Confused About Blockchain? Here's What You Need to Know

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Billionaire and entrepreneur-extraordinaire Mark Cuban recently tweeted that blockchain technology would be "at the core of most transactions in the future". Fellow billionaire Richard Branson believes blockchain technology could bring about an economic revolution. International Business Machines Corp.'s (NYSE: IBM) vice president of blockchain, Jerry Cuomo, recently declared that 2016 was the year of blockchain experimentation and that 2017 would be the year of adoption.

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So what's all the fuss about? What makes blockchain technology so special that it could bring about an economic revolution? Many investors don't even know what a blockchain is, much less what makes it worthy of so much attention from the world's largest corporations and most-revered investors. Some might have a vague notion that it is what powers cryptocurrencies, like bitcoins.

It's important for investors to understand the implications of blockchain technology, how it reaches far beyond the nascent market of cryptocurrencies and could even disrupt major industries in the near future. Let's take a closer look at what it is, why so many are excited about its potential benefits, and how some companies are already incorporating this technology into their existing operations.

What is blockchain technology?

A blockchain is a digital, decentralized, and distributed ledger, having the ability to be easily accessed by many different parties. This ledger can be used to record virtually any type of transaction involving different asset classes. After a transaction is finalized, it is documented on a block. When a block's memory is full, it is added to the end of the chain in sequential order. The blockchain becomes a permanent database of recorded transactions that can never be altered.

A node is a computer connected to the network for the purpose of verifying transactions. As used for bitcoins, each node automatically gets a downloaded copy of the blockchain upon joining the network. Again, just for bitcoins, the blockchain records information such as the time and amount of each transaction, but it does not store any personal information concerning the parties involved. Of course, when used for applications other than bitcoins, the blockchain can be used to record all sorts of information.

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Blockchain's benefits

Proponents claim the benefits to blockchain technology are transactions that are more transparent, secure, streamlined, and cheaper than other methods. Blockchain technology also allows for far fewer middlemen to be involved in each transaction, including payment processors, brokerages, payment networks, and even banks. Without these parties each taking their own small cut, transactions are naturally more efficient in time and cost.

Last summer, Broadridge Financial Solutions, Inc.'s (NYSE: BR) CEO Rich Daly wrote in Forbes about the benefits of blockchain technology.

Some people know blockchain as the underlying technology behind the controversial digital currency Bitcoin. However, blockchain is so much more; it's incredibly innovative and its promise is far-reaching. This technology is a secure and transparent way to digitally track the ownership of assets before, during, and after transactions, and it has the potential to ultimately transform everything from how stock exchanges operate to how proxies are voted.

The companies using blockchain technology today

Probably no company is currently doing more with blockchain technology than IBM. Big Blue recently scored a deal with seven major European banks to construct a new trade finance platform based on blockchain technology. The idea is that the lowered costs of such a platform will expand access to financing for smaller businesses that don't have traditional access to credit.

IBM is heavily involved in other applications with the technology as well. The company recently launched IBM Blockchain, a cloud-based blockchain-as-a-service of sorts, which will enable its customers to build blockchain applications in the cloud. In the company's 2016 letter to shareholders, CEO Ginni Rometty stated the company was working with over 400 clients on such projects. For example, IBM is working with Wal-Mart to track its food supply chain using blockchain.

Of course, IBM is far from alone in this space; several other companies are currently using the technology, too. Earlier this year, Nasdaq, Inc. (NASDAQ: NDAQ), the world's second largest stock exchange, used blockchain technology to facilitate proxy voting on its Estonian exchange and is now considering using it for the same purpose across all of its exchanges. Last September, Broadridge Financial spent $135 million to acquire assets to develop blockchain applications for the company's proxy services. Microsoft Corporation's (NASDAQ: MSFT) Azure cloud service, supports a blockchain-as-a-service application similar to IBM's.

The Foolish takeaway

Blockchain technology could one day disrupt almost the entire financial industry or it could simply be incorporated into the sector as another tool in its tool box. Either way, investors should be aware of the opportunities it might bring to companies that can successfully integrate it into their operations and the risks it poses to companies that fail to adapt.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew Cochrane owns shares of Microsoft. The Motley Fool owns shares of Broadridge Financial Solutions. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.