Blockchain definition: what you need to know

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Contracts, transactions, and records of them provide critical structure in our economic system, but they haven’t kept up with the world’s digital transformation. They’re like rush-hour gridloông xã trapping a Formula 1 race car.

Blockchain promises lớn solve this problem. The technology behind bitcoin, blockchain is an open, distributed ledger that records transactions safely, permanently, và very efficiently. For instance, while the transfer of a chia sẻ of stock can now take up lớn a week, with blockchain it could happen in seconds. Blockchain could slash the cost of transactions và eliminate intermediaries lượt thích lawyers và bankers, and that could transform the economy. But, like the adoption of more internet technologies, blockchain’s adoption will require broad coordination & will take years. In this article the authors describe the path that blockchain is likely to follow and explain how firms should think about investments in it.


It will take years to lớn transsize business, but the journey begins now.

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In Brief
The Hype

We’ve all heard that blockchain will revolutionize business, but it’s going lớn take a lot longer than many people claim.

The Reason

Like TCP/IP. (on which the mạng internet was built), blockchain is a foundational technology that will require broad coordination. The màn chơi of complexity—technological, regulatory, and social—will be unprecedented.

The Truth

The adoption of TCP/IP suggests blockchain will follow a fairly predictable path. While the journey will take years, it’s not too early for businesses to lớn start planning.


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Contracts, transactions, and the records of them are ahy vọng the defining structures in our economic, legal, and political systems. They protect assets and phối organizational boundaries. They establish and verify identities và chronicle events. They govern interactions among muốn nations, organizations, communities, & individuals. They guide managerial & social action. And yet these critical tools & the bureaucracies formed to manage them have sầu not kept up with the economy’s digital transformation. They’re lượt thích a rush-hour gridlock trapping a Formula 1 race oto. In a digital world, the way we regulate and maintain administrative sầu control has lớn change.

Blockchain promises lớn solve sầu this problem. The giải pháp công nghệ at the heart of bitcoin và other virtual currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed khổng lồ trigger transactions automatically. (See the sidebar “How Blockchain Works.”)

How Blockchain Works

Here are five basic principles underlying the công nghệ.

1. Distributed Database

Each party on a blockchain has access to the entire database & its complete history. No single party controls the data or the information. Every buổi tiệc ngọt can verify the records of its transaction partners directly, without an intermediary.

2. Peer-to-Peer Transmission

Communication occurs directly between peers instead of through a central node. Each node stores & forwards information lớn all other nodes.

3. Transparency with Pseudonymity

Every transaction và its associated value are visible lớn anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose khổng lồ remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.

4. Irreversibility of Records

Once a transaction is entered in the database & the accounts are updated, the records cannot be altered, because they’re linked to lớn every transaction record that came before them (hence the term “chain”). Various computational algorithms và approaches are deployed lớn ensure that the recording on the database is permanent, chronologically ordered, & available to lớn all others on the network.

5. Computational Logic

The digital nature of the ledger means that blockchain transactions can be tied lớn computational ngắn gọn xúc tích và in essence programmed. So users can phối up algorithms & rules that automatically trigger transactions between nodes.


With blockchain, we can imagine a world in which contracts are embedded in digital code và stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, và every payment would have sầu a digital record & signature that could be identified, validated, stored, and shared. Intermediaries lượt thích lawyers, brokers, và bankers might no longer be necessary. Individuals, organizations, machines, và algorithms would freely transact & interact with one another with little friction. This is the immense potential of blockchain.

Indeed, virtually everyone has heard the clayên that blockchain will revolutionize business and redefine companies & economies. Although we share the enthusiasm for its potential, we worry about the hype. It’s not just security issues (such as the 2014 collapse of one bitcoin exchange và the more recent hacks of others) that concern us. Our experience studying technological innovation tells us that if there’s lớn be a blockchain revolution, many barriers—technological, governance, organizational, & even societal—will have khổng lồ fall. It would be a mistake to rush headlong inlớn blockchain innovation without understanding how it is likely to lớn take hold.

True blockchain-led transformation of business và government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attaông chồng a traditional business mã sản phẩm with a lower-cost solution và overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential khổng lồ create new foundations for our economic và social systems. But while the impact will be enormous, it will take decades for blockchain khổng lồ seep into lớn our economic và social infrastructure. The process of adoption will be gradual & steady, not sudden, as waves of technological and institutional change gain momentum. That insight and its strategic implications are what we’ll explore in this article.

