Blockchain technology was invented in 2008 but only came into the public conversation when Bitcoin was launched. Many people are aware of it as technology behind Bitcoin, but blockchain’s potential uses extend far beyond digital currencies. Those who admire it are well-known famous personalities such as Bill Gates and Richard Branson, and the best banks for small businesses and insurers are falling over one another to be the first to work out how to use it.
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Blockchain can be a confusing concept to understand. Luckily, we are here to simplify things. Blockchain technology is a relatively new concept and rapidly growing piece of foundational technology, like internet or cloud computing.
More importantly, similar data structures have existed long before the popular cryptocurrency bitcoin was conceived, however, principal theories of blockchain architectures used today were first outlined and defined in the authentic bitcoin white paper written and published by Satoshi Nakamoto in 2008.
As this nascent technology is ripe with ongoing innovations, it is best to keep an open mind and expect new related-technologies to continue to emerge. Below we are going to explore key definitions and concepts to understand the basic pillars behind this revolutionary technology.
What precisely the blockchain is, and why are Wall Street and Silicon Valley so excited about it? We will find out more about the existence and purpose of blockchain in this article.
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A blockchain is considered a continuously growing list of digital records in packages (called blocks) which are linked and secured using cryptography. These digitally recorded “blocks” of data are kept and recorded in a linear chain.
Each block in the chain contains data (e.g. bitcoin transaction), is cryptographically hashed, and time-stamped. The blocks of hashed data are drawn upon the previous-block (which came before it) in the chain, ensuring all data in the overall “blockchain” has not been tampered with and has not been altered.
Blockchain is thus, an algorithm and distributed data structure for regulating and managing electronic cash without a central administrator among people who know nothing about one another.
And really was made for the crypto-currency Bitcoin, the blockchain architecture was driven by a radical rejection of government-guaranteed money and bank-controlled payments.
Blockchain is a special instance of Distributed Ledger Technologies (DLTs), almost all of which have emerged in Bitcoin’s wake. Recently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect and join directly, removing the need for a third party.
Blockchain is the technology to give support to digital currency (Bitcoin, Litecoin, Ethereum, and the like). The technology agrees to digital information to be distributed, but not copied. That means each individual piece of information can only have the specific owner.
You may hear it mentioned as a “digital ledger” stored in a distributed network. Cryptography is quite beneficial in order to keep exchanges safe and secure, blockchain provides a decentralized database, or what is called “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.
For instance, picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is particularly was designed to regularly update this spreadsheet and you thus, have a basic understanding of the blockchain.
The information is constantly and continuously reconciled into the database, which is stored in multiple locations and updated instantly. That means the records are public and verifiable. Since there is no central location, it harder to hack since the info exists simultaneously in millions of places.
A block is a record of new transactions. When a block is completed, it is added to the chain. Hence, the name “blockchain”. Bitcoin owners have the authority of a private password which is a complex key to an address on the chain, which is where their ownership is recorded. Crypto-currency proponents like the distributed storage without a middle man, you do not need a bank to verify the transfer of money or take a cut of the transaction.
Bitcoin first began to appear in a 2008 white paper authored by a person, or persons using the pseudonym Satoshi Nakamoto. The white paper detailed an innovative peer to peer electronic cash system called Bitcoin that makes to happen online payments to be transferred directly, without any interference from the third party.
While the proposed bitcoin payment system was much more exciting and new, it was the mechanics of how it worked that was truly revolutionary. After releasing the white paper, it became strong proof and evidence that the main technical innovation was not the digital currency itself but the technology that lay behind it, known today as blockchain.
Even though, commonly associated with Bitcoin, blockchain technology has various applications. Bitcoin is merely the first and most well-known uses. In fact, Bitcoin is only one out of seven hundred applications that use the blockchain operating system today.
And if we talk about the one example of the evolution and broad application of blockchain which is entirely beyond digital currency, is the development of the Ethereum public blockchain, which is providing a way to execute peer to peer contracts.
Blockchain is a Distributed Ledger Technology (DLT) that was invented to give assistance to the Bitcoin crypto-currency. Bitcoin gains inspirations and motivations by an extreme rejection of government-guaranteed money and bank-controlled payments. The developer of Bitcoin, Satoshi Nakamoto predicted that people would spend money without friction, intermediaries, regulation or the need to know or trust other parties.
