What is blockchain technology and why is it important?

What is blockchain? 

In essence, blockchain is a digital, encrypted database. However, what makes it different from a traditional database is that it is shared by multiple parties across a distributed network so, every single time a transaction of some shape or form happens in the network, it is recorded, verified and finally stored in a database.

These transactions are then relayed to each participant on the network. This process creates a transaction log that can’t be altered by anyone.

With blockchain, multiple copies of data can exist across a network rather than using a single database or server. This allows anyone to access the data in real-time as no institution or authority actually owns and therefore controls the data.

This is what is known as decentralised management and it caters for faster, more cost-effective transaction processing. All participants involved in a transaction are also required to reach a consensus on the state of the database.

An example analogy for how blockchain tech works would be a collaborative document such as Google Docs, Microsoft 365 or Figma.

Let’s say you and your team are all working on an employer handbook for your company using Microsoft Word. When you create this Word document and share it with your colleagues, this document is distributed rather than copied or transferred. This process is essentially the same as creating a decentralised distribution chain whether everyone has access to the base document at the same time. Everyone can edit the contents and add new pages and content at the same time without having to wait for another colleague to finish first.

All additions and edits to the document are recorded in real time for everyone in the team to view which makes the changes completely transparent.

This is a great example of how blockchain works in the real world. The only big difference is that data on the blockchain can’t be edited after being written which heavily improves its security.

Blockchain technology has huge potential and could change the way exchange value, transfer ownership and verify transactions massively in the near future.

How does blockchain technology work?

It can seem quite complex if you are new to blockchain. Here is a brief overview of the important stages broken down into an easy to understand list.

Step #1 – Recording transactions

Every blockchain transaction is public on the blockchain network for everyone to see and is recorded as a data block. These blocks publish the transfer of physical or digital assets from one party to another and often include details such as:

• Who was involved in the transaction?
• What happened during the transaction?
• When did the transaction happen?
• Why did the transaction happen?

Step #2 – Reaching a consensus

The next stage of the process is gaining a consensus. For a transaction to be validated, most of the participants on the blockchain network must agree that this recorded transaction is correct.

Step #3 – Linking data blocks

After reaching a consensus and validating a transaction, the information will be written into blocks similar to pages of a ledger book. With every transaction, a cryptographic hash is also added to the block. This hash acts as a chain that can link blocks together.

This is important as it ensures that if the recorded data within a block is intentionally modified, the hash value will change. This makes sure that data cannot be tampered without everyone on the network being able to see.

To summarise, the data blocks and chains link together securely and cannot be modified. Each new block strengthens the verification of the previous block and as a result the whole blockchain.

Step #4 – Sharing transactions

The latest and most up to date copy of the central ledger is shared with all participants on the network.

What are the benefits of using blockchain?

Now that we know more about what blockchain is, let’s talk through some of the biggest benefits to businesses. As mentioned earlier on, blockchain technology has the potential to completely disrupt hundreds of industries and current business models.

With its ability to automate certain processes, businesses using this technology will be able to focus on more valuable tasks. Several benefits for modern businesses are:

Improved Transparency

The main reason blockchain exists is to enable participants to view the entire journey of data through a digital ledger. This means that there is always a public trail of transactions present on the blockchain which creates a single source of truth that participants in a network can trust. Information and value can be exchanged between one another without having to involve a third-party.

Cost Savings

For most businesses, certain aspects involve duplicating information which can take time and isn’t very cost-effective, especially when having to reconciliate all the duplicated data. Blockchain however, provides shared infrastructure between parties which can be used and trusted which saves large amounts of time and therefore money.

Operational Automation

Another feature of blockchain is smart contracts. By making use of smart contracts, businesses can automate transaction processes and free up time and resources for other opportunities as a result.

Greater Security

Blockchain encrypts all transactions in a digital database and the data stored cannot be modified by anyone. Behind the scenes, complicated cryptography methods are used to create electronic fingerprints that have to be verified before any changes can be made.

Faster Auditing

Many businesses need to be able to audit their online transactions securely. Blockchain records cannot be modified and are stored chronologically which makes audit processing a lot quicker.

Improved Efficiency

B2b transactions often take a lot of time and can cause many problems if not done correctly.

Blockchain’s transparency and smart contracts make these transactions faster, more efficient and also remove a lot of the stress involved in the process.

The fact that this technology is completely decentralised and removes the need for a third party makes it revolutionary.

Why is blockchain technology important?

Standard database technologies that we interact with everyday introduce various different problems when it comes to recording financial transactions. As an example, let’s look at the transaction that occurs when someone buys a car from a dealership.

Once the individual has decided to purchase the car, filled in the relevant forms and finally paid the amount of money owed for the car, the ownership of the car is transferred to the individual who now owns a shiny new car. But, what are the potential problems that could be encountered with this current process?

First of all, the buyer could claim that they have paid the amount owed when they haven’t and the seller could state that they haven’t received the money when they have. This is obviously a big problem.

To prevent these false claims from happening, a trustworthy third party has to be included to watch and validate transactions. Whilst this sounds like a problem solved, this extra step introduces even more problems. Having another party involved, complicates the transaction and creates a single point of vulnerability. If the central database is compromised or if the data is accidently modified, both parties will suffer.

Blockchain technology simply stops this from happening. The way it does this is by creating a decentralised, secure system that records all transactions. In our example, blockchain tech could be used to create a ledger for the buyer and a ledger for the seller. When our individual pays for their new car, both parties have to validate this transaction. After this, both of their ledges will be updated in real-time to show this transaction publicly. If any transaction is modified, the whole ledger will be corrupted which makes this data very secure. It has also removed the need for a third party, making the process smoother and less complicated.

Hopefully this everyday example helps explain why blockchain technology is very important in the modern day and could be a really valuable and revolutionary technology in the future.

What’s next for blockchain?

Blockchain is still a relatively new technology and is constantly changing. It is for this reason that there are still limitations such as scalability, data privacy and technological standardisation. In addition to this, blockchain does require more understanding than the current regulatory framework and is harder for people to understand at the moment. Finally, there have been a few issues with security. These usually relate to user error rather than a problem with the technology itself but, these are all problems that have to be addressed and resolved before there will be a widespread adoption.

Solving the current problems will take time and resources however, blockchain development is not slowing down any time soon and these issues will most likely be solved eventually. Similar to the invention of the internet, there is a chance that in 30-40 years time, we could be using blockchain technology on a daily basis and wonder how we ever lived without it.