Bitcoin and other cryptocurrencies are increasingly favoured by businesses around the world as a way of paying for goods and services. Blockchain is the technology that supports it, and is widely regarded as a safe and efficient money or data exchange system – if a little complex to understand for many of us! So how exactly does it work and how could blockchain technology benefit a small business like yours?
What’s the difference between blockchain and Bitcoin?
Basically, blockchain technology was invented to create Bitcoin. Bitcoin and other peer-to-peer digital currencies are not controlled by a central bank like the dollar or pound sterling, nor are they physical coins that you can hold or deposit in your bank account. They are decentralised digital currencies that only exist online and blockchain is the technology that enables transactions to take place.
How does blockchain work?
Think of blockchain as a public ledger where individual transactions are logged and confirmed, free from input or involvement by an administrator, owner or another third party. Transactions are completely anonymous and once a transaction has been entered in the blockchain it cannot be changed or altered. Essentially what you’re doing is transferring data, and the record of the transaction, say the transfer of ownership of a bitcoin, is facilitated by the blockchain.
What makes blockchain distinct from other databases, however, is that it’s not located on one server and isn’t controlled by an administrator. With blockchain, there is no master copy, rather it is managed by so-called nodes. The nodes have a copy of the entire blockchain and synchronise their copy of the blockchain with those of other users. The technology has been hailed as a game-changer because it allows one user to transfer data to another user safely and securely using a cryptographic signature and in such a way that everyone can be certain the transaction has taken place. In other words, with blockchain technology, there is no need for a so-called trusted third party (for instance, your bank) to facilitate this digital relationship!
The power of blockchain technology
The focus is now on exploring the algorithmic technology of blockchain through so-called ‘Distributed Ledger Technology’ (DLT) to help reform financial markets, create smart contracts, transform the way businesses operate and interact, help the government collect taxes more efficiently, ensure the integrity of official records – the list goes on. Don’t worry if you haven’t heard about DLT, the question is, how is blockchain technology deployed in this way likely to affect and/or benefit your business in the months and years ahead?
Improve cash flow
DLT can create ‘smart contracts’ that will trigger payment (for an invoice) almost as soon as the transaction is completed, helping to improve cash flow. The supplier, project manager or end-user signs off their respective block of the transaction and once the block closes, payment is automatically processed.
Cut out the middleman
Just as digital currency transactions are done peer-to-peer without incurring third-party bank charges, DLT will mean businesses will need fewer intermediaries to facilitate all kinds of transactions in future, saving them money. Of course, if you’re a facilitator of such transactions, you’ll have to think about how you can add value to the service you provide.
Produce records you and your customers can trust
With blockchain technology, records of how a product is made, what ingredients it contains, its provenance, or whether or not a certain procedure is being followed etc., will be more transparent and, once recorded, can’t be changed or altered. What’s more, the way information is updated means that everyone in the chain is able to share data and be sure that all copies will match each other at any one time.
Safer data management
Data management will no longer be centralised, require powerful IT systems or be as vulnerable. Blockchain technology means data will not be located on one server and instead of a single database, will consist of multiple shared copies of the same database, making it much harder to attack. For a small business, this could mean having to invest significantly less in expensive software or upgrades to protect systems while being able to verify or secure data easily and more efficiently.
As with all new technologies, it’s impossible to predict all of the potential uses or abuses but what is certain is that blockchain technology will disrupt business models in ways we can’t yet imagine – be prepared!