- Blockchain technology allows two or more people, companies, or computers, who may or may not know each other, to exchange value in digital environments—in the form of monetary transactions or the sharing of information or other assets—without intermediaries.
- Blockchain works as a kind of distributed (digital) ledger. In its full version, it combines five design elements to authenticate users, validates transactions, and records information in the general ledger, in such a way that it cannot be corrupted or modified later. In this way, it eliminates the need for a centralized administrator.
- Currently, blockchain-based solutions continue to mature, for example in terms of scale, but they will undoubtedly support new social and economic models.
- Have you recently bought a house? Imagine that you could have negotiated the deal directly with the seller, despite not knowing each other, and with the peace of mind that you could record it in such a way that it would be impossible for both of you to modify or rescind it later. You would have been spared having to credit your personal information to a slew of realtors, mortgage brokers, insurers, property inspectors, and title companies. Enter blockchain: the direct and secure way to maintain and record value chain interactions.
Anyway, this is just a blockchain-inspired records management scenario. Once fully developed, blockchain technology will add to the decision-making power of artificial intelligence (AI) and the sensory power of the Internet of Things (IoT) to give rise to new socio-economic models, in the age of user-to-user exchanges of the Web3 and the metaverse. But let’s not get ahead of ourselves.
The business potential of blockchain
The potential impact of blockchain on business is huge. Think about how many deals your organization is currently unable or unwilling to close because you don’t know the other party to the transaction and you’re not sure they actually own the assets you’re trading.
That uncertainty will cease to exist for millions of potential trading partners, asset classes, and transactions. Blockchain will identify the participants, guarantee the validity of all the elements of a transaction, enforce the rules of the ecosystem and ensure that everyone respects them.
Gone are the slow and expensive analog-based methods we have relied on to validate our identity and the legality of business operations since the 19th century. No less important is blockchain’s ability to enable faster and more diverse transactions—both in type and size—than traditional centralized systems.
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For generations, businesses have relied on centralized infrastructures, such as payment systems, insurance companies, delivery and logistics services, and governments, to conduct transactions and manage risk. However, these systems were not designed to handle the complexity, size, and scale of machine-to-machine transactions born out of digital platforms.
In the context of the programming superbull economy, and across digital networks, individual data units, digital trading assets such as cryptocurrency, reward points, or parts of an asset are traded (or will be traded very soon). Units worth less than $0.01 can be traded for millions or trillions. Current payment systems do not have the capacity to securely and cost-effectively process sub-value transactions and handle as much volume as possible.
Companies need another way to deal with new digital assets and interactions, without the intervention of intermediaries who collect data at each step and take a percentage of the value. Blockchain promises to be the solution.
How Blockchain Works
Blockchain blocks are a specific type of distributed ledger that, once created and with the information entered, is read-only. Not all distributed ledgers are blockchain, but all blockchain is based on distributed ledgers.
In its full version, blockchain combines five design elements to authenticate users, validate transactions, and record that information in a way that makes it impossible for a participant to corrupt or change it later. It also enables the adoption of decentralized governance of the ecosystem and the implementation of programming capabilities, such as the creation and use of digital business assets or new forms of money.
While complete blockchain solutions exist, many of today’s business initiatives include just a few of the elements: distribution, encryption, and immutability. Tokenization to exchange value and decentralization to enable consensual governance is often lacking.
These types of incomplete or “blockchain-inspired” solutions can add some value by enabling the digitization of manual processes, such as real estate sales, and by improving the efficiency of information exchange in multi-party transactions, such as insurance claims. But without all five elements, the value they bring in terms of revenue growth is limited.
Five essential elements of blockchain
The complete blockchain concept includes five elements:
Distribution. Blockchain participants, connected to a distributed network, operate on nodes (computers) that run a program to enforce blockchain business rules. The nodes also maintain a complete copy of the ledger, which is updated independently at the time a new transaction occurs.
Encryption. Blockchain uses encryption technologies such as public and private keys to record data securely and partially anonymously. During the process of creating a bitcoin wallet, for example, the blockchain generates an address for the participant that will be visible to all network participants but offers pseudonymization.
Inalterability. Once ICO completed, transactions are cryptographically signed, timestamped, and sequentially added to the ledger. The records cannot be modified unless agreed upon by all the participants. Agreements of this type are called forks.
Tokenization. Value is exchanged in the form of digital crypto-values (tokens), representative of a wide variety of asset types, for example, currencies, data units, or user identities. The use of tokens can be programmed using smart contracts. Tokenization, or token creation, is the way to represent and enable transactions on the blockchain using digital business assets.
Decentralization. There is no single entity that controls most of the nodes or dictates the rules. Transactions are verified and approved through a consensus mechanism that makes the figure of a centralized intermediary unnecessary to govern the network. Decentralization—and its opposite, centralization—consists of three basic elements: technology, economics, and decision-making.