Technically, the original blockchain is separable from Bitcoin, but this report will show that the blockchain design is so specific and particular to Bitcoin that it is not a good fit for much else.
The central problem in electronic cash is spending double more than the income or earnings. Because pure electronic money is just information, nothing stops a currency holder from trying to spend it twice. Blockchain solves and resolves the Double Spend problem without a digital reserve fund or similar form of umpire.
Blockchain monitors or observes and verifies Bitcoin transactions by calling upon a decentralized network of volunteer-run nodes to, in effect, vote on the order in which transactions occur. The network’s algorithm makes sure that each transaction is unique and different.
Several thousand nodes make up the Bitcoin network. Once a majority of nodes reach and attain consensus that all transactions in the recent past are unique and different(that is, not double spent), they are cryptographically sealed into a block. Each and every new block is linked or connected to sealed blocks to create and build up a chain of accepted history, thereby preserving a verified record of every spend.
The Bitcoin blockchain’s functionality and security results or consequences from the network of thousands of nodes agreeing on the order of transactions. The diffuse and spreading nature of the network ensures transactions and balances are recorded without bias and are resistant to attack by even a relatively large number of bad actors.
Actually, the record of transactions and balances remains secure until a simple majority (51 percent) of nodes remains independent. Thus, the integrity of the blockchain has a requirement for many participants.
More importantly, one of the Bitcoin blockchain’s most innovative aspects is how it incentivizes nodes to take part in the intensive consensus-building process by randomly rewarding one node with a fixed bounty (currently 12.5 BTC) every time a new block is settled and committed to the chain.
This gathering and accumulation of Bitcoin in exchange for participation is known as the “mining” and is how new currency is added to the total system afloat.
In addition to the case of Bitcoin, blockchain stores the details of every transaction of the digital currency and the technology stop the same Bitcoin being spent more than once. And just consider the two entities (e.g. banks) that have to update their own user account balances when there is a request to transfer money from one customer to another.
They need to spend a considerable (and costly) amount of time and effort for coordination or collaboration, synchronization, messaging and checking to ensure that each transaction happens exactly as it should.
Typically, the money being transferred is held by the originator until it can be confirmed that it was received by the recipient. And with the assistance of blockchain, a single ledger of transaction entries that both parties have access to can simplify the coordination and validation efforts because there is always a single version of records, not two disparate databases.
Step 1. A wants to send money to B.
Step 2. The transaction is represented online as a ‘block’.
Step 3. The block is broadcast to every party in the network.
Step 4. Those who are in the network approve the transaction is valid.
Step 5. Then, the block can be added to the chain, which provides an indelible and transparent record of transactions.
Step 6. The money moves from A to B.
Blockchain has usages for more than just currency and transactions. The technology can work for almost every type of transaction involving value, including money, goods, and property. Its potential uses almost have no limits at all– from collecting taxes to enabling migrants to send money back to family in countries where banking is difficult.
Blockchain could also help to reduce and minimize fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.
A blockchain is decentralised storage of data and the most common type of data stored is transactions. Each transaction must pass validation, and that is where blockchain technology becomes a bit more complicated. Every blockchain “wallet” (think of this as a blockchain bank account) has both a public key and a private key.
The public key is not sensitive, but the private key is. Only the true account holder should have access to the private key (and if anyone gets hold of it, your account could be taken over). If you want to keep your coins super safe, then you should look for the best cryptocurrency cold wallets.
A wallet presents the public key along with a digital signature. This digital signature is unique and is only generated with the private key. By using the signature and public key, other nodes can verify that this is a legitimate transaction, all without ever revealing the private key.
The cryptography behind the public and private key system is much more complex. Public and private keys are not numbers like bank accounts. Rather, they use Secure Hash Algorithm 256 (SHA-256) and RACE Integrity Primitives Evaluation Message Digest 160 (RIPEMD-160).
Never heard of these algorithms? No worries. You do not need to understand them in-depth to use crypto-currencies. Just know that these algorithms are best for running the internet as we all are aware of it, encrypting web pages through SSL and TLS and more. In the future, other encryption algorithms will be useful for blockchains.
