What Small Business Owners Need To Know About The Blockchain
When we hear the word blockchain, most of us think of cryptocurrency. But there’s a big difference between blockchain and cryptocurrency. And it’s the blockchain that many prominent businesses are interested in.
Companies like Walmart are using or experimenting with blockchain technology to improve the way they do business. A lot of innovation is happening on blockchains and as more uses come to light and the technology becomes more widely adopted, many industries are expected to benefit. And it’s not just the big companies that will be swept up in the change, but also small businesses.
To understand how blockchain is expected to change the way you do business in the future, you need to start with the basics of what a blockchain is. So let us break it down for you. If reading isn’t your thing, check out our video.
What is a Blockchain?
Blockchain is commonly associated with cryptocurrencies but it’s important to know that it’s not a cryptocurrency. A cryptocurrency like Bitcoin is a virtual or digital currency, while blockchain is the technology that digital currencies run on.
The broad purpose of blockchain technology is to provide an online record of information. So, you can simply think of it as an online database.
In the case of cryptocurrency, a blockchain keeps a digital record of transactions and balances. But the way this digital database processes and stores your information is different to how your bank stores your information.
A bank typically stores your information in one location, such as in the computers or servers it owns. A blockchain stores and distributes the information across a vast network of computers. These computers are owned by people who are using the blockchain, in other words, your peers on the network.
This peer-to-peer system removes the need for a central authority or a third party – such as a bank – to manage the data in the database. So, a blockchain has no central authority controlling it. Instead, the ledger – which is the collection of financial records – is distributed and shared across many computers. This is why a blockchain is often referred to as a distributed ledger.
To drive the point home, think of a credit card. Every time you use your card to pay for something – or a customer uses their card to pay you – a central authority such as a bank or payment service like American Express is responsible for processing, managing and storing that information.
On a blockchain, if a similar financial transaction occurs, the computers of people or peers on the network are responsible for processing, managing and storing the information. This means many computers process and store the same data.
Why Cut Out the Middleman?
Cutting out the middleman creates cost savings, reduces paperwork and saves time processing a transaction. But there was a reason for the middleman in the first place and that reason was to keep everyone honest. For example, someone can’t accuse you of not paying them if bank records show the money was sent and received.
But if the middleman has been removed, who creates the trust? The blockchain does! Let’s take a look at how it does this.
Firstly, think about the problem that digital currencies had before the blockchain was invented. It’s called the double-spending problem. And to understand it, let’s think about digital photos you send through Facebook or Instagram. When you send a photo, you are not sending the original but a copy of the photo. In this instance, it doesn’t matter that there are multiple copies of the photo.
Now, let’s say a friend pays you back for a favour using cryptocurrency. You wouldn’t want a copy of the currency. A copy would mean your friend has the original and can spend it again. This is the double-spending problem – when a single unit of currency can be spent more than once simultaneously.
The blockchain gets around double-spending by providing an unchangeable record of who owns the digital coins. So, once you spend a piece of cryptocurrency, you no longer own the original or a copy and can’t spend it again.
How Secure is the Blockchain?
Okay, but you may be thinking “what stops people from altering the online record?” To understand this, we are going to look at how the blockchain organises information compared to traditional databases.
Before blockchain came into existence, computer databases commonly used tables with columns and rows to store and retrieve information. For example, bank account details, including a list of your deposits and withdrawals, are stored in tables.
Instead of tables, a blockchain stores information in blocks. Once a block has been filled with information, it is closed. And instead of editing existing data when the information needs to be updated, a fresh block is added to the chain. This keeps on happening every time there’s a new transaction; effectively creating a chain of blocks, which explains why it’s called the blockchain.
Each block is also time-stamped, which creates a chronological record of the data being stored. But there is something else that makes the blockchain special. Each block carries encryption or code called a hash that links it to the previous block. This feature makes it difficult for someone to change the record because if any of the information in a block were to be changed, it would change the computed hash. A change in the hash means it will no longer link to the previous block and the change will be detected.
How is the Blockchain Changing Business?
As you can see, the blockchain has been designed as a secure and permanent way to record information online and to share this information among many people. The blockchain can store any data. Numerous companies understand this – including IBM, FedEx and Walmart – and are exploring the use of blockchain technology to better manage certain aspects of their business, such as invoicing and supply chain tracking.
Another innovation to come from blockchain technology is self-executing contracts called smart contracts. A smart contract stores terms of an agreement between two or more parties online as code and when terms of the contract are met along the way, funds are automatically transferred. This automation is designed to cut costs and speed up processes by removing the need for an intermediary or middleman involved in executing contracts.
So, What Have You Learned?
- The blockchain is a digital database that keeps a record of something, whether that’s transactions or supply chain movements.
- It’s different to other computer databases in the way it stores, verifies and structures the records it’s keeping.
- The data is structured as a chain of blocks that provide a chronological and unchangeable record.
- This permanent record is maintained by a vast network of computers, removing the need for a central authority.
- The blockchain uses complex encrypted codes to make it tamper-resistant and a secure way to store data.
- And the added invention of smart contracts is opening up more ways businesses can use blockchain technology.
- As a result, blockchain technology has the potential to revolutionise the way small businesses operate beyond simply adopting cryptocurrency.
Keep an eye out for more of our articles and videos that dive deeper into blockchain technology and cryptocurrency.
Disclaimer: Our articles and videos are here to inform you and the information provided does not constitute financial, taxation, legal, business or other professional advice and should not be relied upon as such. See our full disclaimer here.