The One-Sentence Definition

A blockchain or distributed ledger is, in very simplistic terms, a kind of highly secure database – a way of storing information, in other words.

What Are Blockchains and Distributed Ledgers?

IBM CEO Ginni Rometty has said, “What the Internet did for communications, I think blockchain will do for trusted transactions.”¹ That’s quite a strong prediction. So what’s so special about blockchain technology?

In today’s digital age, storing, authenticating, and protecting data presents serious challenges for many organizations. Blockchain technology promises a practical solution to this problem, providing a useful and secure way to authenticate information, identities, transactions, and more. As we’ll see later in the chapter, this makes blockchain an increasingly attractive tool for industries like banking and insurance, among others. In fact, blockchain can be used to provide a super-secure real-time record of pretty much anything: financial transactions, contracts, supply chain information, even physical assets.

Blockchain, then, is essentially a way of storing data. To put it in more technical terms, it’s a form of open, distributed ledger (i.e. a database), where the data is distributed (i.e. duplicated) across many computers and is typically decentralized. It’s this decentralization aspect that makes blockchain so transformative. For one thing, it means there’s no one central point of attack for hackers to target – which is part of what makes blockchain super-secure. (While nothing is totally “hack-proof,” blockchain represents a significant leap forward in information security.) But the decentralized nature of blockchain also means data can be verified by user consensus, in a peer-to-peer system, rather than being processed and controlled by one central administrator – more on this coming up.

In case you’re wondering where the name comes from, records in a blockchain are called “blocks” and each block is linked to the previous block, forming the “chain.” Every block has a time and date stamp, noting when the record was created or updated. The chain itself can be public (like Bitcoin) or private (like a banking blockchain) – this is a key point that I’ll revisit later. And when changes are made to a block, the whole blockchain is kept in synch and each user’s copy of the blockchain is updated in real time.

Whether the chain is public or private, users can only edit parts of the blockchain by possessing the cryptography key needed to alter the file. To illustrate how this works in practice, I often use medical records as an example. Imagine a digital medical record as a blockchain. Each entry (e.g. a diagnosis and treatment plan) is a separate block, with a time and date stamp that marks when the record was created, and only people with the cryptography key can access the information in that block. So, in this case, the patient might have the key that allows them to give a consultant and the patient’s GP access to the information. Information can be shared with another party – say, between the consultant and the GP – but only with permission, using the secure key.

I briefly mentioned Bitcoin as an example of a public blockchain. Many people think blockchain and Bitcoin are the same thing, but they’re not. The digital currency Bitcoin functions using blockchain technology – blockchain provides the public ledger for Bitcoin transactions – and Bitcoin was the first example of blockchain in use. But blockchain has many applications beyond cryptocurrency.

Before we delve deeper into practical uses of blockchain, there’s another important distinction we need to make: the distinction between blockchains and distributed ledger technology. Strictly speaking, the two terms aren’t quite interchangeable. Blockchains and distributed ledgers certainly overlap a great deal, which is why I’ve combined them into one chapter. Both, for instance, refer to information being distributed across a network, and both serve to enhance security. But there is a difference. It’s perhaps more accurate to say that blockchain is one way to implement distributed ledger technology, but not the only way.

Here’s the key difference: blockchains are generally public, which means anyone can participate in the chain and anyone can validate information – it’s a truly decentralized, democratic system with no one body or person being “in charge.” Bitcoin is the perfect example of this kind of public blockchain. With Bitcoin, transactions aren’t verified by a trusted organization, like Visa or Mastercard, but by the Bitcoin community in a peer-to-peer system. A distributed ledger, on the other hand, could be private, meaning access is restricted by one centralized body (say, a company or government agency). So a distributed ledger isn’t necessarily decentralized and democratic – but the information is still distributed and generally far more secure than in traditional databases. A good way to sum up the difference is: a blockchain is typically open and permissionless, while a distributed ledger tends to be permissioned.

For ease, I use the term “blockchain” throughout this chapter. However, strictly speaking, many of the applications and examples outlined in this chapter are examples of private distributed ledgers, rather than a public blockchain. Either way, the technology promises to revolutionize many aspects of how we do business. Blockchain fans predict it could be as disruptive as the internet was before it.

How Are Blockchains and Distributed Ledgers Used in Practice?

While it’s true that early adopters of blockchains have been using the technology for financial transactions, we’re likely to see blockchain being used far more widely in the next few years. Medical records, transfer of ownership records, property transactions, HR records – any process of recording, overseeing, and verifying information could be enhanced by blockchain technology. In theory, any centralized, unwieldy, and unsecure ledger system could be replaced with a streamlined, distributed blockchain system for record keeping. What’s more, Blockchain’s approach to encrypting information could also be adopted as a way to secure IoT devices (see Trend 2).

Let’s explore some real-world examples of how organizations are beginning to use blockchain technology to their advantage.

Key Challenges

There will likely be challenges around industry regulation – just look at the scrutiny Facebook has attracted over its Libra cryptocurrency plans – and we can expect regulators to pay greater attention to blockchains in future.

But, right now, the biggest challenge for those looking to adopt the technology is the fact that blockchain is still in its infancy. In fact, it’s fair to say the technology is about as mature as the internet was in 1996. We’re a long way off blockchains becoming the norm, in other words. Those who rush in at this stage, without a clear plan of how they want to use blockchain technology and what they want to achieve, could end up wasting a lot of time and money.

It’s the old “fear of missing out” thing. Companies who keep hearing blockchain is the next big thing become desperate to demonstrate how cutting edge they are. As a result, they dive in and adopt new practices that are badly conceived and ultimately don’t deliver real value. So, while I firmly believe blockchain has the potential to transform many aspects of business, that transformation is likely to be gradual. There will undoubtedly be false starts and failures along the way.

How to Prepare for This Trend

In the long run, I believe blockchain will bring many benefits to businesses, including:

• Reduced costs – by reducing or eliminating the need for “middleman” services, blockchain promises to remove the financial burdens involved in making and recording transactions.
• Increased traceability – because every point of a supply chain could in theory be reliably recorded in a blockchain.
• Enhanced security – thanks to blockchain’s encryption, handling and securing sensitive data is likely to become a lot easier.

Although it may take years for blockchains to become commonplace, companies can’t afford to be caught out by what’s coming. When it fully takes off, the impact will be significant – just as it was with the internet. Therefore, I’d advise all business leaders to keep abreast of what’s happening in blockchain technology and begin to consider the practical implications of blockchain for their business.