Just know that all this encryption and verification has some costs and expenses. Every node has a requirement of a lot of computing power to verify and authenticate all the transactions that ever happen and update its ledger accordingly. This is where mining comes into play. Users can earn small transaction fees as payment for verification.
By running the ledger this way, miners running nodes get paid and every transaction gets verified. It is an elegant system. But it is not all perfect. During periods of high transaction demand, there is a high chance or possibility of the fee going up or it may be expensive. If there are not enough nodes to go around, users can actually pay more to get their transactions processed sooner than others and miners may end up favoring the higher-paying transactions.
Those who pay lower fees will still get processed, but at a much slower rate, till the fee is too low, in which case nobody will bother verifying the transaction.
Aside from transaction fees, miners can also get paid in shiny new Bitcoins (BTC). By paying miners a fraction of a BTC on top of the transaction fee, new Bitcoins are drip-fed into the market. These non-mined Bitcoins get more difficult to mine as time goes on, until one day, there will not be any non-mined coins left and miners will only get paid in transaction fees.
In theory, if blockchain goes mainstream, anyone with access to the internet would be able to use it effectively to make transactions from one account to another. Currently, only a very small proportion of global GDP (around 0.025%, or $20 billion) is held in the blockchain, according to a survey by the World Economic Forum’s Global Agenda Council.
But the Forum’s research recommends this will increase significantly in the next decade, as banks, insurers and tech firms see the technology as a way to speed up settlements and cut costs. Companies have a racing competition in order to adapt blockchain include UBS, Microsoft, IBM, and PwC. The Bank of Canada is also making experiments with technology.
A report from financial technology consultant Aite estimated that banks spent $75 million in the year 2015 on the blockchain. And Silicon Valley venture capitalists are also queuing up to back it.
Blockchain and its Use in Small Businesses
A blockchain is a record of transactions. Furthermore, using blockchain, companies (or people!) can both make and verify these transactions. That is actually two very important concepts lumped together, so let’s take a closer look.
Let’s say that the lemonade stands in a town are all using blockchain technology to process transactions. Say, John buys a glass of lemonade from Sandy’s lemonade stand. And on John’s copy of the blockchain, he marks that transaction down: “John bought Lemonade from Sandy, $2.” His copy gets spread around town to all the lemonade stands and lemonade lovers and buyers, who add this transaction to their own copies. By the time John has finished drinking that lemonade, everyone’s blockchain ledger displays that he bought his lemonade from Sandy for $2.
Let’s get back to the part where John’s blockchain copy was sent around town. In reality, everybody else was not just adding his new block of data. They were verifying it. If his transaction had said, “Rishi bought Lemonade from John, $500,” then somebody else would have (automatically!) flagged that transaction.
Maybe Rishi is not an accredited lemonade salesperson in town, or everybody knows that that price is way too high for a single lemonade. Either way, John’s copy of the blockchain ledger is not accepted by everyone, because it does not sync up with the rules of their blockchain network.
A lemonade stand seems a little bit a simple way to explain and describe blockchain, but it gets the point across: Adding a transaction to a blockchain involves getting it verified. Whatever your “network” is, whether its lemonade stands or big banks, everyone will have agreed to rules that determine which transactions are valid and which are not.
In fact, this “democratic” system of security is one of the biggest reasons why so many people are flocking to blockchain right now. No one can make alterations in the records, so blockchain is a trustworthy and fair source of information that anyone can verify.
Let’s look at the advantages and disadvantages of using blockchain.
Blockchain technology has the following major advantages:
Since everyone in a blockchain network has access to the ledger and the rulebook, nobody involved gets left behind. You can see who owned or paid or gave or did what, at various points in time, whenever you want or need. It is a totally transparent system.
Since everyone has a copy of the ledger that they use to validate the newest version, it is a democratically secured system, too. There is no single company or agency with extra power. Everyone is in charge.
(iii) Instantaneous transactions
Blockchain transactions take way less time than transactions that involve some sort of middleman, simply because they are self-validating.
