Click to learn more about author Haden Kirkpatrick.

From e-commerce and social networking to healthcare and insurance, more industries are handling large amounts of user data than ever before. Many crucial business decisions are made based on that data. They afford a better understanding of what consumers want and seek, and help companies improve the products and services they offer.

How all that data is managed, however, is an ongoing challenge. Traditional databases, designed pre-internet, are limited insofar as how much data they can house and how it can be utilized. And entrusting a third-party Cloud service with vast wells of data can be costly (and risky) to scale.

Currently, databases are maintained by a central authority. A user might be able to update information on a centralized server, but the permission to update it is still the province of that central authority. Plus, centralized systems have a single control point: one breach and all the contents of the database are exposed, as we’ve seen with high-profile data breach cases.

Blockchain provides a decentralized alternative and eliminates the risks associated with a “trusted” centralized system, like a bank. Bitcoin was the first to use Blockchain as a way of removing the trust and engagement necessary in a third-party facilitated transaction. It functions as a consensus-based network in which all users store and approve what information is being documented. Every update is encrypted and no one can meddle with the system without everyone on the network noticing immediately.

Which leads us to a very important question: What is Blockchain?

Blockchain: The Basics

If a bank ledger is like a spreadsheet that can only be updated one person at a time, then Blockchain is like a Google Sheet of ledgers that are stored on various servers in duplicate but linked to the participants in the chain. There’s no single control point, and everything is duplicated across a vast network of computers. In other words, Blockchains can be added to from multiple places at the same time, and each is recorded in chronological order and seen and verified by everyone on the network.

Plus, all updates are immutable — they can’t be changed or erased. To change a previous entry, someone would need to create a new event, which would then mean their ledger would conflict with the rest of the network. An effective hack in a Blockchain network would then require more than half of the participants editing or changing their records in the exact same manner, at the exact same time. This is why Blockchains are considered “unhackable.” Of course, this feat isn’t actually impossible; rather, it’s so procedurally and logistically difficult that it reaches the point of impossibility.

What’s being updated? In the case of Bitcoin, transactions. In broader terms, data. It can be anything from digital art to car insurance claims. The beauty is that two people can transact with each other over the internet without a “trusted” intermediary. That’s because the system itself minimizes the amount of “trust” required to keep everything on the up and up. For example, a set of nodes called “miners” compete to verify each transaction by solving an algorithmic problem. The miner who solves the problem first broadcasts it to the network for review. Once it’s approved, a “block” is born, wrapped in cryptography, and thus a transaction happens.

Why would these miners want to do math problems? Because they can reap one of two rewards: a transaction fee or new bitcoins for their services. That’s why miners are always watching the network, ready to pounce on a transaction in the queue.

Blockchain: The Benefits

Blockchain has myriad potential in the way of organization, ease of use and transparency. Here are some of its key qualities.

• One absolute database. With Blockchain, you avoid the confusion of having multiple versions of a ledger (again, think Google docs vs. spreadsheets), and gone are the days of inventing version-naming nomenclature on the fly (v1, v2, v3). Instead, you have one ledger shared across multiple computers, and every update is reviewed and approved by multiple parties. One ledger, one truth, zero confusion.
• Centralized databases are updated on a moment-to-moment basis, capturing the system’s status at a specific moment in time. Think of it like a timestamp.

Blockchains are updated in real time. You can take any data entry and trace it back to its origin. You know who created it and when, and that it’s been vetted. This leaves little doubt as to the legitimacy of any entry. It’s the kind of provenance coveted by data scientists and marketers, and it may inspire consumer confidence, especially in light of all the scandal around data misuse.

• Public or private. Blockchains don’t have to be public, either. They can also be set up to restrict user access without sacrificing all the perks of a “peer-to-peer” system. A private Blockchain has all the same features as a public Blockchain. The only difference is that it’s invitation-only, and validating a user might either be consensus-based or determined by the network’s pre-existing criteria. There could also be an “authority” that grants entrance, but once the user is in, they participate in all manners of a decentralized network.

Blockchain’s Limitations

However iron-clad Blockchain might sound, it still has some growing up to do. As with any new technology, businesses ought to proceed with caution — especially when it comes to sensitive data (car insurance claims, client info, etc.). Of major importance is the size of the network. If there aren’t many users on it, then data distribution will lack, leaving it vulnerable to attack.

Blockchain does, however, show promise. Promise for consumers who want to see where a product is created and by whom. Promise, too, for companies to demonstrate why the quality of their product has a reasonable price tag. Blockchain will continue to evolve and — like a node on the server — we’d all do right to keep an eye on its progress.

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