What is the Blockchain?

The blockchain, a form of distributed database that is run across a network of computers, is becoming increasingly important as a solution to the problems of managing and protecting data. Blockchains are being used by thousands of companies all over the world to store their data, without the need for external hardware and software.

As the global financial crisis has showed, if it takes a collapse of major financial institutions to convince people to think seriously about decentralised storage systems, it will happen sooner or later. The most significant benefit of using a blockchain, therefore, is that it can be used to protect and audit vast amounts of sensitive data. It is also used as a mechanism to allow people to exchange digital money, which is fast becoming the most popular method of transferring money across the world.

Therefore, there is an excellent use case for blockchains in finance, but it is not the only potential application. The rise of this technology has been driven by a simple need for transparency: for example, when dealing with contracts in the medical industry, where companies are no longer interested in keeping records in their own offices, but rather would like to put them into a blockchain, to ensure that they are legally bound to perform their contractual obligations.

Large pharmaceutical firms often contract out to third parties for legal advice and then find that the advice is not stored on their own system. So they will try to sell the contract to a third party who they believe has better access to the legal system. If the contract was on the company’s system, it could be shown that the third party had broken the contract, invalidating the whole agreement.

However, in small companies, it may be cheaper to host the contract on their own system, but will take them weeks to get the data into a secure system. To solve this problem, blockchain solutions have been designed, which works by having a centralised database which is updated in real time.

Blockchain is defined as a chain of transactions, or “blocks”, that are independent of each other. Each block contains a digital signature, so that it cannot be altered by anyone else, but it can be altered by the data within the block.

A very significant advantage of the blockchain, particularly for large companies, is the fact that it is highly reliable. It is designed to store and process data securely and is, therefore, extremely robust against errors and loss of data.

The technology is currently being used in large institutions, but it is developing at a rapid pace, as people realise that it is practical. More businesses are starting to experiment with the technology. But just how does it differ from traditional databases?

First of all, the blockchain works at the level of the individual transaction, rather than at the level of the database, so that the blockchain is distinct from the traditional database in many ways. One of the key differences is that the blockchain is not based on the distribution of information from the user to the database, but rather allows individual transactions to be completed automatically without the need for a third party, in the same way that electronic cash systems allow users to complete their transactions without using any of the external banking infrastructure.

Another key difference is that the blockchain is usually in direct communication with the users, rather than with the users communicating with the database. The database can be directly involved, if there is a need to update the transactions or even directly communicate with the users, allowing the database to take a role that was previously seen as the preserve of the users. However, this is becoming less common in the use of the blockchain.

The most important thing about the blockchain is that it does not require any centralised system to be operated but is instead linked through its users, so that the system is completely transparent. Therefore, in most cases, the blockchain is the only source of information about how the system is operating, and any problems can be identified and fixed by the users of the system. In principle, therefore, a blockchain could replace a centralised system of accounts, such as those provided by bank accounts, as it uses decentralized information to operate the system. In practice, the technology is developing at a rate that is unprecedented.