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Blockchain: What it is and how it works

Bnamericas Published: Tuesday, June 06, 2017

When new technology emerges one of the challenges for some of those who work with it is explaining, in simple terms, what it's all about.

Today, a technology that is creating a buzz, but which many people outside the field of IT may not fully understand, is blockchain.

Blockchain was originally created to support bitcoin, but many experts believe it will become more important than the crypto-currency. The idea of blockchain has been around for decades, but bitcoin, introduced in an academic paper in 2008, nudged it into the limelight.

Simply put, blockchain is a "shared, immutable ledger for recording the history of transactions," according to US tech giant IBM. It also says blockchain "provides a single view of truth across all participants while simultaneously providing selective visibility to participants based on their credentials."

Servers, or nodes, in a network maintain the entries and "every node sees the transaction data stored in the blocks when created," says London-based consultancy Autonomous Research, which produced a white paper on blockchain. This makes it relatively secure, because posts to the ledger cannot easily be tampered with or revised. Each node would have to edit the data.

At a recent Chilean insurance conference, US blockchain expert Bettina Warburg drew comparisons with checkbook stubs. In blockchain, she said, each node has the same "stubs" or history of transactions. So, for example, one person cannot simply change their ledger - the rest would need changing, too.

WHY THE HYPE?

Blockchain facilitates secure transactions between two "untrusting" parties.

Professional services giant Deloitte says "two parties are able to make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk."

Autonomous Research echoes this. The distributed nature of the network, it says, "requires computer servers to reach a consensus, which allows for transactions to occur between unknown parties.

"The software is written so that conflicting or double transactions do not become written in the data set and transactions occur automatically."

IBM says that, with blockchain, "businesses of all types can more closely manage the flow of goods and related payments with greater speed and less risk."

IBM says blockchain offers "great promise across a wide range of business applications." Industries such as insurance, finance, banking, manufacturing and logistics are examples, it said.

Autonomous also says the technology, still in the early stages of development and adoption, could lead to billions of dollars in savings in banking sales and trading costs globally.

TOO GOOD TO BE TRUE?

Sometimes, a new technology is initially seen as a panacea for a mountain of problems. Often it is not.

Deloitte identifies seven challenges associated with blockchain, among them its uncertain regulatory status, the nascent nature of the technology, pending cyber security concerns, integration concerns, cultural adoption and cost.

Regarding cost, Deloitte says "blockchain offers tremendous savings in transaction costs and time but the high initial capital costs could be a deterrent."

ALSO READ:

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