Patterns of Technology Adoption

Before jumping into lớn blockchain strategy and investment, let’s reflect on what we know about giải pháp công nghệ adoption and, in particular, the transformation process typical of other foundational technologies. One of the most relevant examples is distributed computer networking technology, seen in the adoption of TCP/IP. (transmission control protocol/mạng internet protocol), which laid the groundwork for the development of the mạng internet.

Introduced in 1972, TCP/IPhường. first gained traction in a single-use case: as the basis for e-mail among mỏi the researchers on ARPAnet, the U.S. Department of Defense precursor to the commercial internet. Before TCP/IP, telecommunications architecture was based on “circuit switching,” in which connections between two parties or machines had khổng lồ be preestablished and sustained throughout an exchange. To ensure that any two nodes could communicate, telecom service providers and equipment manufacturers had invested billions in building dedicated lines.

TCP/IP turned that Mã Sản Phẩm on its head. The new protocol transmitted information by digitizing it & breaking it up into very small packets, each including address information. Once released into lớn the network, the packets could take any route lớn the recipient. Smart sending and receiving nodes at the network’s edges could disassemble & reassemble the packets và interpret the encoded data. There was no need for dedicated private lines or massive infrastructure. TCP/IPhường created an open, shared public network without any central authority or các buổi party responsible for its maintenance & improvement.

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Traditional telecommunications và computing sectors looked on TCP/IPhường with skepticism. Few imagined that robust data, messaging, voice, and Clip connections could be established on the new architecture or that the associated system could be secure và scale up. But during the late 1980s and 1990s, a growing number of firms, such as Sun, NeXT, Hewlett-Packard, & Silibé Graphics, used TCP/IP, in part khổng lồ create localized private networks within organizations. To vị so, they developed building blocks and tools that broadened its use beyond e-mail, gradually replacing more-traditional local network technologies and standards. As organizations adopted these building blocks & tools, they saw dramatic gains in productivity.

TCP/IP. burst inkhổng lồ broad public use with the advent of the World Wide Web in the mid-1990s. New giải pháp công nghệ companies quickly emerged khổng lồ provide the “plumbing”—the hardware, software, and services needed to connect to the now-public network and exchange information. Netscape commercialized browsers, web servers, and other tools and components that aided the development and adoption of mạng internet services và applications. Sun drove sầu the development of Java, the application-programming language. As information on the website grew exponentially, Infoseek, Excite, AltaVista, & Yahoo were born khổng lồ guide users around it.

Once this basic infrastructure gained critical mass, a new generation of companies took advantage of low-cost connectivity by creating internet services that were compelling substitutes for existing businesses. CNET moved news online. Amazon offered more books for sale than any bookcửa hàng. Priceline and Expedia made it easier to lớn buy airline tickets và brought unprecedented transparency to the process. The ability of these newcomers to get extensive sầu reach at relatively low cost put significant pressure on traditional businesses lượt thích newspapers và brick-and-mortar retailers.

Relying on broad mạng internet connectivity, the next wave sầu of companies created novel, transformative applications that fundamentally changed the way businesses created và captured value. These companies were built on a new peer-to-peer architecture & generated value by coordinating distributed networks of users. Think of how eBay changed online retail through auctions, Napster changed the music industry, Skype changed telecommunications, & Google, which exploited user-generated link khổng lồ provide more relevant results, changed website search.


Ultimately, it took more than 30 years for TCP/IP. to move sầu through all the phases—single use, localized use, substitution, và transformation—và reshape the economy. Today more than half the world’s most valuable public companies have internet-driven, platform-based business models. The very foundations of our economy have sầu changed. Physical scale & chất lượng intellectual property no longer confer unbeatable advantages; increasingly, the economic leaders are enterprises that act as “keystones,” proactively organizing, influencing, and coordinating widespread networks of communities, users, and organizations.

The New Architecture

Blockchain—a peer-to-peer network that sits on top of the internet—was introduced in October 2008 as part of a proposal for bitcoin, a virtual currency system that eschewed a central authority for issuing currency, transferring ownership, và confirming transactions. Bitcoin is the first application of blockchain công nghệ.

The parallels between blockchain và TCP/IP are clear. Just as e-mail enabled bilateral messaging, bitcoin enables bilateral financial transactions. The development & maintenance of blockchain is open, distributed, & shared—just lượt thích TCP/IP’s. A team of volunteers around the world maintains the core software. And just like e-mail, bitcoin first caught on with an enthusiastic but relatively small community.

TCP/IPhường. unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to lớn become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence & control emerge.

