What is Blockchain?

The blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting and many other issues.

This distributed ledger — the first blockchain ledger ever created was for bitcoin, and it set the pattern for others — represents the most innovative and potentially influential aspect of the technology. Participants interact with one another using pseudonyms, and their real identities are encrypted. The ledger uses public-key encryption, which is virtually impossible to break, because a message can be unlocked only when a public and a private element (the latter held only by the recipient) are linked.

The term blockchain is derived from the way transactions are stored. For example, every time a bitcoin is created or changes hands, the ledger automatically creates a new transaction record composed of blocks of data, each encrypted by altering (or “hashing”) part of the previous block. The cryptographic connection between each block and the next forms one link of the chain. This process compounds the mathematical difficulty of committing a successful fraud, because blocks of transactions, as well as individual transactions, are continuously validated. The algorithms also incorporate an ID for each buyer and seller in a transaction, adding those IDs to the block.

Potentials of Blockchain Technology

Blockchain is, quite simply, a digital, decentralized ledger that keeps a record of all transactions that take place across a peer-to-peer network. The major innovation is that the technology allows market participants to transfer assets across the internet without the need for a centralized third party.

From a business perspective, it’s helpful to think of blockchain technology as a type of next-generation business process improvement software. Collaborative technology, such as blockchain, promises the ability to improve the business processes that occur between companies, radically lowering the “cost of trust.” For this reason, it may offer significantly higher returns for each investment dollar spent than most traditional internal investments.

Financial institutions are exploring how they could also use blockchain technology to upend everything from clearing and settlement to insurance.

A Strategist’s Guide to Blockchain

An expensive work of art changes hands. Neither the buyer nor the seller is named publicly, but the exchange is verified, the provenance of the painting travels with it, and the artwork is automatically insured against theft.

The name of the technology that could make all this happen is blockchain. Originally the formal name of the tracking database underlying the digital currency bitcoin, the term is now used broadly to refer to any distributed electronic ledger that uses software algorithms to record transactions with reliability and anonymity. This technology is also sometimes referred to as distributed ledgers (its more generic name), cryptocurrencies (the electronic currencies that first engendered it), bitcoin (the most prominent of those cryptocurrencies), and decentralized verification (the key differentiating attribute of this type of system).

At its heart, blockchain is a self-sustaining, peer-to-peer database technology for managing and recording transactions with no central bank or clearinghouse involvement. Because blockchain verification is handled through algorithms and consensus among multiple computers, the system is presumed immune to tampering, fraud, or political control. It is designed to protect against domination of the network by any single computer or group of computers. Participants are relatively anonymous, identified only by pseudonyms, and every transaction can be relied upon. Moreover, because every core transaction is processed just once, in one shared electronic ledger, blockchain reduces the redundancy and delays that exist in today’s banking system.

One of the most noteworthy features of the blockchain architecture is the decentralized technology, which helps ensure that a transaction is reliably reported. When a blockchain transaction (such as a bitcoin sale) takes place, a number of separate computers, connected across the network, process the algorithm and confirm one another’s calculation. The record of transactions thus continually expands and is shared in real time by thousands of people (hence the name “distributed ledger”). The ledger stores basic information about each transaction — such as sender, receiver, time, asset type, and quantity. The blockchain process ensures validity, by mathematically linking each new transaction to those that came before it. This provides the evidence of the provenance of each transaction in a chain of records going back to the creation of the database, block of code after block after block (see Exhibit 1).