The 2020 Mid-Year Economic Update_long

What is Blockchain, Anyway?

Some basic facts on a potentially explosive technology
Declan

Ask that question at a dinner party and you’ll get either a blank stare, or someone will tell you it’s the same as bitcoin (it’s not) or that it’s a truth machine (not really) or that it’s going to have a bigger impact than the Internet (possibly, but not for a good while). Generally, however, you’ll find that people are short on specifics, not least because blockchain is one of those things that seems to get more complex in its details and bigger in its implications the more you study it.

But here, at least, are a few facts to help get you started.

Blockchain has its roots in the financial crisis of 2008, when the global financial system came close to complete collapse. In its wake, some computer scientists, including one named Satoshi Nakamoto (who may not even be a person at all but several people operating under a pseudonym), began to consider ways in which financial transactions could safely be made on a peer-to-peer basis, without the need of a financial intermediator. The main challenge was how to solve the “double spending” problem in a low-trust environment such as a computer network; in other words, how to ensure that once an online transaction has been made, that transaction is indelibly recorded, without any possibility of bad actors trading the same financial instrument more than once. The double-spend problem has for centuries been solved by banks and other financial institutions that clear transactions and keep records. But in the wake of financial crisis people were searching for other methods. The solution that Nakamoto came up with was blockchain.

Very simply put, blockchain is what is known as a distributed ledger, that is, an index of transactions where each exchange is ratified not by a central authority but by a majority (at least 51 percent) of users on a network using something called a consensus algorithm. Every ten minutes, the transactions that have been conducted during that time period are divided into a block, which is then encrypted by an extremely computing-power-intensive process known as “mining” and becomes a permanent, immutable part of the chain. A copy of the complete chain is housed locally on every computer on the network. The distributed nature of the system, the complexity of encryption and the permanent nature of the chain make hacking and malfeasance extremely difficult even in the absence of a traditional central authority. 

Blockchain was used initially for a single purpose, the trading of a crypto-currency known as bitcoin, which probably accounts for why the two are so often confused. Entities on the bitcoin network (sometimes individuals, sometimes syndicates that pool their computing power) earn bitcoins as a compensation for the time and computing energy used to “mine” the data, that is, finding the cryptographic solution to securing the latest block of transactions and adding it to the chain (this is where the computer science becomes kind of complicated). It quickly became apparent, however, that a greater potential benefit of blockchain technology is easy multi-party access to secure real-time data and the associated ability to generate more efficient processes, both in and outside of business. Blockchain data has a number of important advantages over traditional data storage options such as cloud servers. First, its state-of-the-art cryptography makes it very difficult to tamper with. Second, its distributed nature means that there is no central point of failure, making it very robust. Third, the nature of the blockchain means that you have a perfect audit trail that allows you to view the full history of any piece of data back through time. Lastly, its process integrity means that any data that a user adds to the chain is not validated until the integrity of the user is confirmed by a majority of users on the network. 

All of these factors mean that blockchain has significant implications for the distribution industry, especially in the management of supply chains. In the next edition of MDM Premium, due out on December 10th, we’ll be taking a look at what some of those implications are. In the meantime, if blockchain should come up at any holiday gatherings, you’re covered.

To learn more about MDM Premium click here or on “MDM Premium” at the top of the MDM home page.

 

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