What Blockchain Is (and Isn't): A Primer on How It’s Used

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What Blockchain Is, Exactly

Blockchain is, at its simplest, a new kind of database. Referred to as a distributed ledger, the contents of a blockchain database are stored across many decentralized points. This distributed ledger can have either a public implementation, such as Bitcoin, where everyone can participate, or a private implementation, which exists within a closed network. In both cases, the database is cryptographically secured through a system that verifies a user’s permission to add another block of data to the ledger.

Those blocks of data, when all chained together, form a complete and auditable record: a blockchain.

Unlike a cloud-based database, which may be vulnerable to malicious attacks, a blockchain is cryptographically secure, backed up with decades of research. Its decentralized nature adds another level of security, making the database more resilient to tampering and improving redundancy: should one node of the blockchain fail, many others exist to maintain the record. Finally, the record itself is harder to corrupt, as updates to the database require several forms of verification from different entities.

In a society that runs on data and rewards that data’s accuracy, timeliness, and security, blockchain technology has a lot of promise. But its applicability isn’t universal, and the tech still faces significant hurdles to widespread adoption.

What Blockchain Isn’t

Bitcoin, a cryptocurrency, is currently the most popular and widely used implementation of blockchain technology. As a distributed ledger of financial transactions, the decentralized system rewards users for verifying the transactions of others. But blockchain is not just cryptocurrency. The type of data exchanged, as well as the incentives for verifying that data, can be applied to many different industries.

Blockchain also is not invincible. The democratization of verifying blockchain transactions means that the system is vulnerable to what’s known as a 51 percent attack: an instance wherein more than half of the decentralized actors work in unison to achieve a particular end, one that’s against the intention of the consensus algorithm. And while the distributed ledger itself is cryptographically secure, the systems it interacts with are still vulnerable.

Blockchain isn’t the universal solution to all of one’s data needs. In some ways, blockchain isn’t even as efficient as a traditional database: it comes with higher storage costs, higher energy consumption, and higher complexity.

And while blockchain is adept at verifying a user uploading data to the ledger, it’s not always perfect at verifying the data being uploaded. Blockchain is at its most effective in unique environments that can benefit from decentralization, digitization, and collaboration.

How Blockchain is Currently Used

Cryptocurrency was the first (and perhaps simplest) implementation of blockchain technology. But the traditional finance industry, as well as high-priority supply lines, are starting to make use of it, too. The UN, when sending humanitarian aid to Syria, has experimented with using blockchain to authenticate recipients with biometric data, helping to ensure that aid is given to the right people in the right quantity.

While this does add a layer of authentication of who is shipping and receiving aid, it doesn’t adequately verify what is being shipped and received: while inorganic materials (such as steel) can be more easily tracked, organic materials (such as food) are trickier to verify.

The finance industry, which primarily utilizes digitally native assets, is more amenable to the uses of blockchain. Cross-border payments, which totaled approximately $130 trillion in 2019, typically take three to five days under traditional processes and often incur high fees.

Blockchain can drive the modernization of the financial industry’s infrastructure and offer same-day cross-border payments at a fraction of the usual fees. Bonds, equities, and even microloans are all digitally-native assets and well-suited to blockchain adoption.

How Blockchain Will Be Used in the Future

Blockchain also has major applications in the storage of static data, meaning data that doesn’t often change (e.g., birth records, land titles, patents, food origins). By storing this data on blockchain’s distributed ledgers, the public sector could modernize, secure, and share its records in a transparent manner.

The technology also has applications in identity verification and could be used to streamline voting, deter identity fraud, and update census data. In the private sector, health data is a primary candidate for blockchain disruption: it has massive swamps of data that need to be aggregated and shared securely across multiple verified entities.

Smart contracts, such as those pioneered by the Ethereum blockchain, take it a step further: once a smart contract is signed by both parties, an automated exchange occurs when certain predetermined conditions are met. By automating contracts, one removes the possibility of one party reneging on their commitments. It also makes fulfillment quicker.

As smart contracts evolve, they’ll find further applications in the purchase and sale of financial assets, the payouts of insurance claims, or the delivery of pre-ordered goods.

Challenges Facing Blockchain

The adoption of blockchain technology requires investment, innovation, and leadership. As such, the first movers in the industry will seek to recoup their investment through competitive advantage and consolidate their advantage in a particular market. Ironically, this means a centralization of power through the use of decentralized technology, with the most dominant players in concentrated industries like healthcare and finance being the most capable of standardizing new solutions like blockchain.

Blockchain has descended from the cryptocurrency-fueled hype of 2018. Analysts have now coined the term blockchain tourism to describe the effect this has had on industry interest: companies demonstrate some excitement about blockchain technology, dedicate a few weeks of time and energy, and then decide it’s not for them. The question has shifted from whether blockchain works, to whether or not it works for a specific use case. Blockchain works best as a bespoke solution and consultants at McKinsey have prescribed its use only when it’s the simplest solution available.

Now that the haze of hype has cleared, analysts are beginning to approach the blockchain question more soberly. Increasingly, they’re discovering what’s known as the blockchain trilemma: between scalability, decentralization, and security, a network can only emphasize two of those aspects, and at the expense of the third.

Of all the variations on blockchain technology, enterprise-level solutions have almost entirely fallen into the category of highly scalable private networks. The future, however, might see a wide variety of blockchain iterations.

Blockchain has always been a behind-the-scenes technology. As corporations and governments move towards more effective forms of data governance, blockchain may become the integral (but largely invisible) fabric of modern commerce.

Today’s applications of blockchain show that this is no longer a pet project, no longer an experiment in abstract technology. Tomorrow’s blockchain applications could revolutionize the digital world.

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