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Blockchain: What it is and How it Works

Blockchain: What it is and How it Works

April 17, 2019

by Akash Kapur

1. Background

If you have been following technology and finance news for the past few years, chances are you have heard of the term ‘blockchain’.

Blockchains first made news in the public domain in 2009 when an individual, or a group, who went by the name Satoshi Nakamoto, used it to create the world’s first cryptocurrency, Bitcoin.

The success of Bitcoin and the other cryptocurrencies it inspired has helped popularise the underlying technology. This has prompted several players, both large and small, to look at alternative uses for blockchains. IBM, Toyota, and Barclays are a few of the larger players currently researching or experimenting in this domain.

With the discovery of several other potential applications, blockchain is set to revolutionize the way organizations operate and transact.

So, whether you’re a small business owner or the CEO of a large company, it’s important that you understand how blockchains could affect your industry.

But before that, it’s important to understand what is a blockchain and how it works. In this article, we will walk you through the basics of this technology and how it can be applied in various industries.

2. Blockchain explained: What is a Blockchain?

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To put it simply, a blockchain can be viewed as just that – a chronological chain of blocks containing information. In slightly more technical terms, a blockchain is a distributed ledger that is open to everyone. (Except in the case of private and permission blockchains, which we’ll discuss later.)

This ledger can be used to document and store information on the internet. This information could be of any kind ranging from records of financial transactions to ownership details, agreements and more.

However, adding information to the ledger requires a confirmation from several devices or nodes on the blockchain network. Once a majority of the nodes reach an agreement (consensus) to add something to the blockchain, it becomes a part of the chain.

One interesting feature of a blockchain is that data, once recorded on it is very difficult to edit or remove. Especially if you wish to do so without the knowledge of the other nodes.

To understand why and how this happens, let’s first look at what a block is and how it functions.

2.1 Understanding the Block

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A block is a collection of records grouped together as one. Each block is comprised of three key parts:

1. Data: Each block consists of several records – where each record corresponds to one set of information. (Eg: details of a transaction, a medical record, a lease, etc.) In the case of Bitcoin, each record corresponds to one transaction, and each block contains information about several transactions.

2. Hash: This is a unique number that is used to identify each block and its contents. You can think of it as the fingerprint of a block. Changing any of the data inside a block will change the hash. In other words, if the data inside a block changes, as far as the blockchain is concerned, it’s no longer the same block. (To learn more about hashes see the inset below).

3. Hash of the previous block: This is the hash ID of the block just preceding the current block. It effectively links blocks to each other, thus creating a chain: each block in the chain points to the previous block. This goes on until you reach the very first block in the chain, called the genesis block. The genesis block is unique in that it is the only block in the chain which does not contain the hash of a previous block.

Common Blockchain Myths

Despite, or perhaps due to its popularity, it can sometimes be hard to pinpoint exact facts about blockchains. Here are some common myths and misconceptions regarding this technology:

1. Bitcoin is Blockchain (and vice versa): Bitcoin is just the first large-scale application of blockchain technology. Creating cryptocurrencies is just one possible application of blockchain. It can be used for much more.

2. It can only be used for financial applications: While applications of blockchain in finance are the most well known, blockchain can be used in a variety of industries. For example, Estonia has utilized blockchain technology to power several aspects of its citizens’ day-to-day lives. This has helped them create what some believe is the world’s first genuinely digital society.

3. Blockchains are completely secure: No system is completely free from the threat of tampering or hacking. As discussed later on in this article, it could be possible for a determined attacker to potentially alter records stored on the blockchain. However, the larger and more distributed the blockchain is, the more difficult it should be for an attacker to affect the data stored on it.

Hashes are one of the features that make blockchains secure. By changing the content of any particular block in the chain, you end up changing the hash of the block. This will lead to a mismatch between the hash of the modified block and the hash data stored in the next block, thus breaking the chain. The illustration below will help you better understand this concept:

illustration showing the original blockchain structure

This is the original blockchain.

Illustration showing the modified/hacked blockchain s

This is the modified blockchain.

You can also check out this helpful illustration by Reuters for more information on how blockchains work.

