain data provide better information for intelligent decisions. Property title management is transparent and cheaper. Furthermore, processing of financing and payments will be efficient.

Using the technology in real estate will reduce the costs of intermediaries. When property owner and sellers have access to historical information of the subject property, brokers and lawyers may no longer be necessary.

REX syndicates real estate data into a globally accessible marketplace, where data is locally sourced, validated and secured via the Ethereum blockchain, smart contracts, and crypto economics.

The Rex MLS blockchain allows users to upload property listing in return for Rex’s cryptocurrency. Users can freely access data on the MLS and make transactions using Rex’s cryptocurrency.

Limitations

Blockchain is still on infancy stage. Thus, barriers on the technology cannot be avoided.  Coindesk, one of the leaders in blockchain news, identifies the following limitations of the technology.

  1. Complexity
  2. Network Size
  3. Transaction costs, network speed
  4. Human error
  5. Unavoidable security flaw
  6. Politics

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