Blockchain Technology Explained

By Steven Krohn · May 2, 2018

“Blockchain technology isn’t just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.” –  Abigail Johnson

In this information age, businesses rely heavily on advanced data analytics and forecasting methods to make proper strategic decisions. Blockchain technology can significantly improve the process of data collection and evaluation for management.

It allows them to use the data to find patterns such as stock prices, sales patterns and market demand.

Blockchain technology improves processes for businesses in countless ways.

Quick Transactions

In the current business environment, transactions can take days, weeks or months. This in large part is because of cross checking and verification between stakeholders.

A Blockchain technology based verification platform would significantly decrease the transaction time.

Blockchain technology allows multiple parties to deal directly with one another. Developers are certain that this would significantly enhance processing speeds in most industries.

Improved Transparency

A Blockchain ledger can be used to keep a complete record of every transaction that takes place on the platform. This is because every new transaction is added to the existing ledger as a new block of code.

The audit process is significantly simplified for connected banks and institutes. It adds complete transparency to the record keeping process. That dramatically improves the trust level significantly.

Risk Reduction

In today’s existing contracting system, a default by one party can have a major negative effect on a company even if they’ve met their obligation.. A party that has defaulted or “changes its mind’ midway through the completion of an order instills a lot of risk and uncertainty to the market.

A Real World Example

To understand risk reduction better, let’s consider a simple example. Suppose you own a small business that manufactures metal bearings for larger companies that assemble heavy machinery and automobiles.

A major corporation contacts you. “The Big Corp” offers a $1 million dollar contract to purchase your products over the next 6 months.

The deal is great for your business. Let’s assume you would spend about $400,000  to produce the product, so your business makes a profit of $600,000. It might be is a life-changing opportunity for you.

Given that, you are more than happy to sign the contract and begin production of the parts.

While production begins, you take a loan out from a bank for working capital. Thus, you contact a lending institution for the money that is applied toward retooling machinery and buying raw materials.

A month after you start, you invoice the buyer for the first payment.   Obviously, you need the cash to keep the production going and pay labor costs.

The company assures you that the funds will be released in one month just as your inventory starts arriving. Your business will have to get by on its own for the time being.

The major corporation has a good reputation and is trusted in the market. You don’t have anything to worry about. But, you need additional capital which leads to another $100,000 loan.

In a month, your company completes a third of the inventory.  Logically, you contact the buyer in order to set up delivery of the stock. You expect a payment. Unfortunately, you cannot get in touch with the purchasing department.

What you do get is an assurance that the management will be in touch shortly. Meanwhile, you keep the production going.

This leads to a major decision to take out a mortgage against your home. You need the funds to put directly into the business. On the surface, the situation appears to be of no concern.

When the order is delivered in full your business will make a nice profit. That gives you the ability to repay the loans you’ve taken on.

Payment from the buyer unfortunately never arrives.  Within three months, the other company stops responding to your calls. Now you have a huge stockpile of metal bearings, a loan of $300,000 and a home that is mortgaged.

The time has arrived to consider your options.

You can certainly take legal action. More than likely this would be a losing proposition in the long run. They can tie your small business up in litigation for years before you see the inside of a courtroom.

The second option is for your business to file for bankruptcy.

Automated Contracts

While the example may seem farfetched, many businesses go through experiences just like that every day. For example, a business partner may refuse to make good on future payments for a number of reasons.

Smart contracts can solve this problem and provide certainty for contracts.  A Blockchain based smart contract would significantly reduce risks for all the parties involved because transactions become automated.

Smart contracts are executed each time one meets their obligation, regardless of whether the other side fulfills theirs.

Individual Ownership

One problem with the existing banking system is the role of the broker. Bankers hold all the power in determining where capital should be invested.  That said, most of the funds are from depositors to begin with.

Bankers never risk their own funds.  Blockchain technology returns the power of the investment decision back to the individuals who have the funding.

The Bright Future of Blockchain Technology

Blockchain technology offers a more efficient method of exchanging information and security instruments between people.

The ledger is openly accessible and transparent.

You have far more reason to trust a Blockchain than anything or anyone else in reality.

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