What is blockchain and how does it work?

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Blockchain is a shared distributed ledger technology in which each transaction is digitally signed to ensure its authenticity and integrity and it's a poised to make big waves in a wide range of business use cases. Blockchain technology backs up Bitcoin and other cryptocurrencies to this day, but there’s been a recent groundswell of interest from a variety of industries in making distributed ledger technology work, especially in business.

What is a blockchain?

A blockchain is the structure of data that represents a financial ledger entry, or a record of a transaction. Each transaction is digitally signed to ensure its authenticity and that no one tampers with it, so the ledger itself and the existing transactions within it are assumed to be of high integrity.

How do blockchains work?

When a new transaction comes in to a blockchain, generally a majority of the nodes within a blockchain implementation must execute algorithms to evaluate and verify the history of the individual blockchain block that is proposed. If a majority of the nodes come to a consensus that the history and signature is valid, the new block of transactions is accepted into the ledger. And this new block is added to the chain of transactions. If a majority does not concede to the modification of the ledger entry, it is denied and not added to the chain. This distributed consensus model is what allows blockchain to run as a distributed ledger without the need for some central, unifying authority saying what transactions are valid.

Imagine you and I bet $100 on tomorrow’s weather in New york. I bet it will be sunny, you that it will rain. Let's talk three options to manage this transaction process:

1 ) We can trust each other. Rainy or sunny, the losing one will give $100 to the winner. If we are friends, this could be a good way of managing it. However, friends one can easily not pay the other.

2 ) We can turn the bet into a contract. With a contract in place both parties will be more prone to pay. However, should any of the two decide not to pay, the winner will have to pay additional money to cover legal expenses and the verdict might take a long time. Especially for a small amount of cash, this doesn’t seem the optimal way of managing the transaction.

3 ) We can involve a neutral third party. Each of us gives $100 to a third party, he/she then will give the total amount to the winner. But hey, he/she could also run away with all our money.

Both trust and contract aren’t optimal solutions: we can’t trust strangers and enforcing a contract requires time and money. The blockchain technology is interesting because it offers us a third option which is secure, quick and cheap.

The benefits of blockchains:

Consensus between multiple parties: Enhanced coordination and choreography between parties through a shared view of the latest status, obligations and other information.

Reconciliation: Master source of data instead of disparate data stores that require constant validation and reconciliation

Data lineage: Complete traceability, ensure integrity of data that is continuously updates and maintained by multiple parties.

Auditability: Reliable and accurate audit trail with transparency of the identity responsible for each data change.