An Introduction to Blockchain

As we know, blockchain is one of the hot topics in today’s time, it’s the "buzzword of the decade" that some people understand while some don’t. This article will discuss the basics of blockchain and help you to understand what it essentially is, what are its characteristics and advantages. Looking forward, it will also discuss the applications of blockchain in some of the industries and finally, what challenges lie ahead for blockchain.

Read ahead to know where the world is currently at blockchain and where all this can lead to in the future.

What is Blockchain?

Blockchain is simply, a shared ledger, that records transaction information. So, what makes it so unique?

"The fact that it is cloud-based and distributed across the network of the business on a need-basis makes it versatile!"

Every participant of a network that uses the blockchain has a copy of the shared database, instead of the data being hosted on a single central server.

A graphical step-wise guide to how it works...

Features of Blockchain

1. Consensus – blockchain is consensus-based, meaning that each block can only be added to the blockchain once all the concerned parties agree to the changes. This helps keep inaccurate and potentially fraudulent transactions out of the network.

2. Immutability – it means that records once added will stay in the blockchain forever, and cannot be tampered with. Though a reverse transaction can be passed to undo the impact, the original entry will always remain intact.

3. Provenance – it means that we can know the entire history of an asset since it was first added to the blockchain. This feature is possible due to the immutability of data, as discussed above. Changes including a change in prices as well as a change in ownership are tracked.

4. No central authority – one of the main features of the blockchain is that it is distributed, implying a lack of central authority. This implies that whenever a transaction occurs, it need not go through a central authority.

Advantages of Blockchain

1. Smart contracts – Smart contracts basically are digital contracts which are executed only when a condition or a set of conditions is met. An easy way to understand this is through a vending machine, where the condition is that you insert a coin and the outcome is that you get a snack of your choice. This will have huge implications as discussed below.

"Smart Contracts will have huge implications in many industries, considering their easy-to-implement, transparent and all-digital nature."

2. Disintermediation – Blockchain is a very useful tool in the removal of intermediaries from a business network. For example, a cryptocurrency like Bitcoin limits the role played by the banks; similarly, there is no need for banks to set up auctions if they can simply be held online using smart contracts. This results in cost reduction and saves time too.

3. Atomic transactions – It means that a set of transactions between two or more parties can take place in a single transaction. This ensures that either all the transactions will be satisfied or all will fail. For example, A and B want to exchange assets, suppose a car ownership title and down payment for the car. Then these two things can be simultaneously transferred between them in a single, bundled transaction. This helps in risk reduction because A won’t be able to take the money and back out of giving B the ownership, and vice-versa.

4. Privacy and Trust – Since all the transactions are immutable and the ledger is shared, the whole system as a whole is transparent. For this reason, blockchain is also sometimes referred to as the ‘trust protocol’.

Some of the Industries / Areas it will impact

1. Banking and Payments – We all have heard of the term ‘Bitcoin’ and how it revolutionized the structure through which payments are made. It is based on blockchain and was successful due to the properties discussed above. More and more banks are deploying blockchain solutions to make the transactions faster and more secure. But, in the long run, where we wouldn’t need banks as intermediaries in the financial system, banks are likely to play the role of crypto-analysts which can verify all the transactions, generate respective hash-codes and simply maintain the blockchain.

"Banks are likely to play the role of crypto-analysts which can verify all the transactions, and generate respective hash-codes for permissioned blockchain."

2. Supply Chain Management – With blockchain, transactions can be documented in a permanent decentralized record and monitored securely and transparently. This can save time and monitoring costs, labor costs, as well as waste. This can also promote fair trade practices by tracking the products right from their origin.

3. Internet of Things – Samsung and IBM are working on a platform called Adept, which will let the IoT devices to directly communicate with one another without the need for a central location to handle communication.

4. Elections – Leveraging the smart contracts feature of the blockchain, we can have online voting for elections where conditions can be that a person must be an Indian citizen and above 18 years of age. If these two conditions are met, then any adult Indian can vote without waiting in long queues outside the polling booth. And since it’s on the blockchain, and everything is permanently recorded, a person can vote only once.

"This will eliminate the possibility of rigging the Electronic Voting Machines."

5. Insurance – Smart contracts can also prove useful in the insurance sector in the sense that insurance premium inflows and payout outflows can be automated with certain conditions put on them. For example, if the rainfall has been less than 100mm in the previous 2 months in a certain area, then payout the insurance money to the farmers.

6. Real Estate – With blockchain, the properties can be listed on the blockchain, and all the changes can be tracked securely on it. Also, blockchain will allow us to tackle issues like lack of transparency, fraud, and bureaucracy in this sector and make way for easier owner verification by ensuring the accuracy of documents and better tracking.

Challenges Ahead

• The lack of knowledge about blockchain is one of the main obstacles to its adoption. Since people know little about it, they are not able to creatively think about how it can be used as a solution.

• There is a requirement of standards on a global scale. Because blockchain has global applications, there need to be global standards for it, especially since in the current scenario the countries across the world have different takes on blockchain.

• The ability for inter-blockchain communication. Till now we have mostly heard of a public blockchain, but the applications are far more with several private blockchains, which may work on different levels. And while several blockchains would be highly efficient, we’ll need to find ways in which two or more blockchains of two or more transacting parties can be simultaneously updated.

• Lastly, technical challenges still prevail, where transaction speed, data management, and security and privacy-related concerns can become hindrances to adoption of blockchain. While cryptography is advancing by the day, there is always scope to improve.