How Does Bitcoin Work?
Hint: It’s not all about bitcoin
If you invest in the stock market, even a little bit, you’ve probably heard the term “blockchain.” Most of us know it has something to do with the technology behind those red-hot bitcoins that have made millionaires out of mere mortals in recent years.
But what is blockchain? Do small and mid-sized businesses (SMBs) really need to understand it? And, if so, what should they do about it?
First of all, let’s be clear: if you never do anything with blockchain technology, in all likelihood you will be just fine. It’s not for everyone. Yet, at the same time, if you completely ignore it, you are really limiting your opportunities for growth and allowing competitors to leapfrog you in this increasingly digital world.
The most important thing to know about blockchain is that it isn’t just an enabler for bitcoin. It has widespread applicability to markets beyond financial services, including healthcare, education, retail, oil & gas, manufacturing and telecommunications. In fact, analysts project the global market for blockchain-related hardware, software and services will be worth anywhere from $7.6 billion to $60 billion by 2024.
That’s a huge range because this technology is definitely in its early stages, and it’s difficult to tell at this point how various industries will utilize it, to what extent and how it will evolve technically.
What is known at this point is that blockchain is considered incredibly promising - because of what it is.
What is Blockchain?
At a basic level, blockchain is a decentralized, trusted ledger for keeping track of online records. There can be public or private logs, each with different levels of identity and access requirements. Records stored on a blockchain can include information about people, companies, assets, transactions, contracts or just about anything else you might want to store in the cloud.
Because every line item in a blockchain ledger is linked to previous transactions, encrypted and stored across a decentralized network (rather than on a central server), blockchain records are difficult to modify or spoof. So, there is a high degree of confidence that this data is authentic and accurate enough to be shared for important matters requiring some amount of confidentiality.
For instance, if you wanted various health researchers or pharmaceutical companies to be able to review your medical records for a procedure you’re considering, blockchain would help you move encrypted information around with minimal risk of privacy breaches. Similarly, if you’re a small or medium insurer, you could share proprietary risk criteria with underwriters related to things like route, weather and vehicle types in order to determine coverage rates for a transport company.
So What, You Say?
Well, if you’re an SMB owner or operator, you should care about this because as businesses continue a trend toward digital transformation, blockchain will most likely be a mechanism companies use in most contractual situations.
As the technology underlying cryptocurrency, blockchain has already proven its worth for assisting with monetary exchange. Indeed, some more technically creative small and midsized businesses already dabble in using cryptocurrency for paying vendors and suppliers.
Where the technology will really help SMBs is in contractual situations. For a blockchain to work properly, parties need to agree to pre-established terms related to the nature of the transaction and how they will work together. Once this happens, blockchain can help create a “smart contract” where the parties can exchange almost anything of value without having to use a middleman. It basically helps you create the transaction by recording it on the participants’ individual blockchain ledgers, verifies the transaction, secure it with encryption and enforces key provisions, such as net payment terms.
For SMBs, anything requiring a business contract could eventually be powered by blockchain. Whether it’s an insurance policy, commercial lease or loan payment, it will probably be tracked and enforced through a decentralized ledger at some point.
I Don’t Need to Do Anything Now, Right?
Blockchain is on everyone’s radar right now, but that doesn’t mean everyone is jumping to embrace it just yet. According to SMB Group’s 2017 SMB Digital Transformation study, only 18 percent of SMBs are currently using it. And only 1 percent of enterprise organization CIOs indicated any kind of blockchain adoption within their organizations, according to Gartner's 2018 CIO Survey.
Part of the hesitance has to do with the fact that current blockchain platforms are still immature and relatively unproven for mission-critical applications. And they are right to be concerned.
Thus far, blockchain platforms haven’t been able to handle high transaction rates. The fastest existing blockchain is thought to handle about 500 transactions per second, which is well below the level required for high-volume payment system requirements. Blockchain performance also tends to bog down, at times, when handling more complex smart contract tasks, something that will have to improve if the technology is to truly become mainstream. In addition, blockchain adoption is slowed by a lack of understanding about its applicability as well as a shortage of technical expertise for implementing it.
All of this said, SMBs should still start looking into blockchain technology because of its promise for creating a trusted, universal platform for connecting organizations, people and machines in meaningful ways. The platform may not be ready for widespread deployment, but this will change as platforms become more stable, scalable and better understood.
To stay ahead of the technology curve, start thinking through potential use cases and experiment with small blockchain pilot projects. A few advance trials can put you ahead of the game - and your competitors - when blockchain becomes a more common way of doing business.