However, hashes alone are not enough to ensure the security of the chain. While difficult, it is possible for an individual or an organization with a powerful enough computer to recalculate the hashes of all the blocks in the chain. This could allow them to overwrite the chain to suit their needs.

This is where ‘Consensus Protocols’ come in. But before we delve into that, let’s first understand the blockchain network.

2.2 The Blockchain P2P Network

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Instead of using a central point to store and manage data, blockchains create multiple copies of the data and store it across several nodes on a peer-to-peer (P2P) network.

In public blockchains, like Bitcoin, anyone is allowed to join the network. Each new member, or node, gets the full copy of the blockchain.

This creates redundancy, protecting the blockchain from the failure of individual nodes. In traditional systems, the failure of a single server or database can potentially wipe out lots of vital data. By distributing itself across the network, the chain protects itself against this by ensuring that even if a particular node’s data is lost or corrupted, multiple copies of the data remain stored safely on the other nodes.

Additionally, this P2P network is what enables blockchains to utilize one of their most important features, which provides protection against manipulation: Consensus Protocols.

2.3 What is Consensus Protocols?

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Now that you know how hashes work in a blockchain, it might seem obvious that the easiest way to attack a chain would be to tamper with a new block being added onto the chain.

An attacker could simply create a new block with its own set of data, hash it and then link it to the previous block. So how does a network determine which blocks to add and which to ignore?

This is where consensus protocols come in. One of the most important aspects of blockchain technology, consensus protocols are what help keep all the nodes in a network in sync.

Put simply, they are a specific set of rules that every node on the network must follow to validate a new block and the information they contain.

These protocols have two key functions.

The first function is helping the blockchain stay updated while ensuring data validity. The second function of consensus protocols is preventing an individual or a single entity from controlling or hampering the system.

The end goal of these protocols is to ensure that only one chain is used by the entire network.

Hashes and Security

Hashing is the process of taking a string (a set of characters) of any length and converting it into an alphanumeric string of a fixed length (a hash). This is done through the use of a cryptographic hash function.

A cryptographic hash function always outputs the same hash for the same input. However, even the smallest change in the input – say the removal of a comma or a decimal point – will create a completely different hash.

For example, the hashing algorithm of this tool converts the sentence “This is a cat.” into the following hash:


The same tool converts “This is a cat” (this time without the period) into this hash:


You can try it out yourself to see how even the smallest of changes can change the entire hash.

In the context of blockchain technology, the hashing function converts all the data (each record) in a block into a corresponding hash. This hash forms the ‘fingerprint’ of the block and is added in the information contained in the next block, thus linking them together.

One key requirement for consensus to be established is for a majority of nodes on the network to accept the addition of the new block. As mentioned earlier, once a consensus is reached, the block becomes a more-or-less permanent part of the chain.

Thus, to be able to take over a blockchain, an attacker would have to gain control over at least 51% of the network (known as a 51% attack), or higher, depending on the consensus protocols of the blockchain in question. While this is not impossible, it can be impractical to carry out, at least for smaller-scale actors. Especially in the case of larger, more distributed blockchain networks.

In some networks, like the Bitcoin, consensus protocols are also responsible for incentivizing nodes to continue to maintain the blockchain. In the case of Bitcoin, it does this by rewarding ‘miners’ with Bitcoins for every new block added successfully.

Now let’s explore two common types of consensus protocols: Proof-of-Work and Proof-of-Stake.

2.4 What is Proof-of-Work?

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Proof-of-Work (PoW) is a Consensus Protocol especially designed to slow down the speed of creation of new blocks.

Bitcoin uses this protocol to verify blocks and reward miners.

The two working principles of this protocol are the creation of a complex mathematical puzzle and the possibility of easily verifying the solution. These puzzles require a lot of computing power to solve and can only be solved through a brute force (trial-and-error) method. While the puzzle could be solved in a single attempt, this is highly unlikely. Miners need to make several attempts before they arrive at a solution.