(iv) No central authority:
This one might sound a bit abstract, who cares if some sort of authority is watching over your transactions? But here is the deal: When there is a middleman, that middleman tends to slow things down and skim off the top, taking transaction fees and charging late penalties and all that business.
(v) The double-spend problem is solved:
One of the major benefits of blockchain technology is that it solves the double-spend problem. Here is the short of the double-spend problem: Because digital money is just a computer file, it is easy to counterfeit with a simple “copy and paste”.
Without blockchain, banks keep track of everyone’s money in their accounts, so that no one “double-spends”—or spend the same money twice. Blockchain solves this problem differently and more efficiently than banks: it makes all transactions and accounts public so it is blatantly obvious when money is being counted or used twice. (Do not worry, your personal information is not included on the blockchain, though.)
Using blockchain can potentially speed up transactions while cutting costs associated with third-party banks and lowering the risk of fraud. That means more speed, affordability, and security for everyone.
In contrast to its advantages, there are a couple of challenges to implementing blockchain. These are given below:
(i) For blockchain to work, everyone needs to cooperate
In order to belong to a blockchain network, each company needs to be upfront and forthcoming about their own security protocols. Transactions added to the blockchain need to be transparent to everyone else, so they can verify the blockchain. That is the point, which means that, while a blockchain can be encrypted to protect itself against hackers, the data in each block can’t be.
Companies might be understandably hesitant about removing some of their safety features in order to accommodate blockchain technologies, and for good reason. Getting everyone on a blockchain network to “agree” to certain kinds and levels could be difficult and implementing those additional security layers to make sure everyone is up to snuff is another hurdle altogether.
(ii) Blockchain is not regulated just yet
Blockchain is “emerging” and is being adopted by very few corporations and individuals. In other words, the government is not quite sure how to handle it and neither are many companies.
In fact, it will take some time before regulations and laws governing the use of blockchain get written, especially in the financial sector, but they are bound to come up sooner or later. And that is uncertainty that not everyone is comfortable with.
(iii) Blockchain could be hacked, raising security issues
Blockchain as an idea is pretty secure. Everyone double-checks their records to make sure there is no fraud going on. But what about hacking? If a bank gets robbed, it just loses its own cash, but if a blockchain gets hacked into and 40 banks are on that network, then a lot more damage could be done. The potential dangers here have not been fleshed out completely. But it is something to keep an eye on.
It is true that Blockchain, at the moment, is a tough technology to adopt for most small business owners. Unless you are a start-up looking to disrupt an industry, it probably will not directly impact your business. However, over the course of blockchain technology explained, we hinted at something that could actually make an impact on your business.
That’s right! A blockchain-based currency called Bitcoin. Bitcoin is a strange concept to wrap your head around, unless you understand blockchain, that is. People called “bitcoin miners” get paid in Bitcoins in exchange for running complex algorithms on their super-powered computers to verify Bitcoin transactions for other people.
Bitcoin transactions are subject to very small fees that add up to pay these miners, who essentially keep the market going. Without Bitcoin miners, the Bitcoin blockchain could not check itself. You need an incredibly powerful computer to double-check the Bitcoin blockchain.
The Bitcoin marketplace made it possible for a global blockchain to support this all-digital, no-regulation currency that anyone can buy or sell.
That Bitcoin and blockchain explanation is all well and good, but how can you use Bitcoin to help your small business? It is a contentious topic, but over 100,000 businesses small and large around the world accept bitcoin as payment.
Otherwise, it is fairly straightforward. Bitcoin works a lot like cash, but it has requirements for more technological know-how.
As it turns out, Bitcoin has lots of similar advantages that blockchain also has. Here are a few reasons you might want to consider accepting bitcoin as payment from customers.
(i) It is cheaper
Unlike big corporations, small businesses do not have a lot of bargaining power over things like credit card fees and transaction fees. With Bitcoin, these fees are drastically reduced, saving mom-and-pop stores a lot of money.
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And since there is no central authority controlling the number of Bitcoins in the market, there are up to 21 million Bitcoins, and no more, available. It is not a currency that can undergo artificial inflation.
(ii) It is fast: Compared to credit card transactions, which can take days because they rely on centralized authorities like banks, Bitcoin transactions can take seconds or minutes to get verified. This means your business can receive its payments right away, easing up your cash flow.
