• Gemalto is now part of the Thales Group, find out more.

A beginner's guide to blockchain

Some commentators are predicting that blockchain could be the big breakthrough technology of 2016. So what is it, and how does it work?
First published on March 07, 2016

Blockchain? Is that something new?
The technology has been around since 2008, but it's only in the past year or so that it has started to be used as the foundation for a wide range of commercial and government applications. In a September 2015 survey by the World Economic Forum, a majority of technology experts said they expected that at least 10% of global GDP will be stored on blockchain platforms by 2025.

How does it work?
Blockchain is an example of a distributed public ledger; that is, a shared record system for transactions. It's been described as "a technology that allows people who don't know each other to trust a shared record of events".

The idea is that every party involved in a particular type of transaction holds a copy of the entire ledger; there are no centralized databases. Anyone can enter a transaction onto the system, and at regular intervals these transactions are batched together into "blocks." The blocks are then formed into "chains" (hence the name) using cryptographic technology that provides high levels of security. The chronological chain of transactional information is created in such a way that each block that is added protects the information in the previous one.

Is blockchain secure?
Distribution and decentralization are fundamental to blockchain; they ensure that no party in the system has the ability to modify or tamper with the data, thus guarding against fraud, theft, hacking and other misdemeanors. Plus, as mentioned above, the blocks in the chain are protected by advanced cryptography that has so far proved immune to hacking.

What other benefits does blockchain offer?
Paradoxically, for such a complex technology, blockchain actually increases transparency, because any party in the system can verify the information it contains. It also eliminates the need for an intermediary to authenticate and process transactions, saving both time and money.

Why is everyone talking about blockchain now?
A whole range of organizations have begun to see how blockchain could introduce new levels of trust and security to digital transactions. Financial firms, including large banks like Barclays, Santander and Deutsche Bank, have been testing blockchain-based technologies in their innovation hubs, while more and more start-ups in the rapidly growing financial technology (fintech) sector are working on applications for blockchain.

What sort of applications?
Mainly financial ones, for now, in areas including peer-to-peer payments, share trading and insurance. But blockchain could also revolutionize other fields, such as registries, smart contracts and voting.

For example, later this year, Nasdaq will pilot the use of blockchain technology to enable investors in Estonian companies to vote by proxy at shareholder meetings. The scheme, which will be open to users of Estonia's e-Residency digital ID program, will allow for quick, easy and secure authentication of shareholders looking to vote.

The possibilities are endless and could benefit all areas of society.

Is blockchain technology already part of our everyday lives?
Not yet, and it could take a while for it to become widespread. Blockchain represents such a fundamental change in the way transactions are handled that the world's major financial institutions and regulators will take time to agree on the way forward.

In the meantime, though, small, nimble fintech companies are using blockchain to develop innovative, trusted products and services. And that's why you're going to hear more and more about blockchain throughout 2016 - and beyond.

TAGGED IN innovation; financial services; fintech; voting