What is blockchain?
Blockchain technology facilitates transparent information sharing within a business network through an advanced database mechanism. Data in a blockchain database is stored in interconnected blocks forming a chain, ensuring chronological consistency. Altering or deleting the chain requires consensus from the network, making it immutable. Consequently, blockchain technology enables the creation of an unalterable ledger for tracking orders, payments, accounts, and other transactions. The system incorporates mechanisms to prevent unauthorized transaction entries and maintain consistency in the shared view of transactions.
Why is blockchain important?
Traditional database technologies pose numerous challenges when it comes to recording financial transactions, as exemplified by the sale of a property. In such transactions, ownership is transferred upon the exchange of money. However, relying solely on individual records from the buyer and seller is unreliable; the seller may falsely claim non-receipt of payment, while the buyer may assert payment despite non-compliance.
To circumvent potential legal disputes, a trusted third party is typically required to oversee and authenticate transactions. However, this central authority not only complicates the process but also introduces a single point of vulnerability. If the central database is compromised, both parties could be adversely affected.
Blockchain technology addresses these concerns by establishing a decentralized, tamper-resistant system for recording transactions. In the context of property transactions, blockchain creates separate ledgers for both the buyer and the seller. Each transaction must receive approval from both parties and is promptly updated in their respective ledgers in real-time. Any tampering with historical transactions would compromise the integrity of the entire ledger. These distinctive attributes of blockchain technology have led to its widespread adoption across various sectors, including the emergence of digital currencies such as Bitcoin.
Key elements of blockchain.
Distributed ledger technology
All participants within the network have access to the distributed ledger, which maintains an immutable record of transactions. This shared ledger ensures that transactions are recorded just once, thereby eradicating the need for redundant efforts commonly associated with traditional business networks.
Smart contracts
Organizations utilize smart contracts to autonomously manage business agreements, eliminating the necessity for intermediaries. These contracts are software programs stored on the blockchain, which execute automatically upon meeting predefined conditions. They operate on if-then logic, ensuring transactions are carried out securely. For instance, a logistics firm may implement a smart contract that triggers payment automatically upon the arrival of goods at the port.
Immutable records
Once a transaction is recorded on the shared ledger, no participant can alter or manipulate it. In the event of an error in a transaction record, a new transaction must be appended to rectify the mistake, and both transactions become visible on the ledger.
How does blockchain work?
The term “blockchain” is not coincidental; it refers to a digital ledger composed of interconnected “blocks” of data. With each addition of fresh data to the network, a new “block” is generated and appended to the existing “chain.” This process necessitates all nodes to synchronize their versions of the blockchain ledger, ensuring uniformity.
The mechanism for creating these new blocks is pivotal in understanding the high level of security associated with blockchain technology. Before a new block can be integrated into the ledger, a consensus among the majority of nodes is required to verify and authenticate the legitimacy of the incoming data. In the case of cryptocurrencies, this verification may involve confirming the authenticity of transactions within a block or ensuring that coins haven’t been double-spent. This stands in contrast to standalone databases or spreadsheets, where changes can be made without oversight.
According to C. Neil Gray, a partner specializing in fintech at Duane Morris LLP, “Once consensus is reached, the block is appended to the chain, and the transactions it contains are recorded in the distributed ledger. These blocks are securely linked together, forming an unbroken digital chain from the inception of the ledger to the present moment.”
Transactions within a blockchain are typically safeguarded through cryptographic techniques, necessitating nodes to solve intricate mathematical equations to process transactions.
Sarah Shtylman, a counsel specializing in fintech and blockchain at Perkins Coie, explains, “In exchange for their role in validating alterations to the shared data, nodes are typically rewarded with newly created units of the blockchain’s native currency—such as newly minted bitcoin on the bitcoin blockchain.”