To solve the puzzle, the miner must determine a ‘nonce’ – an arbitrary random number such that the resulting hash of the block information results in a value less than the target number or threshold. On finding this solution, the miner broadcasts it to the entire network for verification. If the solution is found to be valid, the block is added to the network and the miner is rewarded as per the protocol.

The difficulty of the mining process is determined by the target. The lower the target/threshold, the more difficult it is to find a valid nonce. Targets are designed such that they increase in difficulty as the computing power of the network increases. This increases the number of calculations needed to arrive at a solution and increases the cost of mining.

PoW is one of the most commonly found consensus protocols. It has been used in several cryptocurrencies like Bitcoin and Ethereum.

2.5 What is Proof-of-Stake?

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Proof-of-Stake (PoS) is yet another consensus protocol employed in blockchains. Instead of creating mathematical puzzles to solve, this protocol creates a mechanism to punish nodes that attempt to validate fraudulent information.

In PoS cryptocurrency systems, each miner – or forger as they are called in this case – is required to put up a ‘stake’ by depositing some amount of tokens into the system. This stake is held securely in a sort of virtual vault and cannot be spent by the miner.

The size of a node’s stake determines the chance of that particular node being selected to validate the next block. The higher the stake, the greater the chance of a node being selected as the next forger.

In return for validating blocks, most PoS systems offer validators a payout in the form of transaction fees. This is different from PoW systems where the miners are rewarded with freshly created currency.

The idea behind the PoS is that the higher a person’s stake in the system, the more they stand to lose by acting against the best interests of the network.

If a node is found to be acting maliciously, the system penalizes it for a part of or all of its stake. This encourages them to act in the best interests of the network.

What is a miner?

Miner is the title given to people who voluntarily maintain a blockchain by validating transactions, grouping them to form blocks, and adding these new blocks to the chain.

Thus, conducting a “51% attack” requires more monetary resources on a PoS system as compared to a PoW system. Additionally, the attacker must be willing to risk money worth 51% of the total stake in the network when attacking a PoS system. In a PoW system, there is no threat to the attackers’ computational hardware – which is the only significant investment they need to make.

One issue with this system is that in this raw form, it seems to favour richer players by giving them more opportunities to validate blocks and thus grow richer.

To mitigate this from happening, PoS networks employ techniques like Randomised Block Selection and Coin Age selection.

However, while PoW and PoS are two of the more common Consensus Protocols used in blockchains, they’re not the only ones. Over the years, various players and created several different types of protocols. This report by KPMG explores the various consensus protocols available in detail.

2.6 Summary: Key Features of Blockchains

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So, now that we’ve explored the basics of what a blockchain is and how it works. It is time to explore the different types of blockchains that exist and their applications.

But before that, let’s summarise the key features of blockchains:

Storage: Blockchains consist of blocks of data, linked to each other by hashes. These blocks can store any kind of information – ranging from health records to transaction details and more.

Decentralization: Blockchain data is distributed across a network of peers, each with an identical copy of all the data.

Immutability: Data, once recorded on a blockchain, is difficult to edit or remove.

Hashes: Each block in the chain is linked to the other blocks through a unique fingerprint called a hash. These hashes help identify individual blocks and secure them against manipulation.

Consensus: The most important feature of blockchains. Consensus protocols determine rules for the validation of blocks and help maintain a single, unified chain across the network. Data can only be added to the chain if consensus requirements are met.

Smart Contracts: The future of agreements?

First conceptualized in 1994 by Nick Szabo, Smart Contracts are digital agreements that can be used to automatically trigger certain actions once certain conditions are met.

The purpose of a smart contract is to cut out the middleman from agreements and transactions. Theoretically, in a world where smart contracts are common, two people wishing to enter into an agreement could simply create a smart contract between themselves instead of going to a lawyer. Thus saving both parties time and money.

A key application of smart contracts and one which is quite relevant in the world of ICOs (Initial Coin Offerings) and other blockchain-powered trades is the establishment of what is known as trust-less transactions.

When entering into transactions with strangers, trust is often a key concern. Both parties are often concerned as to whether the other party will hold up their side of the deal. Thus, they employ third-party platforms or services to establish the level of trust they need to be able to transact.

