‘The Blockchain’ is a new and innovative way that people and companies can create, verify and enforce transactions without a middleman or central authority. It is essentially a decentralised ledger that records transactions chronologically.
Transactions recorded on the blockchain can include the exchange of money, property or anything that requires an enforceable contract or authorized access.
The technology behind blockchain records the terms of each transaction as a ‘block’ on a long ‘chain’. Each transaction is recorded and verified using mathematical encryption techniques, making it almost impossible to change after the fact. Then, as each successive transaction adds to the end of the chain, previous transactions become even harder to alter, further adding to the security.
Many small business owners think that the blockchain is used only for the creation and exchange of cryptocurrencies like Bitcoin. However, this isn’t true.
Let’s understand blockchain technology better and the role it plays in small businesses.
What is Blockchain and How it Works?
Blockchain, at its core, is a platform-like technology upon which other applications can be built.
Currently, the most notable use of blockchain is the decentralized ledger that tracks cryptocurrency transactions.
However, blockchain technology can be used as a decentralized ledger that records and verifies any transaction or contract between two parties.
Any contract that facilitates the exchange of property or has enforceable terms can be tracked by blockchain. It can manage the execution of business contracts, streamline overall contractual enforcement, speed up the exchange of property, verify identities and more.
Specifically, blockchain does three things with each transaction sequentially:
1. Create Transaction:
First, the blockchain creates a transaction by recording it on all of the individual blockchain ledgers. For example, if you buy goods or services, every participating ledger will record the full terms of the sale on the blockchain.
2. Verify Transaction:
Once a transaction is recorded on the blockchain, each individual will independently verify that transaction is valid. If the information on one ledger matches at least 51% of the others, it is flagged as a correct transaction.
3. Enforce Transaction:
Depending on the type of transaction, the blockchain can actually enforce the terms of the agreement. For example, if you bought goods/services on net terms, the blockchain could automatically deliver the money when its due.
The Different Uses of Blockchain Technology For Small Businesses
Here’s how small businesses can make use of blockchain technology.
1. Monetary Exchange:
The primary way that small businesses use blockchain technology is by accepting cryptocurrency as a form of customer payment. Small businesses also use blockchain if they pay vendors and suppliers in cryptocurrency, but this is less common.
Typically small businesses use or will use blockchain technology without even realising it. All they might see is a more efficient transactional process that results in lower costs and better contractual arrangements.
2. Smart Contracts:
Smart contracts are a way for two parties to exchange almost anything of value without having to use a middleman.
Currently, smart contracts help facilitate the exchange of cryptocurrencies. However, at its core, a smart contract is a protocol coded onto a blockchain that automatically facilitates, verifies or enforces the performance of a contract when certain criteria are met.
For small businesses, smart contracts may have an impact in one or two ways. The first is that anything that requires a business contract could soon be powered by blockchain. This means that insurance policies, commercial real estate contracts, payment terms, financial contracts like startup business loans and more will be tracked on a decentralized ledger and enforced by automatic protocols.
Any type of financing that requires a middleman like accounts receivable financing, could be approved. So too could small business financing products like purchase order financing, trade financing, letters of credit, and more. These short-term options would be faster and cheaper using the blockchain.
The second way that blockchain can impact small businesses is by changing industries where contracts are prevalent. This might be an issue for law firms, real estate agencies, notary public, and more.
For example, the need to enforce contracts might go away, reducing a small business’s legal costs but also reducing the amount of work a law firm might receive. Further, businesses like companies and clearinghouses that act as middlemen in property transactions might need to adopt this technology or become replaced.
However, the use of smart contracts is still in its infancy. While now is a good time to stay aware of smart contracts and the impact on your small business, it is not yet a pressing matter.
3. Identity Verification:
One of the few non-monetary benefits of blockchain is to help small businesses track and verify identities.
It is possible to code information regarding a person’s identity directly onto the blockchain. The blockchain can then use smart contracts to verify a person’s identity before they pass a digital access point such as when a customer hits a paywall on your website.
This helps you keep premium content and information safe, sharing it only with verified individuals.
This blockchain use is known as ‘proof of existence’, and it can be used by small business owners to verify customers’ identities online, similar to the current Facebook authentication. This proof of existence gives a safer and more secure way to verify online identities so that sensitive information isn’t shared with the wrong people or stolen outright. It helps keep the customer data safe.
Further, proof of existence will allow content publishers or small businesses using digital marketing tactics to safely distribute content onto other people’s platforms as well as provide cross-platform access.
Impact Of Blockchain Technology On Small Businesses
The blockchain is an important technology for small businesses because it will change the way transactions are negotiated, verified, executed and enforced. The current and future use of blockchain for small businesses will be largely positive.
Here are five benefits of the blockchain for small businesses:
Every transaction on the blockchain has a unique ID, a number that corresponds to the previous block, all transactions included in the smart contract (can be 1 to over 1000), and a public key to identify the transaction. Public blockchains keep all the information open to the public. This means there is complete transparency with public smart contracts.
Once a transaction is recorded and verified on the blockchain it cannot be altered.
This is because of the mathematical cryptography used to record each transaction and the fact that each transaction is stored on thousands of decentralised ledger rather than a single master ledger.
To alter a transaction, you would not only have to figure out how to do it once but then alter 51% of all the ledgers in the network.
Further, as each successive block is added to the chain, it protects previous blocks because to alter a previous transaction, you’d have to first alter all the transactions that came after it.
3. Real-Time Transactions:
It typically takes between 20 seconds to 10 minutes for a transaction on the blockchain to be verified by the network decentralized ledgers.
This means that the blockchain can facilitate transactions in as little as 20 seconds.
These real-time transactions become more beneficial when the traditional transaction time is longer.
4. Low Transaction Costs:
There are typically little-to-no transaction costs when a small business uses the blockchain. This is because there is no middleman or central authority.
5. No Middlemen:
Since the blockchain is decentralized, there is no middleman or a central authority like a central bank or treasury. Instead, the distributed network of ledgers independently works together to track, verify, record and enforce transactions on the blockchain. This allows for faster transaction speeds and decreased transaction costs mentioned above.
The implementation of blockchain technology will change the game for small businesses with low transaction costs, real-time transactions and most importantly, no middleman involved in two-party contracts.
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