Blockchain has become a buzzword in the financial industry. According to a recent IBM survey, 65 percent of banks plan to implement the technology in the next three years.While blockchain has the potential to revolutionize the way businesses conduct transactions, it is not without its limitations. Prior to adopting the technology, businesses should be well-versed in how blockchain works, as well as its risks and rewards.

Current Electronic Transaction Technologies

The first business ledger was carved into stone hundreds of years ago. Over time, organizations came up with more efficient ways to record business transactions. Today, many transactions occur electronically with business partners located across the country or across the globe.

In most cases, current electronic transaction technologies rely on centralized databases that are operated by a single organization, such as banks, clearing houses, and other financial institutions. These organizations are susceptible to corruption and fraud because they rely on human oversight to guarantee a system's trustworthiness. Because the database has one single administrator, there is also little transparency for end-users, which can lead to business disputes.

What Is Bitcoin?

As discussed in prior posts, Bitcoin is a form of digital currency. While it does not exist physically, you must exchange hard currency to acquire it. Unlike cash, Bitcoin resides in your “electronic wallet” as a computer file. A network tracks the transfer of the computer files from purchaser to seller, but does not record the nature of the transaction. While once limited to illicit transactions occurring on the “dark web,” Bitcoin has gained legitimacy in recent years and can be used to pay for a variety of commercial products, including airline tickets and taxi fares.

What Is Blockchain?

Blockchain is the backbone of the bitcoin payment system. It serves as a public ledger of all Bitcoin transactions that have ever been executed. Each time a transaction is completed, a new block is added to the database in a linear, chronological order. Transactions are authorized using a mathematical formula, and each verified computer that is connected to the Bitcoin network receives a complete copy of its blockchain.

This forms verification system requires no human oversight and no centralized authority, like a bank, to confirm the transactions that occur. In short, blockchain is what makes Bitcoin possible. Therefore, Bitcoin itself is a limitation on the capacity of blockchain because the blockchain can underpin any transaction, not just transactions in Bitcoin.

Blockchain’s Potential Business Benefits

The decentralized system uses a shared ledger to record the history of electronic business transactions, such as the exchange assets of value between participants, that take place in a peer-to-peer business network. Nasdaq is just one of the entities currently exploring the technology. Swiss bank UBS is working to develop a new “utility settlement” coin based on blockchain that banks across the globe could use to settle mainstream financial markets. Unlike Bitcoin, the new virtual coin would be tied to real-world currencies and central bank accounts.

Blockchain has the potential to overcome many of the challenges created by current electronic transaction technologies. It is attractive because it could enable financial institutions to settle trades in seconds rather than days. Proponents of exploiting its use also maintain that it could result in lower risk, decreased operational costs, and greater efficiency in transactions between financial institutions.

As large financial institutions and governments begin to fully utilize blockchain technology most of the transactions of the modern world will switch to it. Blockchain technology holds the promise of self-enforcing “smart” contracts, governmental records easily searchable and verifiable, and background checks requiring no middleman while preserving anonymity, just to name a few. Stay tuned for posts on each of these applications.

This post is a part of a series focusing on blockchain technology, bitcoin and cryptocurrency – more on this can be found below: