Blockchain is one of those buzzwords that has been around for a few years. It’s a very powerful technology and it has incredible potential for the logistics industry, but it’s one of those things which can be quite tricky to explain or to understand unless you work in coding – even some of the ‘blockchain for dummies’ guides are full of jargon.
Blockchain technology is increasingly being used across the supply chain, and so it’s great to be armed with information so that you can keep track of how technology is evolving in our industry.
Here is my blockchain definition explained in as simple terms as possible, including an analogy and a glossary at the bottom of the page.
What is Blockchain?
In its simplest form, Blockchain is a piece of software which works as a ledger for financial transactions. The ledger is shared across a network of computers, it is encrypted (converted into code) and it is decentralised (has no governing body).
Okay, in a little more detail?
Blockchain is a Distributed Ledger Technology (DLT). It truly came into effect after the 2008 financial crisis which saw tens to hundreds of trillions of dollars lost overnight. The crisis highlighted the need for a financial system which did not rely on middle men like governments and banks to control peoples’ wealth.
Blockchain is decentralised, meaning there is no middle man. Instead, every record of a transaction that happens on the blockchain is recorded and duplicated across an entire computer network. It’s all encrypted, meaning there’s no ability to be identified. However, what it does mean is that these transaction records are distributed across an entire network, so nobody can claim a transaction hasn’t happened when it has, or vice versa.
The benefits to this system begin with how it works. Because there is no middle man – no bank, for example – there are no fees. So, people who use blockchain keep all of their profits and aren’t charged any transaction fees.
An analogy to help explain how blockchain works
There is a group of 10 school friends who all exchange marbles with each other on the playground. They all trade solely between each other and work things out between themselves.
One day, one of the children, Kelly, comes to school, and really wants Jane’s three pink marbles. But Kelly has forgotten hers.
Kelly tells Jane that if she can have her pink marbles, she will give her five red ones in return. Jane agrees, and so Kelly takes the pink marbles home. The next day, Kelly brings her red marbles into school and gives them to Jane as they agreed. The arrangement works.
All is well so far. But this sort of arrangement involves promises or ‘I owe you’s, which starts to become more common. Sarah keeps forgetting to bring her marbles to school, and Kelly has arranged with Ben to give her marbles to him once she has completed another trade. Things get more confusing.
There needs to be a way in which everyone can keep track of who owes what.
The oldest child, Tom, offers to keep a record in a book – a ledger – which tracks every trade, and who owes what. Tom is the middleman – a bank. This works for a while.
But eventually, Tom decides that he deserves more of the marbles himself for doing all of this work. Also, the other children think that sometimes Tom writes things down wrong, but his word goes above all. And what happens if Tom loses the book?
A better, fairer way is decided.
Every child has a book and keeps track of every trade and ‘promised’ trade. Then, everyone is doing the work, so nobody is owed more marbles than anyone else. If there are any discrepancies, every child has a record of every trade, so they can all check their books and the majority record will win.
This new scenario is how blockchain works (in principle).
It is called a ‘trustless’ system, where there is no single authority controlling it.
Why should I care about Blockchain?
Blockchain technology could be used to store other sensitive data, as well as payment transactions. The medical field has already been utilising this technology for storing patient records in some cases, and some logistics companies are using blockchain to verify shipments and payments.
One of the most attractive features of blockchain is its transparency. It keeps everyone accountable because of the shared ledger.
What’s the difference between blockchain and bitcoin?
I get this question a lot, but the difference is simple.
Bitcoin is a unit of currency – cryptocurrency, to be specific – that exists solely online, divorced from any government. It’s essentially a coin which never leaves the internet, so it can’t be lost or damaged. Its value fluctuates just like any currency, and payments made using bitcoin are encrypted.
Blockchain is the technology which powers Bitcoin. It’s the digital ledger which helps to keep everybody accountable.
Below is a glossary of some of the most common words you might hear when people are talking about blockchain.
Blockchain or Block Chain – See above!
Bitcoin – a unit of cryptocurrency
Bitcoin Wallet or Crypto Wallet / Cryptocurrency Wallet – the equivalent of a physical wallet, but for bitcoin. Instead of coins, the wallet contains your private access keys which you need to access your bitcoin
Cryptocurrency – A digital or virtual currency which is encrypted to ensure privacy and security in transactions. Cryptocurrency is not governed by any bank, and there are many different kinds: Ethereum, dogecoin, reddcoin, etc. Sometimes abbreviated as ‘crypto’
Decentralised – Ungoverned
Encrypted – Concealed by being converted into code
Ledger – A record of financial transactions, like an accounts book
Trustless System – See ‘decentralised’