Blockchain: how it works and why businesses need it

Blockchain may be the most discussed technology of recent years. A source of income for some and a mystery for others, at first glance blockchain may seem too abstract to be of any use to anyone. But progress is inexorable: In the near future, blockchain could become the engine of economic development. Entire systems, from government administration to healthcare, from logistics to banking, are being built on the power of this technology.

Today, innovative companies around the world are using blockchain to solve various problems. Let’s look at how the technology works, what problems it solves today and will solve tomorrow, and why businesses need to know about it.

What is blockchain and when did it emerge?

Blockchain is a distributed database that contains information about all of the transactions carried out by participants in a system. To understand the meaning of these words, it is worth referring to a simple visual image. For example, go back in time and imagine yourself as a schoolchild exchanging candy with your classmates.

Let’s assume that the schoolboy David decides to give three candies to the schoolboy Max. But not right now, because they are in class. Physically, the exchange will take place at recess, but right now the boys need to agree on who will own the rights to the three candies. Schoolgirl Eva, who writes down the details of the transfer of the three candies from David to Max in her notebook, is summoned to confirm their deal. At this point lies the main risk: Eva may lose the notebook. Also, Eva may have been friends with David since kindergarten, so she will simply rip the sheet out of the notebook and throw it away, making it impossible for Max to prove his rights to the candy in any way.

Let us imagine that this example develops differently. The information about David and Max’s deal is written in her notebook not only by Eva, but also by all the other students in the class. Now the information about David and Max’s deal is not lost: it is recorded in multiple notebooks – registries.

That’s how blockchain works: it stores information about transactions on the computers of multiple network participants, keeping the data secure. Transactions are recorded in blocks, one after the other, forming a chain, which is how blockchain is named. This allows information about a product to be stored from the moment it appears. In other words, schoolboy Max can ask his classmates for data on all transactions with three candies and find out who had them before and where they came from in the first place.

Another plus of the technology is anonymity. The schoolchildren’s notebooks don’t say that David gave the candy to Max. Instead, the boys’ names are encrypted in codes. If the schoolboy’s younger brother John decides to find out about the transactions in his brother’s class and steals the notebook, he still won’t be able to understand anything, since there is no personal information in the notebook – only ciphers.

As a result, the class has a decentralized and completely anonymous system with the highest level of protection against risk. This is how blockchain technology can be described in simple terms.

Where and how blockchain is used

The main benefits of blockchain are increased speed of exchange, reduced time costs, reliability and accessibility combined with transparency. These open up a wide range of applications for the technology.

Blockchain is primarily associated with the crypto industry, in which it has become the technological basis for the issuance of cryptocurrencies. However, blockchain is much bigger than the crypto industry. Today, the technology is used in banking, finance, logistics, healthcare, energy, gambling – primarily online casinos and other industries.

In some countries, the public sector is actively mastering the technology. The brightest example is Georgia and its real estate registry. The country uses blockchain to conduct tamper-proof transactions to buy and sell land titles, register real estate mortgages and notarize documents. Businesses can particularly benefit from blockchain tools, solving several common problems at once.

  • Tracking shipments. Here technology becomes an advanced version of the electronic waybill. The seller and the buyer can track the entire route of delivery of goods, which is recorded at each stage of transportation. This gives additional control over the process.
  • Combating counterfeiting. The customer knows exactly where the product was made and how it was delivered, which serves as insurance against unscrupulous contractors.
  • Building brand image. Blockchain technology allows any consumer to see every stage of a product’s production. In a world that emphasizes the ESG agenda, this opportunity is valuable to businesses because it proves that a product meets stringent environmental standards.
  • Concluding smart contracts. Blockchain-based platforms create smart contracts – agreements that spell out a strict sequence of actions for both parties. For example, a supplier must deliver half of the goods to a specific port by a certain date in order to be paid. If he fails to do so, the terms of the smart contract are violated and payment is automatically blocked.
  • Long-distance transactions. Blockchain has no borders, no language barriers and no national holidays. It’s a financial relationship without conventions and stalling intermediaries, so it’s much faster and easier to implement. They also don’t require the physical presence of the parties to the transaction.
  • Attracting investment. A common way to attract investments using blockchain is the creation and subsequent sale of digital tokens, which are equated to a unit of goods/services. A kind of presale takes place, which allows a business to receive investments.
  • Of course, for all of the above tasks, there are the usual solutions. CRM systems are used to track shipments, and intermediaries are used to confirm fulfillment of contract terms. What makes blockchain so good for business?
  • The answer lies in decentralization. Information about all business processes is recorded within the system on multiple devices, allowing any conflict situation to be resolved. An irresponsible contractor cannot prove that he has already provided a service: records of all his actions are stored in hundreds or thousands of blocks. They cannot be erased, destroyed, or corrected at will by either party.

What’s the difference between a corporate blockchain system and a cryptocurrency system

The difference between the two systems responds to a business request for privacy. In the case of cryptocurrency, the blockchain system provides security by making all transaction information publicly available. Everyone on the network can reconcile the data and still not be able to adjust it.

But does a business need to have information about its transactions seen by thousands of users? To prevent this, this maximum open approach is not used in the corporate world. Corporate blockchain platforms take a different approach to security. Access to valuable information is restricted and the business is protected from the unwanted dissemination of trade secrets.

The growing popularity of enterprise blockchain systems around the world has quickly caught the attention of global companies that rely on innovation and technology.

Its distinctive feature is that the source code is publicly available. Any company can refine it and create its own product based on the existing code.