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Blockchain 101: A guide to blockchain technology (Part 1)

Author:

Kirsty Langan

Published On:

February 15, 2023

Published In:

Technology Insights

Blockchain 101: A guide to blockchain technology (Part 1)

In the first of a two-part feature we explore the fundamentals of blockchain, how it works, and address some misconceptions about blockchain technology. 

If you only have 30 seconds:

  • Having been a boardroom buzzword for years, real-world applications of blockchain technology are starting to come to the fore
  • The global blockchain technology market size was valued at $10bn in 2022 and is expected to grow at a compound annual growth rate of 87.7% from 2023 to 2030
  • Organisations need to be aware of the advantages and potential drawbacks of blockchain technology before making strategic decisions on its use

Blockchain is a word that will have been used in a lot of boardrooms around the world over the past decade or so, but until a few years ago only a small fraction of businesses will have actually had any direct experience of blockchain technology. 

More recently, though, there’s been a lot more real-world applications of blockchain coming to the fore. Having initially been developed to serve as a public ledger for the Bitcoin cryptocurrency, blockchains are now used in a range of industries including financial services, digital advertising, media and entertainment, manufacturing and retail. 

It’s certainly a fast-growing area; the global blockchain technology market was valued at $10bn in 2022 and is forecast to grow at a compound annual growth rate (CAGR) of 87.7% from 2023 to 2030, driven by increased venture capital funding in blockchain companies. 

It certainly might feel like now is the right time to get on the blockchain train. But in order to assess the impact and advantages blockchain technology could have for your organisation, first we need to understand what exactly the blockchain is and how it works. 

What is blockchain?

Blockchain is a distributed, immutable ledger that can record and track data of any type. This means that it isn’t held in a central location, but instead shared among all network participants. Once data has been recorded it cannot be altered or tampered with in any way.  

Data recorded on a blockchain usually pertains to assets of some sort. These assets can be tangible ones such as buildings, vehicles and land; or intangible ones, like intellectual property, patents or NFTs.

Blockchain technology allows these assets to be tracked and traded, giving all permissioned network members a single view of the truth. It’s a real-time, accurate record of ownership, orders, payments and so on in a secure, cost-effective environment. These qualities mean it is well-suited to a number of business cases, which we will look at more closely in the second instalment of this two-part feature.

How blockchain technology works

Every transaction recorded by a blockchain is stored as a block of data. This block isn’t limited to storing just ownership data, but it can also tell you who sold it, when, for how much, and many other things besides. When the block is recorded, it is instantly connected to the previous block linked to the asset in question, making a data chain that shows the complete history of the asset. 

As these blocks are connected sequentially, new blocks always go to the end and can’t be inserted in the middle of a chain to prevent tampering. Blockchains are governed by smart contracts, which are sets of predetermined rules that define how the blockchain is to be used, the legal conditions of each transaction, and the data that is recorded. Smart contracts are executed automatically, enabling transactions to be made quickly and smoothly. 

To ensure complete transparency, blockchains even record mistakes; should a transaction be recorded in error, then to correct the error a corresponding reverse transaction needs to be recorded as well. As blockchain records can’t be altered, both the mistake and the transaction will be visible for all network members to see. 

Different types of blockchain

Of course, not all blockchains are created equal, and there are some different types you’ll need to familiarise yourself with. The earliest example of a blockchain is the one that underpins Bitcoin, which is a public blockchain network. Anyone can join a public blockchain, making them great for trading cryptocurrency but mostly unsuitable for businesses.

For a less risky experience, organisations may want to consider a private blockchain network instead. In this case, the owner of the blockchain has full control over every aspect of its running and maintenance, and can even host it on-premises (as opposed to on a public cloud). 

The most common type of private blockchain is also known as a permissioned blockchain. The owner of the blockchain grants permission to relevant partners in order to control who can access it, as well as who can make transactions using it. Alternatively, organisations can opt to be part of a consortium blockchain, which involves a number of different businesses who all have responsibility for maintaining it and granting permissions. We’ll look at the best options for various use cases in the next instalment of this two-part blockchain feature. 

Common misconceptions about blockchain technology

As with all things that have been through the hype cycle, there have been a lot of myths and misunderstandings about blockchain in recent years. One of the most common is that all blockchains are linked to Bitcoin, or that blockchain and Bitcoin are the same thing. This simply isn’t true – there are many uses for blockchain that have nothing to do with cryptocurrencies whatsoever. 

Some might argue that blockchain is a solution without a problem; that there are no use cases for blockchain where a conventional database wouldn’t suffice. However, centralised databases have fewer security protections, changes can be made by bad actors out of the sight of interested parties, and the data is at risk of becoming corrupted. A permissioned blockchain is a much safer option.

There has also been some debate about the carbon footprint of blockchain, given the energy required to power it. While these concerns are quite legitimate, it should be noted that the Ethereum cryptocurrency blockchain has recently been able to reduce its energy consumption by 99.95% by changing the way its consensus mechanism works. 

For those who want to learn more about blockchain, there are some excellent resources freely available online. IBM’s Blockchain for Dummies is a constantly-updated guide to blockchain technology, while the World Economic Forum’s website hosts in-depth reports for registered users.   

Keep an eye out for the next blog in this two-part series where we will look at real-world applications of blockchain technology in business and help you to decide whether blockchain is right for your organisation. 

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