Why use a Blockchain?

Separating the hype from the truth is not always easy where blockchains are concerned. The very words blockchain technology have generated a large buzz. Even those who have no real interest in Bitcoin or cryptocurrency have heard about blockchains. As the technology continues to grow and develop,one of the missions of those who are advancing the field is to be able to convince organizations and financial institutions and even governments why the blockchain should be used.

The Ultimate Reason for Using a Blockchain

 At the end of the day there is a very simple but powerful reason for using a blockchain. Blockchains are used to manage and secure digital relationships as part of a system of record. Businesses have spent literally millions of dollars trying to determine how blockchains can improve their operations. The thing that keeps coming around again and again is that blockchains can foster digital relationships that remove the need for centralized administration.

 Blockchain-based relationships are helping to build an Internet of Value where interactions and transactions are completed in a more secure environment. Yet, even though this is beneficial to some situations,blockchains might not be a viable solution for all. There need to be some factors about data management that are considered before an organization answers the question of why they should be using a blockchain.

Dynamic Data and the Limitations of Traditional Ledgers and Paper Records

 There are some instances where paper instruments provide sufficient value in terms of maintaining a chain of data. Take fiat currency for example. The bills that are printed by a country’s treasury are very difficult to counterfeit, and those bills can be tracked and traced. The thing about this type of paper instrument, however, is that it represent a static form of data. A $20 bill is always a $20 bill no mater how many times it is exchanged for something of value.

When data becomes dynamic and takes on a constant element of change, that is when problems of record keeping can be encountered. If transactions are occurring at a rapid rate with multiple parties being able to become involved in those transactions, the management of data becomes more complex. To use another example from the financial world, can you imagine if you were able to open three different bank accounts at three different banks with the same deposit? Confusion would ensue because of the paper record keeping. One bank might process transactions slower than another. It would be impossible for the ledger of your account to be updated properly.

Blockchains can resolve issues with dynamic data by providing a decentralized ledger that preserves accurate records. When one entity makes an entry in the ledger, a permanent record is created that cannot be altered.Everyone that participates in the blockchain network would have access to the same information as everyone else.

Data Control by a Sole Authority

 Another consideration of organizations that are thinking about using a blockchain is whether or not the data they are trying to track needs to be controlled by a sole governing authority. Much has been made about the ability of a blockchain to eliminate third-party authority, and in many cases this is beneficial. But there would be some cases where third-party centralized management of data is still useful.

It may be that some organizations don’t feel comfortable working with a distributed ledger that is open-source and able to be edited by many parties. Perhaps their particular management of data insists that there be some type of security where those who have access to the ledger are concerned.

 Interestingly enough, blockchain technology has a solutionfor this. Permission-only blockchains are being developed which restrict access to the distributed ledger.

What About Speed?

Organizations also have to ask themselves how important the speed of processing transactions is to their operations. Those who require transactions that can be accomplished in milliseconds will probably find that it is better to stick with their centralized systems. At least for now.

There are efforts in progress to address the so-called scalability of Bitcoin and blockchains. It is generally accepted that a faster processing time is required before some institutions can embrace the technology. Currently, MasterCard and Visa networks can process transactions much faster than Bitcoin, but there have been some developments like the Lightning Network which have made strides in resolving this issue.  

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