Consider how business works now. Keeping ongoing records of transactions is a core function of any business. Those records track past actions và performance and guide planning for the future. They provide a view not only of how the organization works internally but also of the organization’s outside relationships. Every organization keeps its own records, và they’re private. Many organizations have no master ledger of all their activities; instead records are distributed across internal units & functions. The problem is, reconciling transactions across individual and private ledgers takes a lot of time and is prone khổng lồ error.

For example, a typical stock transaction can be executed within microseconds, often without human intervention. However, the settlement—the ownership transfer of the stock—can take as long as a week. That’s because the parties have no access khổng lồ each other’s ledgers and can’t automatically verify that the assets are in fact owned và can be transferred. Instead a series of intermediaries act as guarantors of assets as the record of the transaction traverses organizations and the ledgers are individually updated.

In a blockchain system, the ledger is replicated in a large number of identical databases, each hosted and maintained by an interested buổi tiệc nhỏ. When changes are entered in one copy, all the other copies are simultaneously updated. So as transactions occur, records of the value và assets exchanged are permanently entered in all ledgers. There is no need for third-party intermediaries lớn verify or transfer ownership. If a stoông chồng transaction took place on a blockchain-based system, it would be settled within seconds, securely và verifiably. (The infamous hacks that have sầu hit bitcoin exchanges exposed weaknesses not in the blockchain itself but in separate systems linked lớn parties using the blockchain.)

A Framework for Blockchain Adoption

If bitcoin is lượt thích early e-mail, is blockchain decades from reaching its full potential? In our view the answer is a qualified yes. We can’t predict exactly how many years the transformation will take, but we can guess which kinds of applications will gain traction first và how blockchain’s broad acceptance will eventually come about.

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How Foundational Technologies Take Hold

The adoption of foundational technologies typically happens in four phases. Each phase is defined by the novelty of the applications and the complexity of the coordination efforts needed khổng lồ make them workable. Applications low in novelty và complexity gain acceptance first. Applications high in novelty and complexity take decades lớn evolve but can transform the economy. TCP/IP công nghệ, introduced on ARPAnet in 1972, has already reached the transformation phase, but blockchain applications (in red) are in their early days.


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In our analysis, history suggests that two dimensions affect how a foundational technology and its business use cases evolve sầu. The first is novelty—the degree khổng lồ which an application is new to lớn the world. The more novel it is, the more effort will be required lớn ensure that users understvà what problems it solves. The second dimension is complexity, represented by the màn chơi of ecosystem coordination involved—the number & diversity of parties that need to lớn work together to lớn produce value with the công nghệ. For example, a social network with just one member is of little use; a social network is worthwhile only when many of your own connections have sầu signed on khổng lồ it. Other users of the application must be brought on board to lớn generate value for all participants. The same will be true for many blockchain applications. And, as the scale and impact of those applications increase, their adoption will require significant institutional change.

We’ve developed a framework that maps innovations against these two contextual dimensions, dividing them into lớn quadrants. (See the exhibit “How Foundational Technologies Take Hold.”) Each quadrant represents a stage of công nghệ development. Identifying which one a blockchain innovation falls into lớn will help executives understvà the types of challenges it presents, the cấp độ of collaboration and consensus it needs, và the legislative và regulatory efforts it will require. The maps will also suggest what kind of processes & infrastructure must be established to lớn facilitate the innovation’s adoption. Managers can use it to assess the state of blockchain development in any industry, as well as to lớn evaluate strategic investments in their own blockchain capabilities.

Single use.

In the first quadrant are low-novelty và low-coordination applications that create better, less costly, highly focused solutions. E-mail, a cheap alternative to phone calls, faxes, và snail mail, was a single-use application for TCP/IP. (even though its value rose with the number of users). Bitcoin, too, falls inkhổng lồ this quadrant. Even in its early days, bitcoin offered immediate value to the few people who used it simply as an alternative payment method. (You can think of it as a complex e-mail that transfers not just information but also actual value.) At the end of 2016 the value of bitcoin transactions was expected to hit $92 billion. That’s still a rounding error compared with the $411 trillion in total global payments, but bitcoin is growing fast và increasingly important in contexts such as instant payments & foreign currency và asmix trading, where the present financial system has limitations.

Localization.

The second quadrant comprises innovations that are relatively high in novelty but need only a limited number of users lớn create immediate value, so it’s still relatively easy to lớn promote their adoption. If blockchain follows the path network technologies took in business, we can expect blockchain innovations to build on single-use applications to lớn create local private networks on which multiple organizations are connected through a distributed ledger.