Smart Contracts remove the need for this as the conditions of the transaction are coded into the blockchain itself. Once the conditions are met, the required action is automatically initiated.

This technology has the potential to revolutionize several industries, ranging from music to insurance, real estate and more.

Now, let’s understand the different kinds of blockchains and their uses.

3. Blockchain Explained: Types of Blockchains

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Blockchains can be classified in several ways. When classifying based on the data ownership model they follow, we get public and private blockchains.

When classified based on the access-control mechanisms they use, we get permissioned and permissionless blockchains.

For example, Bitcoin is a public, permissionless blockchain. It isn’t owned by any one entity or group of entities, and anyone can join the network and view, read or add data to the chain. New participants do not need to be authorized by anyone.

3.1 What’s the Difference Between Public and Private blockchains?

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Public blockchains are those where the data is publicly owned. Anyone who joins the network can view and download the data contained in the chain.

These blockchains are hosted on public servers and tend to provide their users with a degree of anonymity. Due to this, public blockchains cannot effectively implement complete access control. However, they can be used to implement selective access control where all nodes are allowed to view and store the data, but only select trusted nodes are allowed to edit or add to the blockchain.

Private blockchains are those where the data is privately owned. In this case, the data is only viewable to those who are authorized by the network owner(s).

These chains are hosted on private servers where all the participants are known to each other or at least to the network owner(s). This restricts access to the data, a key requirement for many business operations.

Additionally, as all the participants on the network and are known entities, it also allows for complete access control, providing different nodes with different levels of permissions (join, read, write and commit).

3.2 What’s the Difference Between Permissioned and Permissionless Blockchains?

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Permissionless blockchains are those where all the participants have equal access to the data. That is, every node in the network can read, write and commit data to the chain.

Cryptocurrencies tend to follow a permissionless model that allows and incentivizes people to write data to the chain and keep it going.

Permissioned blockchains, on the other hand, are those which implement an access-control mechanism. This mechanism chooses whether to allow or disallow peers from performing certain actions based on predetermined control conditions.

For example, a research organization using a blockchain to store data could provide junior analysts with ’read-only’ access to the information, while providing senior managers or data handlers ‘read and write’ access.

So, a blockchain’s properties will vary based on its data ownership and access-control architecture. The image below highlights the key features of four different types of blockchains:

A matrix showing the types of blockchains that can exist

Source: McKinsey&Company

4. Blockchain Explained: Use Cases for Blockchain

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Broadly speaking, most blockchain use cases can be seen as satisfying one of two needs:

  1. Record keeping
  2. Transactions

The record-keeping side covers two major use cases:

1. Static data storage: A distributed database for storing reference data (eg: land records)

  • Identity: A distributed database for storing information (eg: voting records, preventing identity fraud). This is a type of the static data storage use case but is considered a unique case as it comes with its own sets of variations and complexities

2. Smart Contracts: A set of instructions recorded onto a chain that automatically executes a particular action when the necessary conditions are met. (eg: insurance claim pay-outs, music releases, and purchases)

The transactions side covers two major use cases:

1. Dynamic data storage: A distributed database that dynamically updates itself as assets are exchanged on digital platforms (eg: tracking drug supply chains, intra-day trading)

2. Payments infrastructure: A dynamic distributed database that updates transaction data as and when payments are made (eg: peer-to-peer payments)

Other use cases could emerge as a mixture of two or more of the use cases above. One such example is seen in ICOs (Initial Coin Offerings), the cryptocurrency equivalent of an IPO (Initial Public Offering). ICOs combine the transaction use case with Smart Contracts. If an ICO fails to raise the target investment amount within the specified timeframe, the money is returned to the investors.

Now let’s look at some industry-specific applications of the blockchain.

