Many businesses are considering whether blockchain technology could help them achieve better financial returns, efficiency or security. Here are brief answers to some of the most frequently asked questions about blockchain technology:
- What is a blockchain?
At its root, blockchain technology represents a transactional system that allows for the tracking and/or transfer of assets, the recording of payments, and/or the memorialization of interactions among participants who require secure, trusted, and transparent record-keeping in a manner not achievable via traditional database and/or application-development architectures. Think of blockchain technology as an operating system that lets users independently validate the authenticity of the stored information. Cryptocurrencies and smart contracts are examples of applications that run on the blockchain “operating system.”
- How does a blockchain work?
Each blockchain supports a distributed database that serves as a digital ledger of transactions between accounts (or “addresses”). It’s “distributed” because identical copies of this transactional database are stored on computers that form a network. These computers are called “nodes,” and each one contains an equally authoritative record of transactions. When a “block” of transactions is validated by the governing mechanism of that blockchain, all nodes within the network recognize that validated block and append it to the prior transactional blocks — forming a chain of blocks, or a blockchain.
- How do blockchains interact with cryptocurrencies like Bitcoin?
Bitcoin and other cryptocurrencies are applications that run on a blockchain operating system. Technically, a cryptocurrency is a type of digital asset — a non-physical attribute that is created and/or recorded on a blockchain. Blockchain technology can serve many purposes beyond cryptocurrencies, such as identify verification or digitization of artwork and other property.
- How do I know whether my organization should use blockchain technology?
Organizations should only use blockchain technology in cases where traditional database technologies are not fit for the purpose. The litmus test for blockchain adoption boils down to two central themes: trust and resilience. If the issue you’re trying to solve doesn’t hinge on the trust of the network participants or the need for a highly resilient network of computers, you’re probably applying blockchain inappropriately. So, the litmus test should be:
Can this issue be solved with a traditional database technology?
Are speed and privacy bigger priorities than participant trust and resilience? Consider blockchain technology when traditional transaction models do not provide sufficient trust (of the participating parties) or resilience (of the underlying transactional systems).
- What are some use cases for blockchain?
Blockchain can be useful whenever the network participants must trust that transactions are recorded correctly, securely and immutably. Some common use cases for blockchain technology include contracts, regulatory compliance, controlled information-sharing among competitors, credentialing and a host of privacy-related applications. Other evolving use cases center on asset management, supply chain management, digital identity management, asset tokenization and transactions (security) clearing.
Blockchain is well suited to transactions that rely on intermediaries, because it will reduce the “friction” of added costs, delays, paperwork and the need to trust participants that are not a party to the transaction.
- Where should my organization start with blockchain technology?
An organization should weigh a variety of considerations as it plans its approach to blockchain technology.
First, the organization should realistically consider its long-term interest in the technology and its potential benefits. If an organization cannot pass the litmus test in question 4, it shouldn’t adopt blockchain technology. If an organization can pass the litmus test but does not have the current wherewithal to deploy blockchain in-house, it should consider collaborating with platform providers or vendors that have already developed solutions for related industries, products, services or business models. If blockchain development is consistent with the organization’s long-term technology and infrastructure strategy, the organization could develop custom applications to support a wide variety of functions — such as intercompany transfers, contract administration, supply chain management or human resources complaint adjudication.
For a more comprehensive introduction to these and other topics, see Blockchain 101 for business.
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