There has been a lot in the news recently about blockchain and especially bitcoin and the other cryptocurrencies developed over the past few years.
With all the hype and chaos out there, it is understandable that many business people dismiss it. However, there’s a fundamental change coming in the way every business records and secures transactions so it’s best not to ignore it.
What Is Blockchain?
To best understand blockchain, let’s start with a function that is common to all business transactions. Two parties each have something the other one wants; if the two items are not exactly equivalent, there must be a way to reconcile that difference.
This is the first thing we learn when studying economics: I have coconuts and you have fish. I give you some coconuts and you give me fish. If I don’t like fish, it complicates the matter, and we have to think of ways to make things even.
Money, credit, barter, and other financial systems were created to make transactions easier. Accounting, bookkeeping, and banking were developed to make it possible to track and facilitate transactions beyond the basic coconut to fish deal.
The Harvard Business Review describes it as “an open, distributed ledger that can record transactions between two parties efficiently and verifiably and permanently.”
Blockchain Is a Better Ledger
Blockchain is a secure, distributed ledger that makes keeping track of transactions easier, quicker, and safer than other systems now in place. Thousands of computers log an encrypted transaction record that becomes chained to all the transactions that came before and after it, making it impossible to alter record keeping. Any attempt to alter that entry breaks the chain, and since you can’t change all the servers at once, it’s instantly recognized and disallowed.
Blockchain will not prevent bad deals or fraud, but it will help us keep unalterable records of all transactions. Any fraud gets recorded in an unalterable record, making it less tempting.
The decentralized nature of a blockchain network means that no central entity needs to govern the system.
Governments, banks, and other institutions are embracing blockchain technology inside their networks, so it is possible to have a blockchain with an owner, though public blockchains are where most of the disruptive action is taking place.
So, What Is Bitcoin?
Satoshi Nakamoto (or a group using that pseudonym) designed bitcoin and created its original reference implementation. They also devised the first blockchain database as part of the implementation and were the first to solve the double-spending problem for digital currency. Once a transaction is recorded, the money is spent and can’t be spent again.
Blockchain uses a distributed ledger that allows cryptocurrency such as bitcoin to work. There is no core that can be corrupted, no central authority that can take control of the market, and all transactions are transparent and traceable, even while encrypted for privacy.
Bitcoin is created by digital mining, which is a complex equation that miners solve using sophisticated math. As computers get smarter and faster, or more people do the mining, the supply doesn’t change because Satoshi set up a finite number of coins that can be awarded over a 50-year period. An equilibrium of mining activity occurs as the pool of coins is diluted. Some early miners did very well as the price went up, but to do so, they had to invest and take a substantial risk that it all would work.
There are other cryptocurrencies and mining going on. Blockchain can be used without any reference to dollars or other traditional mediums of exchange. For instance, property records can be put onto a blockchain and transactions recorded regardless of physical location.
Trading and exchange are what digital cryptocurrency was designed for. The current news about trading and the skyrocketing values compared to traditional currency is a phenomenon that shows up while the world switches from fiat to digital currencies.
Coins or tokens are actually “smart contracts” where parties agree to standard or customized terms. When those terms are met, the transaction is recorded, and everyone gets what they bargained for. Since the program is set up on the blockchain, it all occurs with minimal cost and handling.
What Your Business Should Be Doing About Blockchain?
The path ahead in the near term will be rocky in currency markets. There is no sure thing in currency trading as values go up and down with speculation. In the future, there will be a lot more non-currency uses for blockchain.
We can expect to take payments in new currencies in the future. More than that, we will see the opportunity to allow our customers to pay for our coconuts with their fish (or the digital equivalent).
My favorite example of this is health care, which is currently near 20% of the U.S. economy and estimated to be 45% paperwork. Imagine how different things would be if we were able to pay with smart contracts and instant, secure, and private record keeping and payments using programmed rules.
Other areas coming soon include logistics, where multiple carriers can use one smart contract to move goods from raw materials through factories, distribution, and then delivery to buyers with no room for mistakes re-entering data. Even food can be traced from the farm to a restaurant table to ensure safety.
But for blockchain to work effectively, you need a way to share the information. And to do that, you need an ISP that can handle this data flow securely. ISP companies like Frontier Business act as the conduit to deliver information between businesses, their customers, and their multiple office locations.
What is certain is that the world is going to keep changing faster than in the past. The smart business will be looking at how lower transaction costs, less friction, and instant access to data will change its industry to find ways to get ahead of the competition.
By Warren Whitlock, futurist and online influencer in marketing technology and blockchain. Warren is CEO and Founder of TopLineRevenues.com and advises ICO and blockchain startups along with e-commerce and social business projects. He contributes to Frontier Business’s blog and CoinHash.co.