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Much of the initial private blockchain-based development is taking place in the financial services sector, often within small networks of firms, so the coordination requirements are relatively modest. Nasdaq is working with Chain.com, one of many blockchain infrastructure providers, to lớn offer technology for processing and validating financial transactions. Bank of America, JPMorgan, the Thủ đô New York Stoông xã Exchange, Fidelity Investments, và Standard Chartered are testing blockchain giải pháp công nghệ as a replacement for paper-based and manual transaction processing in such areas as trade finance, foreign exchange, cross-border settlement, and securities settlement. The Bank of Canada is testing a digital currency called CAD-coin for interngân hàng transfers. We anticipate a proliferation of private blockchains that serve sầu specific purposes for various industries.

Substitution.

The third quadrant contains applications that are relatively low in novelty because they build on existing single-use & localized applications, but are high in coordination needs because they involve sầu broader and increasingly public uses. These innovations ayên ổn to lớn replace entire ways of doing business. They face high barriers lớn adoption, however; not only vị they require more coordination but the processes they hope lớn replace may be full-blown và deeply embedded within organizations và institutions. Examples of substitutes include cryptocurrencies—new, fully formed currency systems that have grown out of the simple bitcoin payment technology. The critical difference is that a cryptocurrency requires every buổi tiệc ngọt that does monetary transactions khổng lồ adopt it, challenging governments and institutions that have sầu long handled and overseen such transactions. Consumers also have lớn change their behavior & understvà how lớn implement the new functional capability of the cryptocurrency.

A recent experiment at MIT highlights the challenges ahead for digital currency systems. In năm trước the MIT Bitcoin Club provided each of MIT’s 4,494 undergraduates with $100 in bitcoin. Interestingly, 30% of the students did not even sign up for the không lấy phí money, và 20% of the sign-ups converted the bitcoin khổng lồ cash within a few weeks. Even the technically savvy had a tough time understanding how or where to lớn use bitcoin.

One of the most ambitious substitute blockchain applications is Stellar, a nonprofit that aims to bring affordable financial services, including banking, micropayments, và remittances, to people who’ve never had access lớn them. Stellar offers its own virtual currency, lumens, and also allows users to lớn retain on its system a range of assets, including other currencies, telephone minutes, và data credits. Stellar initially focused on Africa, particularly Nigeria, the largest economy there. It has seen significant adoption amuốn its target population and proved its cost-effectiveness. But its future is by no means certain, because the ecosystem coordination challenges are high. Although grassroots adoption has demonstrated the viability of Stellar, khổng lồ become a banking standard, it will need to influence government policy và persuade central banks & large organizations to lớn use it. That could take years of concerted effort.

Further Reading

To learn more about technology adoption, go lớn these articles on thanglongsc.com.vn:

“Digital Ubiquity: How Connections, Sensors, và Data Are Revolutionizing Business” Marco Iansiti và Karlặng R. Lakhani

“Strategy as Ecology” Marco Iansiti & Roy Levien

“Right Tech, Wrong Time” Ron Adner and Rahul Kapoor


Transformation.

Inkhổng lồ the last quadrant fall completely novel applications that, if successful, could change the very nature of economic, social, & political systems. They involve coordinating the activity of many actors và gaining institutional agreement on standards and processes. Their adoption will require major social, legal, và political change.

“Smart contracts” may be the most transformative sầu blockchain application at the moment. These automate payments & the transfer of currency or other assets as negotiated conditions are met. For example, a smart contract might skết thúc a payment lớn a supplier as soon as a shipment is delivered. A firm could signal via blockchain that a particular good has been received—or the hàng hóa could have sầu GPS functionality, which would automatically log a location update that, in turn, triggered a payment. We’ve already seen a few early experiments with such self-executing contracts in the areas of venture funding, banking, and digital rights management.

The implications are fascinating. Firms are built on contracts, from incorporation to lớn buyer-supplier relationships lớn employee relations. If contracts are automated, then what will happen to traditional firm structures, processes, & intermediaries like lawyers & accountants? And what about managers? Their roles would all radically change. Before we get too excited here, though, let’s rethành viên that we are decades away from the widespread adoption of smart contracts. They cannot be effective sầu, for instance, without institutional buy-in. A tremendous degree of coordination và clarity on how smart contracts are designed, verified, implemented, & enforced will be required. We believe the institutions responsible for those daunting tasks will take a long time khổng lồ evolve. And the giải pháp công nghệ challenges—especially security—are daunting.

Guiding Your Approach lớn Blockchain Investment

How should executives think about blockchain for their own organizations? Our framework can help companies identify the right opportunities.