(iii) It is border-proof: Does your small business export to other countries? Using Bitcoin means you do not need to deal with foreign currencies or exchange rates. It is a borderless world to the bitcoin user.
(iv) You can hold onto them as an investment: If you are concerned about business taxes, know that you generally only need to pay on bitcoin exchanges when you cash in your Bitcoins for dollars or spend them on something else.
Check your local laws to make sure this is the case for you. However, the value of Bitcoins can be pretty fluid. So, if you are waiting for an increase in their worth, you can hold onto Bitcoins without paying any penalties.
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(v) Like with cash, Bitcoin transactions are final: This means an unhappy customer cannot dispute your payment like they could with a credit card, and it means that you get your money, irreversibly, right away. Even though it is a digital currency, Bitcoin does not rely on credit.
(vi) It has marketing potential: Some small businesses have found that “accepting Bitcoin” can attract a younger clientele, even if it is not used too often as a payment method. It says something about your business and your brand if you are willing to step into the next biggest thing in financial technology.
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You have got blockchain explained and you are ready to adopt it for your small business. However, there are downsides for you to consider.
That said, there are some potential problems you should take into account when thinking of accepting Bitcoins. Many of them overlap with the disadvantages of blockchain explained in our earlier section.
There is nothing stopping Bitcoin from completely shutting down tomorrow. But, as an unregulated form of currency, Bitcoin is naturally a riskier investment than good old dollar bills. That is one reason why some countries have placed bans or restrictions on the use of Bitcoin, in the first place.
This is a selling point and a danger of using Bitcoin and is probably one of the biggest impacts Bitcoin would have on your business. The value of Bitcoins changes every day.
Although the U.S. dollar (and every other currency) also fluctuates regularly, those shifts are small and more predictable. On a month-to-month basis, the value of a Bitcoin can rise from $350 to $1,250, then drop down to $600.
In fact, in the latter half of 2018, Bitcoin’s valuation has really been tumbling. There is no reason to believe the trend will not turn around, but it is important to watch the Bitcoin market if you have invested in this for your business. What does this mean for your business? It is entirely possible that the Bitcoins you own today are worth much less tomorrow, leaving you out in the cold.
But on the other hand, you could receive some Bitcoins whose value then skyrocket a few months later, providing you with a nice cash flow windfall. The point is Accepting Bitcoin is far less predictable, but much more lucrative, than just accepting dollar bills.
More importantly, whether your business can or should take the risk is up to you. That said, if you are willing and able to pay for it, there are services that will immediately convert bitcoin transactions into U.S. dollars, making your decision quite a bit easier.
Although you can hold onto Bitcoins as investments instead of cashing out, it can be tough to plan your business finances around your Bitcoin income, since the value fluctuates so often. If you are drawing up a cash flow analysis for a business loan application, for example, you might struggle with figuring out how to account for your Bitcoin sales.
Plus, dealing with the IRS if you accept a lot of Bitcoin in exchange for your goods and services might be more complicated than you want. Technically, the IRS sees bitcoin as a property, not a currency.
This can get messy since a Bitcoin exchange can involve a gain or a loss in U.S. dollars, even if you are gaining Bitcoins. Talk to your accountant before diving into the world of Bitcoin and keep an eye out for future developments regarding Bitcoin regulation.
If you have customers from all over the world buying your goods and services with Bitcoin when Bitcoin itself holds a different value from day to day. What should you charge? You might need to constantly update your pricing to reflect the shifts in Bitcoin valuation.
Some point of sale (POS) services that deal in Bitcoins could help you price your products, but those generally are not free services. You have to make a trade-off based on how much you expect to make in Bitcoin and how well the market is doing.
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It might go without saying, but incorporating Bitcoin into your business model means you have to feel pretty comfortable dealing with technology. If that does not sound like you, it might be best to stay away.
There it is, folks! That is all about blockchain explained. Hopefully, now you have got a firm grasp on what blockchain is, why everyone is talking about it and how it can impact your small business. Whether or not you decide to accept Bitcoins as a form of payment depends on you and your small business needs.