I regularly hear people talk about blockchain, bitcoin and distributed databases in the business and investment community. Cybersecurity is becoming more important by the day and business leaders are trying to find ways to optimize their technology work. So, I’m not suprised when someone tells me that they must get blockchain or do blockchain.
After a number of these conversations, I started to realize that most people get one thing fundamentally wrong with blockchain. Blockchain isn’t something you do.
Many people know the story of bitcoin and its rise to financial dominance. Few people know exactly why blockchain needed to be created, though. The problem with bitcoin and non-traditional financial transactions is there needed to be a factor of trust between two parties.
In our current financial system, banks act as the keeper of all records and therefore agents of trust. If I were to send someone money from my account, how can the recipient be sure that I didn’t already spend the money? In today’s environment, the bank ensures I do not overdraw or double-pay someone.
The creator of bitcoin needed a mechanism to ensure trust between two anonymous parties. The goal of blockchain was to replace the responsibility of the bank. Because there was no centralized ledger of transactions, he created a method to tie each transaction to the previous transaction. This is a chain of transactions, or blocks.
This chain of transactions is distributed across many computers and is used as a form of authentication. If a transaction doesn’t match the the chain of transactions, it likely isn’t valid and will not be added to the chain.
Blockchain validates bitcoin transactions and stores these transactions across a number of hard drives so the likelihood of a breach of trust is virtually zero.
Google vs. Microsoft
To get a better understanding of how blockchain compares to a standard bank, compare Google Sheets to Microsoft Excel. They are both similar software with similar functions and uses. A main difference between the two is how you send and receive updates when collaborating with someone.
Traditionally with Microsoft Excel you must make your updates, save it and then send it to someone else for them to make updates. Then, you have to wait for it to be sent back. Only one person can edit this file at one time. You are reliant on a some sort of version control to know which is the most accurate version.
This is how banks operate with traditional transaction environments. Only one person can access funds at a time. You initiate a transaction, then wait.
With Google Sheets multiple people have access to the same single version at the same time. They can view and edit the document without sending it back and forth. Version control isn’t needed because it is a main component of how the software functions.
Blockchain uses distributed, linked ledgers as a way to eliminate version control from banks or any other intermediately. While Google Sheets does not run on blockchain, the analogy is useful. The purpose and general functions of Google Sheets and Microsoft Excel are the same. The main difference is in how it accomplishes the general functions.
How, not what.
Blockchain is a method to ensure integrity of transactions between two parties. It isn’t just a peer-to-peer network or distributed network. It also isn’t just a ledger of accounts. Blockchain is a system to fulfill the responsibilities of a centralized, authorization organization in a distributed, anonymous and secure manner.
Blockchain has been used outside of bitcoin and currency for some time. Music companies like PledgeMusic are using blockchain technology to ensure artists are paid when fans listen to or download their music. Blockchain is used as the intermediary. AScribe is a service for artists to sell their work online and protect against copyright infringement.
Like the Google Docs analog and bitcoin, these two companies are using blockchain in how they conduct business not as what they do. Blockchain isn’t something you do, it is a way you conduct the technology side of your business. So, when someone says they need to adopt blockchain or “do” blockchain, they must clarify exactly the goal they are trying to accomplish.