5. Blockchain Explained: Applications Across Industries

5.1 Applications of Blockchain in Banking and Financial Services

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The Banking and Financial Services industry (BFSI) has tremendous potential for transformation through the application of blockchains.  We’ve already covered some these in brief in an earlier article on the use cases for blockchains in finance. Some areas for potential business applications include:

Trade Finance

Cross-border trade is one key area where blockchains can be applied in the BFSI industry. These transactions create large volumes of documentation and involve a large number of variables, this makes some deals uneconomical. Blockchain can resolve this issue by using consensus protocols to help participants authenticate and enable transactions in the absence of trusted third-parties or central authorities.

This has already been tested in two cases.

The first was a letter of credit transaction between Ornua and Seychelles’ Trading Company, guaranteeing the trade of nearly $100,000 worth of cheese and butter from the former to the latter. This transaction was enabled by Barclays bank in partnership with an Israeli blockchain startup, Wave. A letter of credit transaction typically takes several days to complete. However, in this case, it was completed within just 4 hours.

The second was a trade transaction between Australia and Japan. In this transaction, the entire trade process was handled by IBM’s Hyperledger Fabric platform using blockchains. This resulted in shorter delivery times for trade documents, saved on the time and cost required to store and transmit documents, and ensured higher transparency by sharing the transaction details with all parties.

Cross-border Payments

Blockchains have the potential to transform the cross-border payment business by making international payments easier and faster to complete and verify.

The current SWIFT-based system of international money transfer involves several banks, each of which has to carry out the actual debit and credit of the amount being transferred at each step. This increases the work and time required to complete the process. Additionally, as SWIFT charges banks for processing SWIFT transactions, it also increases transaction costs.

By using blockchain based money transfers, banks involved in cross-border payments can directly transfer the money to each other. The consensus protocols help the banks verify the transaction instantly without the need for a trusted third-party. It also reduces the time taken to settle a transaction and the risk of manipulation by removing middlemen from the process.

Moreover, the very nature of blockchain makes it more resistant to manipulation. It can also standardize the formats used to process transaction data.

Foreign Exchange Trading

Currency trading (Foreign Exchange or FX trading) currently involves the creation of multiple records for the various parties involved in a transaction. These records must be continuously reconciled across several devices. This slows down the process of trading and leads participants to incur several avoidable charges.

Instead, blockchains can be used to provide a single shared record among all the participants in the FX Trade blockchain network. They can instantly verify all trades taking place on the network through consensus. What’s more, the ability of the chain to be instantly verified by other participants can reduce the load on company back-offices, freeing up employees to focus on other tasks. It can also reduce the overall cost of FX trading for participants and speed up the process by cutting out the middlemen.

Monitoring of Financial Transactions

Another innovative use of blockchains is to monitor the transactions of a borrower. This is especially useful in cases where a large borrower is being financed by a consortium of banks.

Currently, banks have limited oversight over the movement and usage of funds by the borrower. Additionally, traditional systems have several vulnerabilities that make it relatively easier for borrowers to manipulate or hide information from lenders.

By implementing a blockchain based transaction tracking tool, participating banks will easily be able to track the movement and use of loan money.

This information can form the basis of increased scrutiny or audits and can help detect if a diversion of funds is taking place.

Know Your Customer (KYC)

Banks and other financial institutions have to comply with several stringent regulations such as Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements.

Compliance with these regulations involves the verification of each customer’s data by a financial institution after which it is transferred to central digital storage. The current system leads to a lot of duplication of effort and can sometimes result in delays in customer account opening and activation.

By implementing a blockchain-based KYC registry, the industry can eliminate the duplication of effort, reduce the manual labour involved in the verification of KYC data, and reduce the overall time taken to verify a customer’s information and activate their accounts.

5.2 Applications of Blockchain in Energy and Utilities

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The energy industry is yet another sector that has seen promising progress in the adoption of this technology. Here are some current and potential future applications of blockchain in this sector:

Peer-to-Peer Energy Trading

Microgrids are a new development in the field of energy supply. Unlike traditional grids which rely on a central power source, microgrids link to local power sources in a decentralized manner. For example, office buildings with their own solar panels may be linked to other nearby buildings and residences. Those participants who generate their own energy share the surplus with the rest of the network as needed.

