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Blockchain Technology

  • Date: 15-Apr-24
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Finance Management
Blockchain Technology

About Blockchain Technology

What is blockchain technology?

Blockchain technology is an advanced database mechanism that enables transparent information sharing within a business network. A blockchain database stores data in blocks that are interconnected in a chain. The data is chronologically consistent because you cannot remove or modify a string without consensus from the network. With this, you can use blockchain technology to create an immutable ledger to track orders, payments, bills, and other transactions. The system has built-in mechanisms that prevent unauthorized transactions and create consistency in the shared view of these transactions.

Why is blockchain important?

Traditional database technologies present several challenges for recording financial transactions. For example, consider selling real estate. Once money is exchanged, ownership of the property passes to the buyer. Individually, both the buyer and seller can record monetary transactions, but neither source can be trusted. The seller can easily claim that he did not receive the money even though he received it, and the buyer can equally argue that he paid the money even though he did not receive it.

To avoid potential legal issues, transactions must be overseen and verified by a trusted third party. The presence of this central authority not only complicates the transaction but also creates a single point of vulnerability. If the central database were compromised, both parties could suffer.

Blockchain alleviates these problems by creating a decentralized, tamper-proof system for recording transactions. In a real estate transaction scenario, the blockchain will create a single ledger for the buyer and seller. All transactions must be approved by both parties and are automatically updated in both their ledgers in real time. Any corruption in historical transactions will corrupt the entire ledger. These properties of blockchain technology have led to its use in various industries, including the creation of digital currencies such as Bitcoin.

How are different industries using blockchain?

Blockchain is an emerging technology that is being innovatively adopted by various industries. In the following subsections, we describe some use cases in different industries:

Energy

Energy companies are using blockchain technology to create peer-to-peer energy trading platforms and streamline access to renewable energy. For example, consider these uses:

Blockchain-based energy companies have created a trading platform to sell electricity between individuals. Homeowners with solar panels use this platform to sell their excess solar energy to neighbors. The process is largely automated: smart meters create transactions, and the blockchain records them.

Blockchain-based crowdfunding initiatives allow users to sponsor and own solar panels in communities that lack access to energy. Sponsors can also receive rent for these communities once the solar panels are built.

Finance

Traditional financial systems such as banks and stock exchanges use blockchain services to manage online payments, accounts, and market trading. For example, Singapore Exchange Limited, an investment holding company that provides financial trading services across Asia, is using blockchain technology to build a more efficient interbank payment account. By implementing blockchain, they solved several problems, including batch processing and manual reconciliation of several thousand financial transactions.

Media and entertainment

Media and entertainment companies use blockchain systems to manage copyright data. Copyright verification is critical to fairly compensating artists. Recording the sale or transfer of copyrighted content requires several transactions. Sony Music Entertainment Japan uses blockchain services to streamline digital rights management. They have successfully used the blockchain strategy to improve productivity and reduce copyright processing costs.

Retail

Retail companies use blockchain to track the movement of goods between suppliers and buyers. For example, retail company Amazon has filed a patent for a distributed ledger technology system that will use blockchain technology to verify that all goods sold on the platform are authentic. Amazon sellers can map their global supply chains by allowing participants such as manufacturers, couriers, distributors, end users, and secondary users to add events to the ledger after registering with a certification authority.

What are the characteristics of blockchain technology?

Blockchain technology has the following main features:

Decentralization

Decentralization in blockchain refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust between participants. These networks also discourage participants from exercising power or control over each other in ways that impair the functionality of the network.

Immutability

Immutability means that something cannot be altered or changed. No participant can tamper with a transaction once someone records it in the shared ledger. If a transaction record contains an error, you must add a new transaction to remove the error, and both transactions are visible to the network.

Consensus

A blockchain system establishes rules on the consent of participants to record transactions. You can only record new transactions if the majority of participants in the network agree to do so.

What are the key components of blockchain technology?

Blockchain architecture has the following main components:

Distributed ledger

A distributed ledger is a shared database on a blockchain network that stores transactions like a shared file that can be edited by anyone on the team. In most shared text editors, anyone with edit rights can delete an entire file. However, distributed ledger technologies have strict rules about who can edit and how. Recordings cannot be deleted after uploading.

Smart contracts

Companies use smart contracts to independently manage business contracts without the need for an assisting third party. They are programs stored in the blockchain system that are automatically launched when predetermined conditions are met. They perform if-then checks so that transactions can be completed with confidence. For example, a logistics company might have a smart contract that automatically makes payments once the goods arrive at the port.

Public key cryptography

Public key cryptography is a security feature that uniquely identifies participants in a blockchain network. This mechanism generates two sets of keys for network members. A single key is a public key that is shared by everyone on the network. The second is a private key that is unique to each member. The private and public keys work together to unlock the data in the ledger.

For example, John and Jill are two members of the network. John records the transaction, which is encrypted with his private key. Jill can decrypt it with her public key. In this way, Jill is convinced that John made the transaction. Jill's public key would not work if John's private key was tampered with.

How does blockchain work?

Step 1: Record the transaction.

A blockchain transaction shows the movement of physical or digital assets from one party to another in the blockchain network. It is recorded as a data block and may contain details such as these:

  • Who was involved in the transaction?
  • What happened during the transaction?
  • When did the transaction take place?
  • Where did the transaction take place?
  • Why did the transaction occur?
  • How much of the assets were exchanged?
  • How many preconditions were met during the transaction?

Step 2: Reach consensus

A majority of participants in a distributed blockchain network must agree that a recorded transaction is valid. Depending on the type of network, the rules of the agreement may vary but are usually established at the beginning of the network.

Step 3: Connect the blocks.

Once participants reach a consensus, transactions on the blockchain are written into blocks equivalent to ledger pages. Along with the transactions, a cryptographic hash is also attached to the new block. A hash acts like a string that links blocks together. If the contents of a block are intentionally or unintentionally modified, the hash value will change, providing a way to detect data tampering.

So blocks and chains are securely linked, and you cannot edit them. Each additional block strengthens the verification of the previous block and thus the entire blockchain. It's like stacking wooden blocks into a tower. You can only stack blocks on top, and if you remove a block from the center of the tower, the entire tower will break.

Step 4: Share the ledger.

The system distributes the latest copy of the central ledger to all participants.

What are the benefits of blockchain technology?

Blockchain technology brings many advantages for managing asset transactions. We list some of them in the following subsections:

Advanced security

Blockchain systems provide the high level of security and trust that modern digital transactions require. There is always the fear that someone will tamper with the underlying software to generate fake money for themselves. However, blockchain uses the three principles of cryptography, decentralization, and consensus to create a highly secure underlying software system that is nearly impossible to tamper with. There is no single point of failure, and no single user can change transaction records.

Improved efficiency

Business-to-business transactions can take a long time and create operational bottlenecks, especially when third-party regulators are involved. Transparency and smart contracts in the blockchain make such business transactions faster and more efficient.

Faster auditing

Businesses must be able to securely generate, exchange, archive, and reconstruct electronic transactions in an auditable manner. Blockchain records are chronologically immutable, meaning that all records are always sorted by time. This data transparency makes audit processing much faster.