For most, the easiest place to lớn start is single-use applications, which minimize risk because they aren’t new và involve little coordination with third parties. One strategy is khổng lồ add bitcoin as a payment mechanism. The infrastructure & market for bitcoin are already well developed, and adopting the virtual currency will force a variety of functions, including IT, finance, accounting, sales, and sale, khổng lồ build blockchain capabilities. Another low-risk approach is lớn use blockchain internally as a database for applications like managing physical & digital assets, recording internal transactions, và verifying identities. This may be an especially useful solution for companies struggling lớn reconcile multiple internal databases. Testing out single-use applications will help organizations develop the skills they need for more-advanced applications. And thanks to the emergence of cloud-based blockchain services from both start-ups and large platforms like Amazon & Microsoft, experimentation is getting easier all the time.

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Localized applications are a natural next step for companies. We’re seeing a lot of investment in private blockchain networks right now, and the projects involved seem poised for real short-term impact. Financial services companies, for example, are finding that the private blockchain networks they’ve sầu mix up with a limited number of trusted counterparties can significantly reduce transaction costs.

Organizations can also tackle specific problems in transactions across boundaries with localized applications. Companies are already using blockchain to lớn trachồng items through complex supply chains, for instance. This is happening in the đá quí industry, where gems are being traced from mines lớn consumers. The giải pháp công nghệ for such experiments is now available off-the-shelf.

Developing substitute applications requires careful planning, since existing solutions may be difficult to lớn dislodge. One way to lớn go may be to focus on replacements that won’t require kết thúc users to lớn change their behavior much but present alternatives lớn expensive sầu or unattractive sầu solutions. To get traction, substitutes must deliver functionality as good as a traditional solution’s and must be easy for the ecosystem khổng lồ absorb & adopt. First Data’s foray into lớn blockchain-based gift cards is a good example of a well-considered substitute. Retailers that offer them to consumers can dramatically lower costs per transaction and enhance security by using blockchain to traông chồng the flows of currency within accounts—without relying on external payment processors. These new gift cards even allow transfers of balances và transaction capability between merchants via the comtháng ledger.


Transformative sầu applications are still far away. But it makes sense lớn evaluate their possibilities now và invest in developing công nghệ that can enable them. They will be most powerful when tied khổng lồ a new business model in which the xúc tích và ngắn gọn of value creation và capture departs from existing approaches. Such business models are hard to lớn adopt but can unloông xã future growth for companies.

Consider how law firms will have sầu khổng lồ change to lớn make smart contracts viable. They’ll need lớn develop new expertise in software & blockchain programming. They’ll probably also have sầu lớn rethink their hourly payment Mã Sản Phẩm and entertain the idea of charging transaction or hosting fees for contracts, to lớn name just two possible approaches. Whatever taông chồng they take, executives must be sure they understvà & have sầu tested the business Model implications before making any switch.

Transformative sầu scenartiện ích ios will take off last, but they will also deliver enormous value. Two areas where they could have sầu a profound impact: large-scale public identity systems for such functions as passport control, và algorithm-driven decision making in the prevention of money laundering & in complex financial transactions that involve many parties. We expect these applications won’t reach broad adoption & critical mass for at least another decade và probably more.

Transformative sầu applications will also give rise lớn new platform-màn chơi players that will coordinate and govern the new ecosystems. These will be the Googles và Facebooks of the next generation. It will require patience khổng lồ realize such opportunities. Though it may be premature lớn start making significant investments in them now, developing the required foundations for them—tools and standards—is still worthwhile.

CONCLUSION

In addition to providing a good template for blockchain’s adoption, TCP/IP has most likely smoothed the way for it. TCP/IPhường. has become ubiquitous, & blockchain applications are being built on top of the digital data, communication, & computation infrastructure, which lowers the cost of experimentation & will allow new use cases to lớn emerge rapidly.

With our framework, executives can figure out where to lớn start building their organizational capabilities for blockchain today. They need to lớn ensure that their staffs learn about blockchain, to lớn develop company-specific applications across the quadrants we’ve sầu identified, and lớn invest in blockchain infrastructure.

But given the time horizons, barriers to lớn adoption, and sheer complexity involved in getting to TCP/IP levels of acceptance, executives should think carefully about the risks involved in experimenting with blockchain. Clearly, starting small is a good way to develop the know-how lớn think bigger. But the cấp độ of investment should depover on the context of the company & the industry. Financial services companies are already well down the road to blockchain adoption. Manufacturing is not.

No matter what the context, there’s a svào possibility that blockchain will affect your business. The very big question is when.

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A version of this article appeared in the January–February 2017 issue (pp.118–127) of Harvard Business Review.