Blockchains can be used in this system to maintain an accurate track of transactions through a transparent, decentralized accounting and metering system. This enables smaller areas without access to the main power grids, or those wishing to shift to renewable energy sources a reliable means of accessing and paying for their energy. One live example of this is the Brooklyn Microgrid.

illustration of micro-grids powered by blockchain tech

Real-time Production and Consumption Tracking

Blockchain, coupled with IoT devices, could enable utility companies to track power generation and consumption in real-time. This could be especially useful in the generation of Renewable Energy Certificates (RECs) that are given to solar energy producers. Currently, these are given based on projected generation estimates instead of actual generation. By implementing blockchains with smart contracts, this entire process can be automated with the certificates being generated based on actual energy produced. The presence of actual data will reduce the work and inaccuracies involved in the current estimation-based system.

Flexible Services Through Real-time Transactions

The supply of solar and wind power from a particular source often varies with the sun and the wind. This fluctuation in power generation from renewable sources of energy, coupled with an increasing reliance on these sources has led to a rising need for flexibility in energy services.

In other words, there is a need to be able to either adjust the power demand to match the supply or to balance the power supply with the demand by tapping and compensating backup sources of power.

This can be done by integrating all potential sources of power, from solar panels in houses to batteries used to store backup power, into the existing power markets. Blockchains can then be utilized to enable transparent, real-time transactions between power consumers and suppliers in an energy marketplace.

5.3 Applications of Blockchain in Healthcare

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The healthcare industry is yet another sector that has a high potential for digital transformation through the implementation of blockchains. Here are a few potential applications of blockchains in this industry:

Storage of Medical History

One of the key challenges faced by the healthcare sector is the ability to access critical patient data and information at short notice. Very often, patient records are scattered across different departments and even different hospital systems. Additionally, patients themselves may not have access to all their records. If they do, it may be in a physical form which requires tremendous care.

All of this works to slow down the process of delivering treatments in a timely manner.

Blockchains can change this in many ways. By implementing a blockchain-based distributed ledger of medical records, shared across a network of hospitals or even with a central medical authority, healthcare providers can ensure that they can readily access patient information as and when needed.

As all partners in the network have access to the same blockchain, they also have access to the same data. This cuts down on the time taken to request and receive data from other organizations, which is often a time-consuming process.

Also, the structure of blockchains ensures that all records added to it are in chronological order. This will help doctors see a clear timeline of the various treatments and tests the patient has undergone and the results of the same, allowing them to give precise, efficient care.

These blockchains would also be accessible by the patients, thus ensuring they’re easily able to access their entire medical history as needed.

If taken further, blockchains can form the basis of a unified database shared among and accessible to all patients, healthcare providers, payers (insurers), pharmacists, and other participants in this sector.

Securing Patient Data

Blockchains can also tackle another key problem prevalent in the healthcare industry: the security and ownership of patient information.

Currently, a lot of information is stored with providers and not readily available to the patient. Plus, as the patient cannot control what the providers do with the data, there is a high chance of misuse. Malicious actors in control of this information could sell patient data to third parties without consent, commit identity theft, and more.

Blockchains can counter this.

Many cryptocurrencies employ what are known as public and private keys to secure their users’ data. The private key is known only to the user and is used to authenticate and approve transactions or messages. These approved messages are encoded to carry the user’s public key, which is known to the network. As each public-private key combination is unique (i.e. each public key has its own specific corresponding private key), this can be used to verify that the message in question was shared by the user. If there is a mismatch in the public key contained on the message and the user’s actual public key, the message/transaction is rejected.

Healthcare data can be stored on permissioned blockchains designed such that only the patient has full access to their medical records through their private key.

Providers or Payers seeking to access the patient’s data can raise a request which the patient can approve using their private key. The blockchain network can then use the patient’s public key to verify that they have in truth authorized the organization in question to access their data.

This provides users with a greater degree of control over who can view their medical records.

Instant Claim Verification and Payment

Another pain point in the healthcare industry is the time taken to authenticate insurance claims and approve payouts.

When coupled with robotic process automation in claim verification, blockchain technology can significantly cut down on the time taken to verify and approve claims and release the payout.

