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So here’s what we know about BlockChain

Understanding how blockchain creates business value is essential for companies to identify the right use cases and move beyond small pilots to widespread adoption.

Blockchain has a lot of potential applications, in areas as diverse as supply-chain management, trade finance, insurance, and even cybersecurity. But there are a lot of misconceptions and often good reasons why a blockchain may not be the right tool for the job.

What is blockchain?

When you think about blockchain, is really to think of it as a database. And it’s a database which is shared across a number of participants. We think about a network of participants. Each has a computer. The idea is that at any moment in time, simultaneously, each member of that network holds an identical copy of the blockchain database on their computer. That’s the essential principle. Information is potentially available to all participants at a moment in time.

When you think about that definition as a database, think of it in three parts. The first is that this is a cryptographically secure database or distributed ledger. That means that when data is read or written from the database, you need the correct cryptographic keys to do that: a public key, which is a basically the address and the database where information is stored, and a private key, which is your personal key, truly the security which prevents other people from updating the information unless they have that correct key. It’s secure data.

Second, it’s a digital log or digital database of transactions. Digital’s important because, in many industries, we’re still going through the process of digitization, and that’s an important first step before you can even think about using blockchain.

Finally, this is a database that’s shared across either a public or a private network. The most famous public network is probably the Bitcoin blockchain. That is something which has been around for many years. And you can join that network. You can become a node on the network with a computer, without any expressed permissions. And you can leave again. So no one really knows who’s joining and leaving.

Conversely, you can have a private blockchain, a private network, which in an application like banking is probably much more culturally acceptable, in which you know who’s participating, who’s got access to data, who’s holding a copy of that database.

But we already have big databases. And we already have the cloud, where you can share big databases and manage permissions. So just double click for us, why is blockchain potentially a better mousetrap?

There are four areas of innovation in why blockchain should be used.

One certainly revolves around the cryptographic keys. The cryptographic security we’re using today that was originated in the Bitcoin blockchain truly comes from 20-plus years of cryptographic research. This wasn’t just invented overnight. The way of securing data in a distributed database through these keys is pretty unique and certainly uses cutting-edge securities. That’s number one.

Second, the idea that this is a distributed, a decentralized, database means that you don’t have some of these issues around a database breaking the single point of failure. What you’ve actually got is a system which is very robust. If one database fails, one copy fails, you’ve got that important redundancy across multiple nodes.

Third, the essence of blockchain is a chain of blocks of information together. When you have those blocks chained together, you’re creating a perfect audit history. You can go back through time and see a former state of the database. If you’re recording things like property titles, you can see a previous owner of the property and the current owner. You’ve got this perfect audit trail.

But perhaps the most important aspect here, and this is what’s getting people excited, is this idea of process integrity. And that is the database can only be updated when two things happen. One, the correct credentials are being applied, the private and public key together. But most importantly, those credentials are being verified by a majority of participants in the network.

You can only update the database when the majority of independent computers check and verify those credentials that allow you to write to the database. You’re securing this against the idea of a single point of failure and somebody working nefariously to try and corrupt the database. You have this democratization of the process of dating the database.

Then, is blockchain Bitcoin? No, as we were just saying, Bitcoin is an implementation of and leverages a blockchain in order to deliver a virtual currency. We often hear, “Is it better than traditional databases?” No, it’s not necessarily better than traditional databases. But blockchain is very effective in an environment where you need to have a decentralized way of working or you’re looking to take out a centralized entity—so in things like in trade finances.

That said, blockchain isn’t as efficient as traditional databases. It’s much hungrier in terms of energy use and in many cases has higher storage costs. By definition, it’s much more for specific use cases. Is it immutable or tamper-proof? It is only as immutable and tamper-proof as the implementation itself. And, frankly, if you’re able to take over half the nodes in a blockchain network, it’s very difficult. But if you are, you can tamper with it because then you will be able to affect the consensus algorithm.

As far as it being a truth machine, well, the blockchain’s only as good as the information you put in it. So if you have a blockchain, and in the blockchain, you’re keeping people’s driver’s license information or voting history, and you put in incorrect data, the data itself isn’t checked in any particular way. All that the blockchain itself does is ensure the integrity of the individuals making the transaction, ensuring that you have the right combination of a public and private key.

This article is from McKinsey&Company Podcast.

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