Blockchain and Bitcoin are often mentioned in one breath. But blockchain has so much more to offer as a technology. Blockchain-based applications are ideal for optimising business processes and strengthening security.
What is a blockchain?
Put simply, a blockchain is a shared database that is particularly well suited for data processing, for instance in transactions involving multiple parties. Data is protected from manipulation or loss because it’s distributed across a network of computers – known as ‘nodes’ – in a decentralised structure.
These nodes validate transactions in blockchains by consensus, with the network as a whole validating each transaction using special algorithms and a blockchain protocol. Information about each transaction is validated by the nodes. As soon as a majority of nodes has confirmed the accuracy of a transaction, it is encrypted to ensure confidentiality. The transaction is then «chained» to other validated and encrypted transactions in a new ‘block’.
One important aspect in encrypting the transaction is the hash, a kind of ‘digital fingerprint’. The hash enables verification of whether a transaction in the blockchain has been registered, without revealing details of the transaction’s participants to third parties. The original transaction details are needed to check whether a transaction has been validated. As soon as it has been validated, the transaction between the parties is executed. And since it’s saved on multiple nodes, it’s tamper proof.
One general factor distinguishing types of blockchain is the access rules for transactions within the blockchain, i.e. whether it’s a private or public system.
In public blockchains, there are no restrictions on data being read and transactions created within the network. Anyone can take part in a public blockchain, validate transactions and add transaction blocks through consensus with the network.
In contrast to public blockchains, membership in private blockchains is by invitation only. New members have to be validated by a network administrator or a number of rules. This means that only pre-defined participants can read data or process transactions.
Essentially then, this type of setup is a shared database for a defined user group. Although private blockchains share similarities with traditional decentralised databases, they also use the advantages of blockchain technology; no central institution is needed to safeguard data security and reliability.
Bitcoin and Ethereum
The most famous example of a public blockchain is Bitcoin. Now a global phenomenon, the payment network enables peer-to-peer transactions without the involvement of an intermediary financial institution. Then there’s Ethereum, a platform for smart contracts. Predefined actions are triggered as soon as the conditions agreed in smart contracts are met. Applications that operate on these blockchains can be used to transfer digital – but also physical – assets. Blockchain can thus help ensure fraud-proof transactions in areas such as bond trading, mortgages and ticket sales, but also transfers of assets such as precious wines, certificates, artwork or diamonds.
More efficient business processes
Implementing blockchain technology will enable more efficient, more secure business processes.
BDO’s Blockchain Initiative has prepared a series of articles that explain how blockchain can be used and explore the opportunities and risks it presents.