San Francisco (CNN Business)You’ve almost certainly heard the term blockchain. But you probably have no idea what it is or how it works, let alone why it generates so much hype. That’s OK. Most people don’t.
Not bad for an esoteric technology developed by the enigmatic fellow who created bitcoin.
Of course, none of that answers your underlying question: What is blockchain technology and why is everyone so excited about it?
A public digital ledger
A blockchain is essentially an immutable public digital ledger. Once someone enters a transaction, it cannot easily be changed. An analogy might help explain how it works.
Think back to when people used a checkbook register to keep track of purchases and payments. Now extrapolate that to include countless transactions by millions of people and imagine that copies of the register are held by thousands of computers. Each computer must verify a transaction before it can be noted in the register. Once verified, a transaction is written in permanent ink.
The register records transactions for a set period of time, which can be as little as 10 minutes. Once the register is filled, it is stapled shut, and labeled with a unique alphanumeric sequence that identifies it. A new register is then started and glued to the first. Eventually you wind up with a chain of registers.
That’s essentially what a blockchain is. The fact that these registers are stored on many, many computers makes them essentially unchangeable and unhackable. To continue with the analogy, you’d have to work backward, ungluing every checkbook until you got to the one containing the transaction you want to change before making the revision. And you’d have to repeat this process for every copy of the register. You couldn’t do it without it being noticed.
The biggest advantage to public blockchains is that the information can’t really be changed once it’s been logged. There’s a permanent record, and because the ledger is held by many entities, it’s nearly impossible to hack.
The entries are also made using pseudonyms, so there’s a certain degree of privacy, and no one person wields full authority over the ledger. That makes blockchain ideal for bitcoin and other cryptocurrencies.
And a great many other things — although people disagree about how effective it will be for certain applications.
A little history
Satoshi Nakamoto inventedblockchain in 2008 when he developed bitcoin. Nakamoto, an enigmatic figure who has proved all but impossible to definitively identify, wanted a decentralized, permanent and public means of recording the creation and distribution of every bitcoin. Todayblockchains underpin a dizzying number of cryptocurrencies. But that’s another story.
So far, people have mined more than 16 million of the 21 million bitcoins that will ever exist. Every one of them, and any transaction using them, has been recorded on a blockchain. That gives you a sense of the volume of data the technology can handle.
Although Nakamoto designedblockchain as a public ledger, it wasn’t long before permissions-backed blockchains controlled by a given company or group appeared. They don’t offer the same level of immutability because they’re held on a far smaller number of computers. And, despite the hype, the thinking behind them isn’tnew.
“[Permission-based blockchains] are 20-year-old ideas,” said Nicholas Weaver, a senior researcher at The International Computer Science Institute. “Whenever someone says ‘private blockchain,’ just mentally replace that with a Google Docthat can only be updated.”
Already companies are using blockchains to do things like manage pharmaceutical information, track freight shipments and trace the origin of food. Each application touts the ability of blockchains to keep a complete record of data in a system that can’t be easily changed.
Still, some people question the utility of the underlying technology. Sure, it’s great for cryptocurrency. But critics scoff at the idea that it’s going to revolutionize anything. “Someone who says blockchain can be used to solve Problem X doesn’t understand Problem X,” Weaver said.
He cites the popular example of using a blockchain to track the production and distribution of food. Advocates say it would improve safety andmake it easier to, say, identify the origin of a salmonella outbreak. It would be far easier to use RFID chips or QR codes, he said. Such technology provides a more reliable record because it does not require a person tomanually record the data on the ledger, a process that invariably introduces human error.
But Catherine Tucker, a professor at the MIT Sloan School of Management, sees tremendous potential in blockchain technology. She sees blockchains being most useful for managing digital currencies and tracking health and insurance data.
“I think we can all agree that the way we store and record data has not transformed in the same way that other aspects of our use of digital data has,” she said. “It makes a lot of sense to identify better technologies for recording data and ensuring its integrity.”
Tucker said the important thing for early adopters of blockchain technology to remember is that the technology is “evolving” and companies shouldn’t embrace it just for the sake of embracing it. Instead, they ought to make sure they genuinely need the tech and, once they’ve adopted it, make sure they adapt to changes as it evolves, she said.
So who’s using it?
IBM is a major player in the space, with more than 500 blockchain-related projects in the realms of shipping, banking and food safety. For example, its TradeLens project aims to improve shipping by minimizing paperwork and the documentation errors that often accompany it. More than 150 million transactions have already been logged on its blockchain.
Other major companies are dabbling inthe technology. Walmart hopes to improve the safety of the food it sells by using a blockchain to track its path from production to customer. Microsoft has been exploring its potential for data sharing, JPMorgan Chase is planning pilot programs with it, and American Express has been experimenting with its use in rewards programs for customers.
Academia is fixated on it, too. Columbia University plans to launch a blockchain research center before long. Schools like MIT already explore the technology’s possibilities.
Even companies that wouldn’t seem like natural fits for the technology are embracing it. The Crown League, the world’s first professional fantasy football league, believes using a blockchain to keep track of wins, losses and earnings will ensure accuracy and fairness by creating an indelible record. But even Tucker concedes blockchain may not be the answer to every problem.
“The key thing about blockchain technology is that you must have a use case for why you need digital data to be persistent and unchangeable,” she said. “It makes sense for digital currencies and also health data and insurance data. It makes less sense in industries where the usefulness of data is more temporary.”
It seems the number of people who understand that may be only slightly higher than the number of people who understand what a blockchain is.