A Simple Definition of Blockchain Technology and Cryptocurrency
Blockchain is the distributed ledger technology that bitcoin and many other cryptocurrencies run on.
It's like a ledger of transactions that, instead of being stored in your own desk at home, is stored and encrypted on thousands of computers around the world. All of these computers agree on which transactions have occurred and on what order they have occurred in.
Because anyone can download the blockchain onto their own computer and become part of the network, these distributed personal computers have the ability to be used to validate and add transactions. This allows blockchain to be a distributed system with no central authority.
When all of these distributed computers work together, they're able to validate transactions in a process called "mining" and by successfully validating a transaction and adding it to the block, a bitcoin is created.
With the lack of a central authority, a distributed public ledger can allow the blockchain to grow far beyond a decentralized database of cryptocurrency transactions.
Why is this important?
Cryptotechnology and blockchain technology has the potential to be as disruptive to society as the creation of the internet, affecting the way we transact with family, friends, colleagues, banks and customers. And bitcoin, the most recognizable cryptocurrency, put blockchain on the map, which has created a massive use case for the technology.
Since the first bitcoin transaction occurred in 2009, companies have come to accept bitcoin for payment, as well as a means to paying employees’ wages. Blockchain, meanwhile, is introducing greater security and efficiency in the critical processes of many industries.
What should companies do to prepare themselves to transact with cryptocurrency?
Cryptocurrency is volatile, so whether it’s adopted for investments or transactions depends on how risk averse the individual and business is — bitcoin’s value could be nothing tomorrow, and that’s important to keep in mind. There are also operational considerations, such as the administrative aspect — tracking trades, payments and receipts — and the custody aspect, which is how to store the currency securely.
Cryptocurrency lacks regulation, which means there’s no regulatory body to adjudicate a dispute. It’s intentionally decentralized. As a business or investor, that lack of regulation could be a serious threat. Any business owner looking to deal with cryptocurrency needs a very good understanding of it. Working with a trusted adviser who has knowledge to help a business through it is key.
Under what circumstances could cryptocurrency benefit a business?
A company that accepts bitcoin as a form of payment could potentially expand its customer base as a result. It’s a global phenomenon, so the move has the potential to open up the business to the international marketplace.
Cryptocurrency can also reduce payment processing fees because it has lower transaction fees than credit cards. Further, transactions are permanent so there are no questionable chargebacks. If managed correctly, transactions are secure thanks to strong encryption. It’s also a way for a company to diversify its assets.
How is blockchain technology being used?
Some countries and local governments have turned to blockchain to help ease the burden of real estate property sales and title transfers, thus reducing paperwork and making it more difficult to forge records.
Although a blockchain is not intended to replace the general ways in which a database is used, for many transactional systems, a blockchain could potentially replace the traditional database for systems involving asset ownership and asset transfer involving multiple parties.
Examples of systems currently being developed with blockchain technology include currencies, music distribution, supply chains, medical records, and identity.
Blockchain provides the health care industry with data exchange systems that are cryptographically secured and irrevocable — a good fit when working with patient data.
Banks have begun to implement blockchain to reduce fraud by spreading out information over the blockchain database where it’s verified on various terminals. They’re also using blockchain to transfer money faster and cheaper, and to more easily obtain compliance information on their customers when dealing with regulators.
In accounting, blockchain can reduce errors when reconciling complex information from multiple sources. It also can decrease the amount of time it takes to complete an audit and reduce fraud.
What are some security considerations, advantages and challenges of blockchain?
Blockchain networks have an auditable operating environment with comprehensive log data that can be tested for compliance, providing security through verified transactions, locked contracts on the distributed ledger and a single set of records that can be viewed by all members.
It has the potential to eliminate reconciliations, duplicate ledgers and disputes over contract terms. Efficiencies are gained since information is continuously updated and intermediaries are removed from the transaction process.
With the help of a trusted adviser such as The3rdParty.co, businesses can be ready when the opportunity arises to use blockchain technology.
Cryptocurrency and blockchain can be transformational for a business — they are important subjects to understand.