6 Essential Blockchain Technology Concepts You Should Know
The application of Blockchain technology is changing the world of business and trade finance. Find out what you need to know here now.
Blockchain technology can enhance basic services that are essential in trade finance. At its core, blockchain is based on a decentralized, digitized, and distributed ledger model. By its nature, this is more robust and secure than the proprietary centralized models currently used in the commercial ecosystem.
Blockchain technology creates a viable and decentralized registry of transactions, the distributed ledger, which allows the replacement of a single master database. It maintains an immutable record of all transactions, back to the point of origin of a transaction. This is also known as provenance, which is essential in trade finance as it allows financial institutions to review all steps of the transaction and reduce the risk of fraud.
The blockchain application also offers a much better means of establishing and proving identity than current systems. Blockchain technology greatly simplifies the direct transfer of business assets and increases confidence in their provenance. This is achieved by providing unique and unfalsifiable identities for assets, along with an inviolable record of their ownership. The result is an opportunity for additional financial services based on the trading of physical goods.
1. Blockchain and Bitcoin are not the same
Many people assume that blockchain and bitcoin are the same. Blockchain is the underlying technology of Bitcoin. They are closely related, but they are not the same.
In 2008, Bitcoin was introduced as a type of unregulated digital currency created by the pseudonym Satoshi Nakamoto. Blockchain was the accounting solution used to securely record and facilitate the use of this new currency, as there was no bank or government involved to monitor or police the transactions. As such, Bitcoin can actually be considered as the first use case leveraging blockchain technology. The confusion between blockchain and bitcoin often arises because these two concepts were introduced at the same time.
Blockchain Transactions and Bitcoin
Since the introduction of blockchain technology, it has been extrapolated for use as an accounting solution in many other industries involving assets other than currency. These fields include healthcare with patient records, business finance, and owner of a bill or purchase order, as well as insurance and who has title to a house or car.
Bitcoin is known as a cryptocurrency and the first decentralized digital currency of its kind. It was released as an open source solution to work without a central repository or single administrator. Bitcoin transactions are transferred and stored using a distributed ledger on a shared network that is open, public, and anonymous. Blockchain is the underlying technology that maintains the transaction ledger for Bitcoin transactions.
Blockchain technology, such as that used for Bitcoin, allows the recording of transactions in a distributed ledger through a network of users. Open source technology allows transaction data to be stored in blocks. Each block includes a time-stamped record of transactions with each block linked to the previous one, thus creating a chain. The information stored on the blockchain is completely transparent and permanent without the ability to change or delete previous transaction data from the distributed ledger. This feature and solution can be used to solve many inefficiencies in different applications and industries.
While blockchain is an excellent option for a digital currency, it can be used to maintain a reliable audit trail of ownership of a wide range of asset types. These can be intangible (eg trade finance assets) and tangible (eg diamonds). This creates a very diverse choice of blockchain applications for multiple sectors and institutions, including the Marco Polo Network (formerly known as TradeIX), which focuses on the trade finance industry with dedicated solutions leveraging blockchain technology.
2. The data stored on the blockchain is public
. This statement is partially correct. Some public blockchains are open, while others are private and accessible only to specific users. The use case will determine what type of blockchain is needed. There are basically three types of blockchains.
In a public blockchain, a user can become a member of the blockchain network. This means that they can store, send and receive data after downloading the required software on your device. Allow anyone to read and write the data stored on the blockchain, as it is accessible to everyone in the world.
A public blockchain is completely decentralized. Permissions to read and write data to the blockchain are shared equally among all connected users, who reach a consensus before any data is stored in the database.
The most popular example of a public blockchain is Bitcoin. Digital currency allows users to use a platform to transact directly with each other.
Smart Contracts: The Business Process Enablers for Blockchain
With so much being talked about and written about blockchain, the technology seems in danger of being misunderstood by the general public. To them, it is no longer a technology, but a one-man gang…
Smart Contracts: The Business Process Enablers for Blockchain
With so much being said and written about blockchain, the technology seems in danger of being misunderstood by the public in general. . To them, it’s no longer a technology, but a one-man gang that can do anything: enable bitcoin, secure data, make coffee, and more!
Demystifying the common hype around blockchain, we can simply state that it is “just a database”, a secure, decentralized and transparent container of data that features a clever concept: link each piece of data with the previous one using cryptography. Therefore, each transaction is linked to the previous transaction through hash algorithms that reduce the amount of data contained in the transaction to a single, fixed-length string. This string is then added to the next transaction and recomputed creating the ‘string’.
But here, we are not exploring how blockchain works, rather we will delve into how it can be adopted in the enterprise business model to take advantage of the many benefits this exciting technology has to offer.
Since a business is a complex setup, it involves processes to connect people and their use of information for various everyday purposes. A process is a formal procedure used to accomplish a specific action or transaction. Sometimes processes may need only coordination with people within the organization, and at other times these processes may require collaboration and partnership with other organizations for various business goals.
This “Business Process”, as it is commonly called in an organizational environment, could be an order, an invoice or a payment, all transactions involving people and data. And blockchain can help organizations secure all of these transactions.
But can transactions be secured using a database? No they can `t!
There has to be a layer of “logic”, more precisely, business logic to fuse this data with the actions that people can take using it. And, smart contracts are this layer of business logic, which allows the blockchain to support the fulfillment of a business process.
In a nutshell, smart contracts manage transactions in an automated and pre-programmed way.
The common logic used to complete a transaction is ‘If-this-then-that’ or ‘after-this-then-that’. Therefore, it is a logical orchestration between subjects (or things) involved in the transaction.
You can define the terms, events, and signature required to complete the process. If the product is not tangible, you can choose Digital Rights Management (DRM) to manage access or control rights to the digital assets in the smart contract.
Smart contracts are executed in an automated way and do not need human intervention or paper trails. They are decentralized and at the same time secured.
They can be divided into two broad categories: smart and code-based legal contracts.
Code-based smart contracts, which are based on applications, can be divided into three subtypes: DAOs (decentralized autonomous organizations), DApps (distributed applications), and IoT blended contracts.
Smart Legal Contracts combines a legal template with business logic and aims to digitize legal contracts.
Smart legal contracts: Cicero’s concept: Courtesy of accordproject.org. To learn more about this open source project, click here.
The subcategories of code-based smart contracts (DAOs, DApps, and IoT combined) are for managing business processes within or between organizations.
DAO (Decentralized Autonomous Organization)
DAO aims to codify the rules of an organization in a computer program to achieve transparency. Since such an organization is controlled by shareholders and not influenced by a central government, transaction records are facilitated by the smart contract system.
DApps (Distributed or Decentralized Applications)
These software applications run in a P2P environment and are not hosted on a central server. They use blockchain to store data and as such the program is designed in such a way that it is not controlled by a single entity. Smart contracts need a network to function, and DApps help integrate their use efficiently.
IoT blended smart contracts enable business transactions through IoT-enabled products and are used to govern and manage interactions between multiple devices, meeting monetization or security needs for the Internet of Things.
In the next article in this series on smart contracts, I will discuss the potential application of smart contracts in the enterprise and the security of smart contract execution with some real business use cases.
My article was published by The Digital Enterprise.
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What are smart contracts in blockchain?
Learn about smart contracts and how a blockchain network can automatically execute a contract when predetermined terms and conditions are met.
What are blockchain smart contracts?
Smart contracts are digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met.