The Key Concepts of Blockchain for Business

Posted in: Business Insights

This blog post, the first in a series, discusses the key concepts of the business blockchain as explained by William Mougayar.

Blockchain has been variously described as revolutionary, disruptive and transformative. It has also been described as an overhyped buzzword, the latest fad, and technical jargon. But what, exactly, is blockchain—in business terms? And why should you care?

William Mougayar recently spoke at the Pythian Love Your Data conference in New York City, to explain the business implications of blockchain. With 34 years of experience in technology, Mougayar is an advisor, entrepreneur, venture investor, and author of the book The Business Blockchain. According to Google, he’s also the best Blockchain expert on the planet.

A quick primer on blockchain

First, here’s a brief explanation of a blockchain. It’s a distributed database that maintains a constantly growing list of records, called blocks. Each block has a timestamp and a link to a previous block. Cryptography ensures that users can edit only the parts of the blockchain that they “own” and also ensures that everyone’s copy of the blockchain is kept in synch[i].

Mougayar’s context and definition

Mougayar explains blockchain in the context of the web. He explains that for about 22 years, we’ve used the web mostly to move information from one place to another. But although the web has changed the way we share information, it hasn’t affected the way we deal with money…until the advent in 2009 of Bitcoin, the cryptocurrency that is based on blockchain technology.

Yes, we buy and sell goods online, and we transfer money—but we don’t do it directly. There’s still always an intermediary: a bank, a credit card company, some financial institution in the middle. And they’ve led us to believe we need them and their trust to conduct financial transactions.

With this background, Mougayar defines blockchain as “a new technology that enables the peer-to-peer transmission of electronic value, without any intermediary.”

Let’s break down this definition. Blockchain isn’t a tool, it’s much bigger: it’s a technology. It lets us transmit not just money but “electronic value”—because money is only one form of electronic value. With Blockchain, we can transmit any digital asset. Another key characteristic of blockchain is its peer-to-peer infrastructure. Blockchain lets us transmit not just money but “electronic value”. Click To Tweet

Peer-to-peer

What are the implications of a peer-to-peer infrastructure? There’s no intermediary, so no wait time, the way there is with a wire transfer. There are also no transaction fees, the way there are for a wire transfer or for using PayPal.

A peer-to-peer infrastructure is decentralized, which is the default infrastructure of blockchain, whether you have five parties in a network or thousands. This decentralization isn’t just a technical element, it’s a governance business element. (I’ll discuss the implications of governance, according to Mougayar, in a future blog post.)

Security

But without centralization, is blockchain secure?  Yes, because cryptography is everywhere in a blockchain. When a user writes something to a chain, there are no changes. You can’t erase something the way you can on a centralized database.  And everything is encrypted:  there are keys for sending and receiving. These characteristics make a blockchain an excellent record of value. It’s not, as some have described it, simply a digital ledger, but one of its applications is as a record-keeping tool.

Also, everything is validated based on consensus by the users.  The bigger a blockchain network is, the more secure it is—because any scam would require collusion of the network. It’s also very difficult to counterattack any specific transaction because there is no center.

Economic incentives

According to Mougayar, security is also enhanced by the economic incentives offered to users. These incentives, based on game theory, help to grow blockchain networks—and the bigger the networks become, the more resilient they become to counterattacks. This argument is seconded by Vitaly Buterin, the creator of Ethereum, one of the world’s largest blockchains, second only to Bitcoin. At a keynote address to the Financial Cryptography and Data Security conference in Malta earlier this year, Buterin argued that incentives play a key role in securing the blockchain—and are also why Bitcoin succeeded after decades of failed attempts at peer-to-peer currency[ii].

So, now that we understand the key concepts of blockchain—it’s a new technology that enables secure, peer-to-peer transmission of electronic value without any intermediary—what are the business implications? Mougayar describes blockchain as a “catalyst for change” and discusses seven areas of disruption. But that’s a topic for another blog post. Stay tuned.

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