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Ever since ancient merchants began using beads and shells as a form of currency, tokens of value have facilitated the flow of commerce. Physical coins and banknotes have long been the facilitators of choice. More recently, digital money has emerged. And now, commerce may be on the verge of fundamental change thanks to a new technology: blockchain.

Digital money keeps commerce flowing in much the same way physical currency does. But because digital currency is electronic and internet based, it can streamline business processes and help reduce the time and cost of getting things done. The downside is that digital money opens up transactions to a new type of fraud: double spending.

When I pay you with physical money, the coin or paper bill leaves my hands and I can’t use it again. But with digital money, I still have all the data on my computer. I can make a copy and spend it again. One way to stop such fraudulent double-spending is through a central authority that can verify whether the money has been spent — the same kind of solution that’s used in electronic banking and funds transfer. However, this approach suffers from the inherent delay when implementing a central clearinghouse and also creates a single point of technical failure.

How blockchain works

The digital currency bitcoin, implemented in 2009, avoids this problem by using decentralized control in the form of a distributed ledger called blockchain. Here is how blockchain works:

• Two parties are members of an online blockchain network that includes many other members.
• The first party wants to send money to the second party.
• Using blockchain, the first party generates an online record called a block, which represents the transaction.
• Every node in the network automatically receives a copy of the new block.
• An agreement protocol enables each node to approve the transaction as valid.
• The block is linked to a chain of previous blocks, creating a transaction record and audit trail.
• No one can go back and rewrite the transaction history.
• The money moves from the first party to the second.

Because the blockchain shows the money now belongs to the second party, the sender cannot double spend it. And no centralized authority is needed to certify the transaction because the blockchain provides a verified ledger that is present on every node.

Added protection for blockchain users

Although bitcoin is the best-known use of the blockchain concept, organizations of all kinds are discovering that they can embed distributed ledger technology in their own solutions without using the bitcoin currency. These networks can be open, with anonymous users such as bitcoin users, or they can be private to ensure only identified, authorized members can view and record transactions.

Business enterprises tend to prefer the second version, which is a private, shared network. Some also want data encryption as a further protection for users’ confidential data, along with digital signatures to identify who entered the data.

To help meet needs such as these, a group of companies including IBM got together to create the Hyperledger project, an open source blockchain platform that is enterprise scale and includes security options. It advances cross-industry blockchain technologies for business. Leaders in banking, finance, the Internet of Things, manufacturing, supply chains and technology have joined in this global collaboration. The goal is to encourage communities of software developers to build blockchain frameworks and platforms.

Blockchain in the cloud

In that spirit, IBM has developed a blockchain platform on top of the Hyperledger open source code. IBM Blockchain enables companies to quickly run their own blockchain network in a secure cloud environment on the IBM Bluemix platform. These companies can use the environment to test their ideas and develop what is expected to be a new generation of transactional apps based on the blockchain concept.

IBM is now using the blockchain environment for its own commerce flow with suppliers and partners. Placing transactions on IBM Blockchain enables companies in business with IBM to easily and securely check the status of their workflow, orders and invoices. IBM expects the shared ledger to greatly speed up transactions compared to suppliers and partners each using their own databases and ledgers.

An exciting future

Exciting times are ahead for business and commerce. As the Hyperledger project puts it, “Not since the web itself has a technology promised broader and more fundamental revolution than blockchain technology.”

Learn more on the potential of blockchain in this article by IBM Fellow Donna Dillenberger.

For more information, visit the IBM Blockchain website.

The post Blockchain explained: Keeping commerce flowing appeared first on IBM Systems Blog: In the Making.