Once the patient records have been added to the blockchain, the insurance provider’s robots can automatically extract the data and verify the details. Successful verification of the claim can trigger the smart contract, releasing the required payout amount instantly.

5.4 Applications of Blockchain in Logistics and Manufacturing

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With the advent of Industry 4.0, blockchain has great potential to revolutionize manufacturing supply chains and logistics networks. This technology has the potential to increase transparency, reduce inaccuracies, provide better data security, and more. This is why blockchain technology has already seen many takers in the logistics and manufacturing industries.

Companies such as IBM are already experimenting with enterprise solutions for supply chains based on blockchains. Thus, it won’t be long before these industries face a major transformation at the hands of this technology. Here are a few ways in which this transformation can, and is beginning to happen:

Inventory Tracking

Blockchain technology can be used to build an efficient and effective tracking system. This system would provide users with live, accurate updates of the location of a particular consignment.

It can allow for tracking and backtracking of individual items from the producer to the seller and back. In the case of product defects, this can help companies easily identify the batches of products affected by a defect and their origin. This will make it easier for organizations to detect, isolate and eliminate problems in their supply chains, ensuring a faster response time.

Also, it helps make recalls more economical. Instead of having to recall all the products of a type, they can easily recall only the affected batches. This would be made possible by the granular tracking capability that blockchain offers.

illustration of live tracking in supply chain using blockchain technology

Freight and Shipping

The tracking use case of this technology can also be applied to the world of freight and shipments. The application of blockchain technology can allow for easy tracking of the movement of cargo across international waters.

The transparent nature of this system will help hold each party accountable. Additionally, it will reduce errors, shorten delivery times and make it easier to detect fraud, while lowering the costs incurred. This, in turn, could save the logistics industry millions of dollars every year.

Authenticity Verification

Another extension of the first use case, the storage of the entire production history of a product on a blockchain allows the end-user to easily verify the origin of the product.

This provides the end-users with an easy way to ascertain the quality and authenticity of the product. It can help them avoid counterfeit or illegally sourced items (eg: ‘blood diamonds’ sourced from a war zone could be marked accordingly).

Everledger is currently using this technology to enable diamond buyers and owners to know the origin of the diamonds they have purchased.

6. Blockchain Explained: Current Challenges

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Even though the technology has been a major buzzword in certain circles, it is still far from reaching maturity. The Gartner Hype Cycle, 2018 places blockchain as just crossing over the peak of inflated expectations. Gartner currently believes that blockchain will take another 5-10 years to achieve maturity.

In a separate report, McKinsey&Company state that the technology is still immature and may take 3-5 years to be feasible to deploy at scale.

These challenges to the feasibility of blockchain deployment can be classified as follows:

Scalability: Blockchain’s consensus-based validation methods and continuous growth of stored data will lead to larger storage and bandwidth requirements. Additionally, as the volume and velocity of data to be added to the records grow, there will be an increasing need to speed up the process of validating and adding blocks. Until these bottlenecks are solved, blockchain may not be feasible at large scales.

Interoperability: Due to the need to control and protect access to data, most organizations will prefer to implement private, permissioned blockchains. This could lead to a proliferation of several blockchains. The problem is that without standards to enable them to interact with each other, these blockchains will remain isolated systems, much like the legacy databases of today. This standardization, known as interoperability, is needed to be able to leverage the advantages blockchains generate at scale.

Regulations: Supportive regulations are another key requirement for blockchains to be implemented successfully. Certain applications of this technology have been outright banned in some countries. An example of this ICOs in China and South Korea and cryptocurrency trading in countries like India. Others, such as Smart Contracts, are still in a grey zone. Until regulators provide more clarity on the legality of such applications of this technology, it will be difficult for organizations to implement these solutions.

7. Conclusion

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Blockchain technology could be extremely disruptive and transformative for most industries. Its features readily lend it to a host of activities that can help optimize various business processes and operations.

While there is still time for the technology to mature, organizations of all sorts, from market leaders to followers, would do well to keep track of and experiment with this technology.

A strong early entrant into this technology could gain a sizeable advantage over late entrants as the technology matures.