CMO Sunday: Blockchain 101

Last updated on February 23rd, 2018 at 04:15 pm

Breaking Down the Basics of Blockchain

Blockchain is a fascinating technology with transformative potential that is gaining momentum. But the concept still confuses a lot of people, including me.

Before B2BNN I was at an SAP financial services partner, when Bitcoin and Blockchain were first being talked about. Digital payments were of particular interest to the Managing Director, so these new topics were of particular interest. There were a lot of barriers, like cross-border payments, currency exchange issues, and the time it took to process.

It’s no surprise then that financial institutions were among the first to look at this new technology. This may seem a bit odd, since Blockchain is all about transferring value from peer-to-peer (P2P), without the trusted system of an FI in the middle.

Here’s what I’ve learned, something of a Blockchain 101.

Blockchain Definition

Blockchain is a network of many distributed parties (nodes) who verify and validate transactions and arrive at a consensus on a distributed (replicated) database of records, known as the ledger. This eliminates the need for a central authority and replaces this with the Blockchain itself. In a public Blockchain, anyone can join and process transactions, and all parties can interact with each other in a public and pseudo-anonymous manner. The information, once published on a Blockchain becomes immutable (i.e., is unchangeable).

Benefits of Blockchain

First, it enables PEOPLE to trade value directly with others through P2P value transfer (ie. payments). Think of what this does for the 2.5 billion people who are unbanked, but have goods and services they can provide to others. Secondly, it transforms existing business operations by removing friction from working with intermediaries and third parties. It also improves efficiency, cuts transaction times, and reduces costs that result from inefficient processes.

Typical Transaction

As an example: when someone wants to send Bitcoin to another person, they just need to know that person’s public address. Person A initiates this transfer and submits this request to the Bitcoin Blockchain through a participating node. This represents one of many transactions that need to be processed by special nodes known as “miners” on a Bitcoin Blockchain. Miners first confirm that A indeed has 1 bitcoin to send to B, then they compete to solve a complex mathematical puzzle. The first miner to solve the puzzle takes this transaction and adds it to the other transactions on a block.

The function used is a cryptographic process known as a hash function. A hash function is a mathematical function which turns data into a unique fingerprint of that data called a hash. It’s a formula or algorithm which takes the input data and turns it into an output of a fixed length. It is nearly impossible to back-calculate the original data from the hash. If the input data changes in the slightest, the hash changes significantly. Hash function results cannot be reverse engineered.

Transactions are hashed with other transactions in a block. It takes about an hour (six blocks) for miners to confirm a transaction.

What Miners Do

On Bitcoin Blockchain 1000s of miners compete to be the first to append a block of Blockchain. Only the winning miner gets bitcoins.

Commercialization

The public Bitcoin Blockchain has been facilitating peer-to-peer money transfer through cryptocurrency since 2009. The emergence of Ethereum, a Canadian-led initiative, allows anyone to write code as smart contracts that run on a Blockchain.

More and more organizations are looking at how Blockchain can change their business models.

Businesses like OpenBazaar offer Blockchain based P2P marketplaces where users can buy and sell goods and transfer funds across borders. Banks in Canada and the USA are moving from proof-of-concepts to selective commercial deployments.

Estonia launched a digital identity and an e-residency program on Blockchain in December 2014, and has become one of the most digitized governments in the world. It’s attracting tax revenues from global digital nomads that become e-residents of the little nation.

Applications

Blockchain is not limited to finance. Blockchains are applicable across multiple industries: legal, real estate, supply chains, insurance, healthcare, charities.