Blockchain demystified

Blockchain demystified

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Contributors:

Pat d'Entremont, Senior Partner, Nicom IT Solutions

New technology could revolutionize commerce

At first, it seemed to be all about online monetary transactions and in the very early stages of adoption. But suddenly it’s here now — and likely in your industry. So, you should start paying attention to blockchain technology.

What exactly is blockchain technology? First of all, it’s not magic. A blockchain is physical storage of data, just like any other data storage, but what is unique is how it is being done. Basically, information is recorded in blocks of data that are linked together, then replicated multiple times across a network of users, called “nodes.”

Think of a blockchain as an association and the nodes as its members. There is no central authority dictating the rules of conduct, only whatever governance the association puts in place. It is an ideal technology to ensure trust among trading partners without having to rely on some higher authority or neutral third party. Plus, for the reasons I’m going to list below, it is hard to hack and it’s easy to detect if anyone is attempting to do so.

In short, it is highly secure and decentralized.

There are two types of blockchains: public (like the online currency known as Bitcoin) and private (like most business usage). It is the unique properties of these blockchains that make them very appealing as a means of direct communication among trading partners:

Resilient distributed network

The fact that data gets replicated across the nodes means that the entire system is peer-to-peer, where communication is decentralized and each machine has the same capabilities as any other. There is no central server to be compromised and all records are public and verifiable by authorized individuals. Also, it is very robust, because if one part of the network goes down, other copies will take over.

"Immutable" transactions

That means that transactions can only be added. The technology does not allow for changing or deleting information once it is placed on the blockchain, leaving a clear audit trail. If anyone tries to change an existing transaction, it will be easily detected. Since only one part of the chain has been compromised, the node where the block resides will simply replace it with a block from another node.

Cryptographically secure

Every digital asset and block goes through a cryptographic one-way “hashing” algorithm that further ensures they cannot be tampered with. The hashing yields a unique result called a digest and someone modifying a block and correctly guessing the input that produced the digest is highly unlikely.

Transactions only allowed by consensus

Network participants must agree on the rules of business, which are embedded in “smart contracts” that are programmed right into the blockchain.

Accessible via web services

Participants use the internet to participate in the blockchain.

Blockchain technology can be used for transmitting many types of transactions and other digital assets such as mortgages, video content and shipping bills of lading. Although banks and federal authorities are studying this technology, it may be a while before it gets widely adopted. Because these organizations have already spent billions of dollars on existing secure systems. Also, blockchains are extremely resource-intensive due to their security algorithms, something that has to be improved upon before it becomes mainstream and the legality of “smart contracts” is something that is still up for review.

Regardless, blockchain technology has the potential of vastly reducing the cost and complexity of online commerce and it doesn’t seem like it’s going away. In fact, blockchain has been described by some as being even more important than the internet itself.

Pat d’Entremont is a Senior Partner at Nicom IT Solutions, an IT firm that provides professional advisory services and software products to the seaport industry.

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