Blockchain 101 for Business: The Benefits and Risks

“Digital assets” traditionally included music, videos, photos and other data that has value. The development of blockchain technology ushered in a new era and expanded the definition of digital assets to include cryptocurrencies and other types of assets stored on blockchains.

How a blockchain works

How it works: A blockchain is a transaction system that can track and transfer assets, record payments and remember interactions. It can provide record keeping that is more secure, reliable and transparent than traditional database or application architectures can provide. How does it do this? Each blockchain is a distributed database that acts as a digital ledger of transactions between accounts (electronic address). Each transaction records the accounts involved and the amount. The database is distributed, in that duplicate copies are stored on computers that form a network. These copies are called “nodes” and are equally authoritative regarding the transactions – each node can independently validate a group of new transactions in a “block”. When a significant number of nodes validate the transactions in a block, the nodes confirm and complete the block. If a node submits an unauthorized or invalid block, the other nodes in the network will reject it. Once transactions on the ledger (blocks in the chain) are confirmed and completed, they can never be edited – only added to, with new transactions.

Why it’s important: Blockchain technology provides better trust and resilience than most traditional database systems. A blockchain network is reliable because a block of transactions must be validated and then cannot be undone or reversed. A blockchain network is resistant to disruptions because the nodes operate independently and are equally authoritative – if a node goes offline, the blockchain still functions.

The trust and resilience of blockchain technology allows us to use it to store currency, tokens, contracts and more:

• Cryptocurrency and tokens
  Most cryptocurrencies have a set number of coins. Each coin has equal value and is stored on a blockchain where every exchange is recorded and holders can verify their balances. A token is usually not currency in itself – it’s more like a gift card or a claim cheque. A token can be created in a system that runs on top of a blockchain, rather than directly on a blockchain.
• Non-fungible tokens (NFTs)
  An NFT is usually a unique asset stored on a blockchain. We can “tokenize” (make a symbol that means) anything people value, effectively like a digital trading card. It has value as long as someone wants it.
• Smart contracts
  ONE smart contract is a program that includes automatic actions – such as automatic transfer of money at regular intervals or when a certain event occurs. It is effectively like a traditional contract, except that it does not require human intervention to execute its terms and payments, and it cannot be tampered with on a blockchain.

The benefits

So how can you turn blockchain technology’s capabilities into business benefits? Here are just a few of the areas where blockchain has proven its benefits:

Payment processing

Systems can use blockchain technology to process payments securely without third parties. This can reduce the costs and risks of payment processing, especially for cross-border payments to new business partners. These payments can even be triggered programmatically, as part of agreed terms in a structured contract.

Contracts and leases

Many businesses are responsible for a complex network of contracts and leases, often created by different teams, in different locations, with different terms and conditions. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) now have standards that require companies to record almost all of their leases on the balance sheet.

Grant Thornton Advisory Manager Sean Roberts said “There’s really a shift in the way some technologists think about this, in terms of how we can use smart contracts and how we can use the technology of blockchain, which is particularly useful for things like immutability — the ability to to lock something up and say ‘this can’t be changed from here on out.'” But blockchain’s locks need to be built into a larger system. Grant Thornton Innovation Director Malcolm Silberman said, “If you design this right, you shouldn’t even know that you’re on a blockchain … really, from an architectural point of view, we’re looking to design user experiences where the users “don’t know about the complexity of the blockchain.”

Fraud detection

A shared blockchain can be used to detect cases of fraud, even when entities are not free to share all identifying details.

For example, banks usually offer “accounts receivable financing” – a business loan where the security is the sum of money owed to the business by customers. Companies can only borrow against this security once, but the banks have no way to check for duplicate applications at other banks because they cannot share the details of loan applications. So instead, banks can use a shared blockchain network where they convert loan application details into a “hash” – a long and unique string of characters that cannot be decoded. Then the banks simply need to check whether the hash already exists in the blockchain. In that case, the company has already received this loan, and it is fraudulent for the company to apply again. Because of blockchain technology’s trust and resilience, others cannot hack this network, and the network will continue to function even if several of its individual nodes go offline.