Blockchain may be one of the hottest technologies to disrupt the world of finance, linked to the rise of cryptocurrencies, but it is reshaping perhaps the most archaic of all financial technologies: the ledger. Yes, the system descended from the clay tablets that the ancient Mesopotamians used thousands of years ago to record transactions and balances.
This latest iteration, however, has bells and whistles that make the ledger capable of upending the entire financial environment that gave birth to it. How does an upgrade work?
Blockchain is a digital ledger database whose recorded contents are encrypted into a sequence of blocks and distributed across a network of participating computers (nodes).
It really is that simple. So, what’s all the buzz? This looks like a slightly enhanced shareable spreadsheet with tracked changes, right?
The functionality of blockchain may seem simple and clear. But given changes to old ledger technology, it now has some features that would be considered impossible in today’s soon-to-be old world.
The blockchain is:
- Immutable. Entries cannot be edited once they are saved.
- Decentralized. It is capable of operating without third party entities, human or not.
- Distributed. All participating computers have a copy of the ledger.
- Consensus. All transactions are verified and updated by consensus.
- Secure. All recorded content is individually encrypted.
In short, blockchain has the potential to revolutionize almost every digital operation we know today, from sending payments and issuing contracts to managing complex industrial and government operations.
A project of this magnitude is likely to present a wide range of opportunities, but also many risks, for both users and investors.
How does blockchain technology work?
The essential aspect that sets blockchain apart from all other ledgers and databases is that it is designed to distribute and record information on a peer-to-peer basis which, once completed, is immutable and incorruptible.
Immutable verification is one of the key features of blockchain. All data contents are, so to speak, “set in stone”, but digitally. And blockchain networks achieve this goal by using strict consensus verification procedures. So how does it work?
- Digital transactions are stored in a digital “block” (much like a ledger entry) that is added to a previous “chain” of blocks; hence the term blockchain.
- Each block has a unique “hash,” such as a signature or identification code, and a timestamp to indicate the exact time it was validated or mined.
- Each block contains the hash of the previous block, forming the chain.
Once a block is added to the blockchain, all nodes (participating computers) update their copy of the blockchain. This is what makes blockchain a secure system. Any changes to the contents of a single block must be saved to a new block, making it almost impossible to rewrite a block’s history.
If a hacker attempted to tamper with an existing block, then they would have to modify all copies of that block on all participating computers on the network. This is practically impossible: the number of participating computers around the world can number in the thousands. Unless every node in the network accepts a change to a block, the change is ignored.
What makes blockchain technology so revolutionary?
There are many potential benefits to adopting blockchain technology. Here are three to consider:
Blockchain can significantly reduce or even eliminate data tampering. Blockchain can significantly increase data security. This is why this technology is often referred to as “trustless networking”. This means you don’t need to trust anyone to be certain that a given trade or transaction is accurate and accurately recorded.
Blockchain can make transactions more transparent and traceable. Since it is a distributed ledger, all participating computers in a network have access to the same database (the blockchain itself). This increases transparency and access, and the hash history makes every exchange and transaction traceable.
Blockchain can eliminate the need for centralized third parties. An automated network enabling peer-to-peer transactions removes the need for middlemen. This can include eliminating third-party service fees and any delays caused by paper or human-driven processes.
How to use blockchain?
Any industry that can use a peer-to-peer transaction system with an immutable ledger can benefit from blockchain technology. It is easy to imagine how widespread blockchain applications can be.
The cryptocurrency industry has made blockchain a household term; decentralized and traditional finance may soon follow crypto’s lead. Other areas likely to adopt blockchain technologies include non-fungible token (NFT) markets, supply chain and logistics, energy, healthcare, e-commerce, media, voting systems, and government and public sector operations. Smart contracts (blockchain-based computer programs or transaction protocols that function like digital contracts) and the decentralized applications (dApps) that use them can be the key to innovation.
Again, we are still in the early stages of blockchain development. Although its potential use cases are many and varied, it is important to remember that its widespread adoption has not yet begun.
What are the risks?
Each unique technology carries its own set of risks. Blockchain is no exception.
While the blockchain itself is not hackable (remember it is an immutable ledger), the systems surrounding the blockchain can be hacked.
The simplest example is a bad actor obtaining passwords and credentials to access digital assets. Unsecured and exposed goods can be stolen.
A more sophisticated risk is that of a 51% attack. In cryptocurrency applications, this means that a single entity could take control of more than 50% of all cryptocurrency mining or staking. Once in control, the entity may not be able to modify previous blocks on the chain, but it can modify future blocks. For example, it may be able to prevent or cancel transactions or even double spend any cryptocurrency while waiting for a slot in the block.
For large networks like Bitcoin and Ethereum, a 51% attack may be too difficult and expensive to attempt. But for small networks it may be possible.
How can a person invest in blockchain technology?
Probably the most direct and regulated way to invest in blockchain technology is to invest in shares of publicly traded companies that are developing blockchain networks.
You can also gain indirect exposure by investing in companies involved in decentralized finance, financial technology (FinTech), metaverse technologies, cryptocurrency exchanges, or hardware designed for crypto, blockchain, or decentralized finance (DeFi) purposes.
Your other options are to purchase digital assets such as cryptocurrencies or NFTs. Note that the crypto world is largely unregulated, so scams and fraudulent activity are frequently reported. Additionally, cryptocurrencies and their underlying investments are highly volatile (i.e., prices tend to fluctuate violently).
The essentials
Blockchain is an emerging technology that has the potential to disrupt and revolutionize the way we conduct business, transact business, enforce legal contracts, and even enforce government policies. Its impact on the world today can be compared to the advent of the Internet in the 1990s.
Like the first technological booms, the blockchain movement is generating numerous innovations. They may all be unique, but not all of them will be successful or widely adopted. Blockchain offers investors exciting new opportunities, but it also carries a number of risks. Proceed with caution.
