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Blockchain, Explained

A look at the advantages and pitfalls of decentralizing data in your operation.

Blockchain—it might sound a bit like a medieval fabric, but there’s nothing primitive about this database that upends expectations of what a digital archive is capable of.

Most databases provide centralized data storage, and people and systems who need access to the data must come to that single source to query and receive. 

Blockchain, however, is a decentralized database; there are multiple copies of the blockchain database, and each copy is considered a “peer” of the others.  When a change occurs to one copy, the technology works to ensure that the same change is applied to all, so in effect, there is no “master” database.

In a fully transparent, multi-party blockchain database, all of the participants hold their own copy of the database.  Any new data arrives in real time in each participant’s copy of the blockchain database. There is no need to consult a third party—each participant has an authoritative ledger.

Updating multiple copies in real time can allow multiple users to make edits to the same piece simultaneously instead of saving multiple versions or circulating a file or document from person to person. It can also be helpful in the case of a private database where only authorized parties can see the information. 

Two Functions, Three Concepts

Blockchain has two fundamental functions—record-keeping and transacting. 

1. Distributed record-keeping on blockchain provides the capability to store and manage static reference information that require high levels of trust—i.e., one where there is no central party or single trusted authority to control or solely access the information. This element is essential in the current digital environment where identity fraud is alarmingly prevalent.

2. Distributed transacting offers the ability for multiple parties to garner an unprecedented level of visibility and transparency into many kinds of transactions.  Consider the manufacturing industry, where each participant in a supply chain relies upon receiving and shipment information from a network of vendors.  On-time delivery of raw materials and/or components can make or break a small manufacturer’s production schedule and profitability.  Blockchain reduces information complexity, increases reliability of supply chain logistics and improves overall efficiency.

At the core of blockchain are three concepts:

1. Immutable ledger. The blockchain database is “insert only,” so accepted records cannot be changed.  (As such, blockchain is not appropriate if you would like the ability to correct any sort of transaction in the database after it has been committed to the database.)

2. Lack of data validation. Unlike traditional databases that perform logical checks on information prior to acceptance, blockchain does not validate data for accuracy nor completeness prior to it being logged.  Applications which use blockchain databases, such as smart contracts, may require some specific information to be filled out in a certain way in order to submit to the blockchain. 

3. Consensus. All blockchain participants must “accept” the transaction before it is immutably logged into the database.

Consensus, though, can be a double-edged sword.

One advantage of consensus is the real-time distribution of information to all blockchain participants. This drives significant efficiencies in supply chain management.

Another advantage is the trustworthiness of the data: that an immutable ledger cannot be altered after achieving consensus.  A manufacturer’s supply chain is typically populated with organizations that are several transactions away—six degrees of separation, if you will. Do you want to know all the participants in your supply chain?  Probably not—you just want your vendors to meet their commitments.  If you did try to track all of the participants in your supply chain, the complications would be horrendous.  But with consensus in blockchain, you don’t need to know all the participants—it’s multi-party—to still see what’s happening in the network in real-time.

The disadvantage of consensus is it performs no completeness or logical check on data recorded in the blockchain.  This means that specialized implementations may be required to meet the demands of your use case.  For example, if you need to know the country of origin for certain metals in the ledger to ensure they do not come from conflict zones, then you need an implementation of blockchain requiring that before consensus can be achieved.

Additionally, in terms of security, blockchain consensus does have the potential to introduce vulnerabilities. For example, a hacker could convince more than 50% of the blockchain databases that there has been an entry to the ledger.  In this scenario, the consensus ratio could be tipped, opening the door for malicious data to be accepted.  The good news is that this type of attack requires an enormous amount of computer-processing power.

For sure, there have been many advances as a result of the digital revolution, but for each advance, there seems to be a reactive menace that sometimes outweighs the benefits with risk.  For many of its practical applications, however, blockchain is fighting this trend, making business operations more efficient and secure.   

Brian Berry is a director with blumshapiro (www.blumshapiro.com), the largest regional business advisory firm based in New England, with offices in Massachusetts, Connecticut and Rhode Island.  He can be reached at [email protected]

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