As a venture capitalist, you’re likely already aware of the blockchain as it applies to cryptocurrency – but did you know that forward-thinking companies that handle sensitive customer data (healthcare, finance, and legal) are also using blockchain to strengthen security?

While you don’t need to be an expert on blockchain to win in these sectors, a working knowledge of how this technology benefits business can help you position yourself as a trusted advisor to your current and potential clients.

A Primer on Blockchain Technology

There are a few components central to blockchain that explain why it’s such a revolutionary technology, no matter the use case. But first, what is the blockchain? Blockchain is a decentralized and distributed digital ledger technology that securely records transactions across multiple computers. Each transaction is grouped in a block and added to a chain of previous transactions. 

This technology offers transparency and eliminates the need for intermediaries, and it’s the foundational technology behind cryptocurrencies and various other digital assets.

Core Principles of Blockchain

The three core principles of blockchain are decentralization, immutability, and security. 

Decentralization refers to the absence of a central authority that governs the operations of the network. Each node in the network has a full copy of the blockchain and can independently verify and validate transactions. 

This structure enhances security as no single entity has the power to alter the data on the network, and any changes must be validated by consensus.

Immutability refers to the permanent nature of the transactions once they have been added to the blockchain. Every transaction is timestamped and linked to the preceding transaction, forming a chronological chain. 

Making alterations to any block would require the consensus of the majority of the network and the alteration of all subsequent blocks, making it practically impossible. This characteristic of immutability enhances the security and trustworthiness of the blockchain, making it resistant to fraud and unauthorized manipulation.

Blockchain and Data Security

Given the three tenets of blockchain listed above, you can imagine how this technology would be crucial for sensitive industries like healthcare, finance, and the legal sector. These industries manage a wealth of private contact data every day, and traditional contact databases are far more susceptible to data breaches and unauthorized access.

If you want to make a case for the use of blockchain tech, here are four ways blockchain solves major data security issues for businesses.

Decentralized ledger. Unlike traditional centralized databases, where a single entity (often a government or private company) has control over data, blockchain distributes copies of the ledger across numerous nodes in the network. Any attempt at tampering or fraud would need to alter the majority of these distributed ledgers simultaneously, which is practically infeasible due to the blockchain’s consensus protocol — a mechanism requiring confirmation from most nodes for any change.

Immutable records and transparency. Once data is recorded in the blockchain, it can’t be altered without consensus. Here’s how it works: each transaction is encrypted into a cryptographic hash, a unique string of characters that conceals the original data. This hash is then linked to the hash of the next transaction in the chain, creating interdependence. If any alteration is made to a transaction, the corresponding hash changes, breaking the link with the next transaction. This makes it easy to detect and stop unauthorized changes.

Smart contracts for more control over access to data. A smart contract is a self-executing contract where the terms of the agreement are directly written into code. This code is then stored and replicated on the blockchain. In the context of managing access to sensitive contact information, a smart contract can be programmed to allow data access only when certain predefined conditions are met. Once these conditions are fulfilled, the smart contract automatically executes the agreement, granting the appropriate level of access to the data. 

Privacy and Compliance in Sensitive Industries: Compliance with government regulations is key to keeping customers happy (and avoiding hefty fines and other negative outcomes). Blockchain’s architecture allows it to facilitate compliance with privacy regulations, such as the General Data Protection Regulation (GDPR) and the Health Insurance Portability and Accountability Act (HIPAA). Utilizing a blockchain for contact database management can help ensure that user data is handled in a compliant manner. 

Common Objections to Using Blockchain for Contact Data Security

Like any newer technology, blockchain technology can elicit resistance from wary business owners and startups for all the usual reasons – including scalability, cost, and interoperability. While a potential client may be a less risky investment if they use blockchain technology to keep their data secure; you may feel like you’re fighting a losing battle if you’re talking blockchain with anyone who isn’t an early adopter!

However, according to one IDG study, 50% of IT leaders are interested in adopting blockchain security solutions, meaning that even if a company isn’t ready to implement, they will certainly appreciate more information and thought leadership on the topic – presenting an opportunity for you to help educate and inspire them (and ultimately win their business).

Future Trends: What’s Next for Blockchain and Data Security?

One development in blockchain is the concept of “zero-knowledge proofs.” This provides an additional layer of security by allowing one party to prove to another that they know a value (for example, a password) without conveying any other information. This form of cryptography could help maintain user anonymity and data privacy while ensuring the security of a blockchain.

One of the tenets of GDPR is that data should be able to be easily edited, meaning the immutability of blockchain is problematic here. Data tokenization may be a solution. This concept replaces sensitive data with non-sensitive equivalents, known as tokens. The actual data is stored securely off-chain, while the tokens are used for on-chain transactions. This way, even if a breach occurs, the exposed data is useless to the attacker.

Opportunities for VCs

Whether you are providing technology advisory services to your clients or considering investing in blockchain technology, VCs play a key role in these advancements. Your financial backing can help visionary blockchain companies overcome initial development challenges, scale their solutions, and spur innovation in this space. By funding these ventures, you’ll not only accelerate the adoption of blockchain technology in contact database management but also contribute to creating a more secure digital environment for everyone.