As Fastmarkets begins a series on the use of blockchain in commodities, we take a look at the basic concepts in a guide for beginners.
What is blockchain?
Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets. In other words, it is a record of deals and data that can be shared among members of a network and that cannot be changed.
Wait, so what’s Bitcoin?
It is totally different. Bitcoin is a digital currency, but it uses blockchain technology as its transaction ledger.
Okay. So what do you mean by tracking an asset?
You can track pretty much anything. A vehicle, a property, a ship, a banana, copyrights, patents, production logs, an aluminium ingot.
You can record anything from moving money between a buyer and seller to sending goods from one location to another.
How does it work?
At its most basic, blockchain has to gather and order data into blocks and then chain the blocks together. Once data is in the chain, it is connected to the block before it and after it, creating a chain that cannot be altered, not even by a system administrator. The ledger is shared to nodes on a permissioned basis, so only approved parties get to see it.
Think of blockchain as your computer server. A node is basically the essential infrastructure. Data in blockchain is stored in blocks on a node. Every node can send or receive data from another node, with the data synchronized across the network as it is moved around. As each transaction occurs or asset is tracked, the details - which all nodes have to agree to - are encoded into a block of digital data with a unique identifying mark.
So everyone has to agree?
Yes, blockchain works on a consensus model. Everyone in the network relevant to a particular transaction or asset has to agree that the information is valid. They do this through algorithms, which vary from network to network. This means there is no need for a central authority to approve transactions, like a government or a clearing house; it is decentralized, with verification coming from the consensus of users.
How do you stop people from tampering with the data?
Through the use of a hash. A hash is a string of characters unique to each block of data. The hash from one block is chained to the next and so on through the chain. Try changing the data in a block and it will alter the hash, preventing it from matching up in the chain. This disruption automatically alerts everyone that the chain has been altered.
What is a smart contract?
A smart contract is a piece of computer code that sets out the rules for each transaction, agreed on by everyone. It is stored in the blockchain network, available to participants through their databases. If certain conditions are met, certain actions are triggered. This helps create trust and is extremely efficient - smart contracts are self-executing, eliminating the need for paperwork and manual processes.
Why do we need it?
Many processes still rely on paper or email - both of which can be altered, hacked or open to fraud - to transfer data. It is also extremely time consuming - the time between transaction and settlement can be long and manual processes slow things further, making it inefficient. Transparency is limited, information is often inconsistent, processes are slow and mistakes are made. Blockchain saves time, improves security, streamlines processes, improves auditability, enhances privacy and - once the initial cost of technology is overcome - cuts costs by reducing intermediaries and self-policing via permissioned access, among other factors.
What are the problems?
Regulation has yet to catch up. It is getting there slowly, but it will take time. It is also complicated. Most people do not really understand blockchain, so there is a lot of educational work to do to get people comfortable using it. There is also an associated cost for the development of technology for all participants involved in a network, particularly at smaller companies that rely on paper-intensive processes or within large corporations such as banks or retailers that need to overhaul their systems.