What is blockchain technology?

Blockchain technology is an advanced database mechanism that allows transparent

information sharing within a business network. A blockchain database stores data in
blocks that are linked together in a chain. The data is chronologically consistent
because you cannot delete or modify the chain without consensus from the network. As
a result, you can use blockchain technology to create an unalterable or immutable
ledger for tracking orders, payments, accounts, and other transactions. The system has
built-in mechanisms that prevent unauthorized transaction entries and create
consistency in the shared view of these transactions.

Why is blockchain important?

Traditional database technologies present several challenges for recording financial
transactions. For instance, consider the sale of a property. Once the money is
exchanged, ownership of the property is transferred to the buyer. Individually, both the
buyer and the seller can record the monetary transactions, but neither source can be
trusted. The seller can easily claim they have not received the money even though they
have, and the buyer can equally argue that they have paid the money even if they
haven’t.

To avoid potential legal issues, a trusted third party has to supervise and validate
transactions. The presence of this central authority not only complicates the transaction
but also creates a single point of vulnerability. If the central database was
compromised, both parties could suffer.

Blockchain mitigates such issues by creating a decentralized, tamper-proof system to

record transactions. In the property transaction scenario, blockchain creates one ledger
each for the buyer and the seller. All transactions must be approved by both parties and
are automatically updated in both of their ledgers in real time. Any corruption in
historical transactions will corrupt the entire ledger. These properties of blockchain
technology have led to its use in various sectors, including the creation of digital
currency like Bitcoin.

How do different industries use blockchain?

Blockchain is an emerging technology that is being adopted in innovative manner by
various industries. We describe some use cases in different industries in the following
subsections:

Energy
Energy companies use blockchain technology to create peer-to-peer energy trading
platforms and streamline access to renewable energy. For example, consider these
uses:

 Blockchain-based energy companies have created a trading platform for the sale
of electricity between individuals. Homeowners with solar panels use this platform
 to sell their excess solar energy to neighbors. The process is largely automated:
smart meters create transactions, and blockchain records them.
 With blockchain-based crowd funding initiatives, users can sponsor and own solar
panels in communities that lack energy access. Sponsors might also receive rent
for these communities once the solar panels are constructed.

Finance
Traditional financial systems, like banks and stock exchanges, use blockchain services
to manage online payments, accounts, and market trading. For example, Singapore
Exchange Limited, an investment holding company that provides financial trading
services throughout Asia, uses blockchain technology to build a more efficient interbank
payment account. By adopting blockchain, they solved several challenges, including
batch processing and manual reconciliation of several thousand financial transactions.

Media and entertainment

Companies in media and entertainment use blockchain systems to manage copyright
data. Copyright verification is critical for the fair compensation of artists. It takes
multiple transactions to record the sale or transfer of copyright content. Sony Music
Entertainment Japan uses blockchain services to make digital rights management more
efficient. They have successfully used blockchain strategy to improve productivity and
reduce costs in copyright processing.

Retail
Retail companies use blockchain to track the movement of goods between suppliers and
buyers. For example, Amazon retail has filed a patent for a distributed ledger
technology system that will use blockchain technology to verify that all goods sold on
the platform are authentic. Amazon sellers can map their global supply chains by
allowing participants such as manufacturers, couriers, distributors, end users, and
secondary users to add events to the ledger after registering with a certificate
authority.

What are the features of blockchain technology?

Blockchain technology has the following main features:

Decentralization
Decentralization in blockchain refers to transferring control and decision making from a
centralized entity (individual, organization, or group) to a distributed network.
Decentralized blockchain networks use transparency to reduce the need for trust among
participants. These networks also deter participants from exerting authority or control
over one another in ways that degrade the functionality of the network.

Immutability
Immutability means something cannot be changed or altered. No participant can
tamper with a transaction once someone has recorded it to the shared ledger. If a
transaction record includes an error, you must add a new transaction to reverse the
mistake, and both transactions are visible to the network.

Consensus
A blockchain system establishes rules about participant consent for recording
transactions. You can record new transactions only when the majority of participants in
the network give their consent.

What are the key components of blockchain

technology?
Blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is the shared database in the blockchain network that stores the
transactions, such as a shared file that everyone in the team can edit. In most shared
text editors, anyone with editing rights can delete the entire file. However, distributed
ledger technologies have strict rules about who can edit and how to edit. You cannot
delete entries once they have been recorded.

Smart contracts
Companies use smart contracts to self-manage business contracts without the need for
an assisting third party. They are programs stored on the blockchain system that run
automatically when predetermined conditions are met. They run if-then checks so that
transactions can be completed confidently. For example, a logistics company can have
a smart contract that automatically makes payment once goods have arrived at the
port.

Public key cryptography

Public key cryptography is a security feature to uniquely identify participants in the
blockchain network. This mechanism generates two sets of keys for network members.
One key is a public key that is common to everyone in the network. The other is a
private key that is unique to every member. The private and public keys work together
to unlock the data in the ledger.

For example, John and Jill are two members of the network. John records a transaction
that is encrypted with his private key. Jill can decrypt it with her public key. This way, Jill
is confident that John made the transaction. Jill's public key wouldn't have worked if
John's private key had been tampered with.

How does blockchain work?

While underlying blockchain mechanisms are complex, we give a brief overview in the
following steps. Blockchain software can automate most of these steps:

Step 1 – Record the transaction

A blockchain transaction shows the movement of physical or digital assets from one
party to another in the blockchain network. It is recorded as a data block and can
include details like these:

 Who was involved in the transaction?

 What happened during the transaction?
 When did the transaction occur?
 Where did the transaction occur?
 Why did the transaction occur?
 How much of the asset was exchanged?
 How many pre-conditions were met during the transaction?

Step 2 – Gain consensus

Most participants on the distributed blockchain network must agree that the recorded
transaction is valid. Depending on the type of network, rules of agreement can vary but
are typically established at the start of the network.

Step 3 – Link the blocks

Once the participants have reached a consensus, transactions on the blockchain are
written into blocks equivalent to the pages of a ledger book. Along with the
transactions, a cryptographic hash is also appended to the new block. The hash acts as
a chain that links the blocks together. If the contents of the block are intentionally or
unintentionally modified, the hash value changes, providing a way to detect data
tampering.

Thus, the blocks and chains link securely, and you cannot edit them. Each additional
block strengthens the verification of the previous block and therefore the entire
blockchain. This is like stacking wooden blocks to make a tower. You can only stack
blocks on top, and if you remove a block from the middle of the tower, the whole tower
breaks.

Step 4 – Share the ledger

The system distributes the latest copy of the central ledger to all participants.