Here are four things to get your Finance Department caught up.
1. What is blockchain?
Blockchain is a live network of distributed ledgers, and like all ledgers, it’s used to record and verify transactions. Because it’s distributed, every participant in the network owns a full copy of the ledger on their own computers.
One of the many advantages of this approach is that participants in the network don’t need to trust each other to know that the ledger is accurate, because it can be accessed, traced, and verified at any time by anyone who has the software.
And because this ledger is both live and the information on it is constantly viewable by all users, experts say it cannot be tampered with, exploited, or hacked.
How does blockchain work?
In its simplest form, blockchain can be broken down into two main components.
The first is how the information is stored. Blockchain technology relies on a network of computers working together, simultaneously. This creates the distributed ledger. Each of these computers holds all the information on the blockchain. When there is an addition or a change to the ledger (a new block of information), each computer on the network will store this new block of information as the newest link on the chain.
A blockchain can be either public or private, and a public blockchain can store private, encrypted information.
The second is how information in a block is created or verified. Each block of information is encrypted and then inextricably linked (chained) to previous blocks of information once consensus among participating computers is reached. In order for a block to be accepted by the network, it needs to be validated through a mechanism of computational work, and the change must be verified by more than 50% of the computers. Once the validity of the new information is confirmed by the majority of computers, that block is saved as a new link in the ledger.
Is blockchain secure with all of this information and these computers connected?
First, every transaction is masked by a system of irreversible computations, which protects the sender and receiver’s personal information. Then, the transactions are recorded and verified on the ledger.
A successful hack on the blockchain would require knowing the sender and receiver’s private information, then finding the block (in a long chain of blocks) where their transaction occurred. The hacker would then need to not only change the information of that block, but also alter all of the blocks that come after it (because the information is linked), all while convincing the computers in the network that your new version is the real ledger.
As Kharim Lakhani, a Harvard Business School professor, said in an interview with HBR IdeaCast, hacking blockchain requires a “James Bond-level villain”.
What are the benefits and challenges for blockchain?
Some of the top benefits to blockchain are that it removes the need for intermediaries (the “middlemen”), and consolidates a sprawling, siloed technology infrastructure that’s so common in modern businesses, making inter-departmental collaboration much easier.
Plus, information is live, accurate, and easy to find — if you have access to it.
Some of the top challenges for blockchain are that while it’s a great resource for storing and sharing data, it struggles with high volumes or frequent processing, and is slower and more resource intensive than other forms of shared databases.