What is Blockchain?

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The democratization of high-speed Internet access along with advancements in peer-to-peer networking and cryptography have enabled the rise of the blockchain technology. The blockchain is a design pattern where each block contains a record of the transactions protected by cryptography, and it writes each block only after approval through a consensus mechanism. It writes the blocks onto the blockchain in chronological order to form a chain, with each block containing a hash of the previous block. Ever wondered what is blockchain, read on...


The backbone of the future peer-to-peer transaction network, benefits of blockchain technology is that provides an open and distributed cryptographic ledger shared across all nodes that take part in the network. The ledger records every performed transaction, and all participants in the network share the secured ledger. Ledgers are programmable, meaning actions it can take actions on a business transaction hitting the ledger.

What is Blockchain?

What is Blockchain? Why all the fuss?

In any business network, there are multiple participants such as buyers, sellers, and regulators that have varying degrees of interest in tracking, accessing or interchanging an asset of value. Because these participants do not trust each other, they keep separate records of all transactions and then reconcile their ledgers to ensure that everyone’s records reflect reality. This reconciliation is a costly operation that many industries have to maintain and support to comply with the regulatory authorities. Blockchain use cases provides the ability to create business networks but takes away the centralized nature of business today and removes friction by replicating the data at every node on a distributed network to create permanence and resilience.

The reason blockchain technology is so disruptive is that it can solve the problem of authenticity without reliance on any trusted intermediaries, and independent instant verification, regardless of where the data originates from in the network. [examples of disruptive technology]

Consider global trade finance – the financing of international trade flows essential for businesses to survive. A seller manufacturing goods in one country may require the buyer to pre-pay for goods to minimize the risk of non-payment upon delivery. The buyer may require the seller to document the shipment of goods before payment. Both the buyer and seller may engage banks in their countries to act as middlemen and mitigate risk. For example, the buyer’s bank may provide a letter of credit to the seller’s bank as a means of assurance of payment upon receipt of documentation such as bill of lading. The seller’s bank may extend a loan to enable the seller to manufacture and ship the goods. According to the World Trade Organization, 80% to 90% of the world’s trade transactions involve some kind of trade finance, by credit or guarantee to that credit. Global trade finance is a process of dizzying complexity and requires manual checks of authenticity, verification of legitimacy of the buyer and seller, and the high cost of this process restricts access to trade finance for smaller businesses. Using blockchain can enable digitization of real-time trade details and smart contracts can verify them. The buyer and seller can have access to the same information at the same time and reduce the costs of verification, reduce the time taken for reconciliation in case of disputes.

According to a McKinsey report, the global cross-border payments industry will generate $2.2 trillion in revenue by 2020. Any cross-border payment in the US takes 3 to 5 days for settlement, and costs an average of $42, and has an error-rate of 3% to 5%. With a distributed ledger on blockchain, the payments can happen in the same way as people share images, videos, and messages on peer-to-peer networks. The Internet of Value that blockchain enables allows users to share any asset of value including stocks, loyalty points, music, art, land titles, and more.

In the power industry, the value chain of transactions spans power generation, transmission, distribution, retail, and peer-to-peer transactions. Electricity changes hands several times between generation and consumption. Power relies on existing cumbersome trading and clearing systems to support complex markets, and blockchain provides a straightforward mechanism to encode units of power in smart contracts. The meter data can be fed onto the distributed ledger to modernize the wholesale electrical transaction processes and unlock new opportunities such as peer-to-peer energy trading where neighbors can sell excess power to each other.

Another interesting prospect of blockchain-based value transfer systems is the possibility of making tiny transactions, as tiny as a fraction of a penny, economically viable. Instead of creating click-baiting news headlines just to attract more views for the ad banners on the website, companies could be more accurately rewarded for creating insightful and meaningful content that the readers enjoy, irrespective of how many ad banners are shown and how many clicks the website generates. For example, it could utilize tiny, automated transactions as an e-mail spam filter that would be very difficult to circumvent. By setting a nano-scale price tag on sending an e-mail message, the cost would be insignificant to any normal use of e-mail, but it would grow to prohibitive proportions when trying to send millions of spam e-mails.

Blockchain industry leaders already recognize the power of Blockchain. Vitalik Buterin, founder of Ethereum says “While most technologies automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly”. Blythe Masters, CEO of Digital Asset Holdings says “The blockchain is the financial challenge of our time. It is going to change the way that our financial world operates”. Ginni Rometty, Chairman & CEO of IBM has stated “Anything that you can conceive of as a supply chain, blockchain can vastly improve its efficiency. It doesn’t matter if it’s people, numbers, data, [or] money”. According to Peter Thiel, co-founder of Paypal, “Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative”.

Several features of the blockchain technology have the potential to disrupt several industries in the long-run when leveraged in relevant use-cases.

Blockchains replicate the distributed ledgers over a peer-to-peer network such that all participants have access to the same information, and the distributed network does not have a single point of failure. Thus no individual, organization, country or government has special privileges over other members. The ledger is transparent to all participants with no single points of failure.

A blockchain network establishes trust by using consensus algorithms that determine the order and integrity of transaction information, without requiring a trusted intermediary. As a result, we are no longer dependent on a potential single point of a failure (such as a trusted intermediary).
Once written on the blockchain, a block cannot be altered without altering all subsequent blocks. This built-in immutability provides an audit trail that is applicable across industries.
Business automation via smart contracts: Blockchains provide a mechanism to encode the rules of operation as computer code on the blockchain along with transaction data. The contract code can execute on pre-determined conditions thus making transaction validation easier, cheaper, and more reliable. [application of blockchain]

What is Blockchain? Some implications of blockchain for enterprises are:

• The redefinition of trust : The trust protocols have evolved over human progress from the early barter systems to modern-day digital exchanges. With economic & societal progress, trust bearers evolved from tribal chiefs to central authorities like Tallies, to central & commercial banks. These institutions of centralized trust acted as bookkeepers, and governments issued money backed by precious metals such as gold to encourage trust in the monetary system. Over time this practice evolved to issuing fiat money without the backing of a physical commodity, giving the central banks an essential record-keeping function as the delegated trust bearers. Public trust in banks eroded over time due to lack of transparency, financial crises and subsequent bailouts, and hacking attacks on banks. Blockchain replaces the trust bearers of yesterday with a more robust, decentralized model over a distributed ledger shared among a network of computers. Real trust happens when multiple independent parties have their copy of transaction information, with no single authority to govern the process, and only parties involved in the transaction can see it and make alterations to it. As Leanne Kemp, Chief Executive Officer and Founder of Everledger said: “At its core, blockchain for enterprise is shared ledger that allows participants in a business network to transact assets where everyone has control, but no one person is in control.” Another way that blockchain helps build trust is the transparency of transactions, which establishes a traceable audit trail. “Blockchain will help pharmaceuticals keep up with the regulatory requirements,” one Life Sciences CEO in India noted. The CEO of an Electronics company in Italy said: “Blockchain can bring transparency to the supply chain and make our image more trustworthy and reliable.” Others expect traceability to improve processes and partner hand-offs. Smart contracts can encode the commitments between parties and help ensure compliance. Those smart contracts, a Government CIO from the U.S. said, could give them “the power to not only record property rights but enforce them.” 
• The democratization of devices : Blockchain allows Internet of Things (IoT) devices to gain greater autonomy by providing capabilities such as device identification, trusted transaction execution, and providing a complete record of transactions for audit. IoT devices can, therefore, become devices of transactions and economic value creation. For example, as soon as a product completes final assembly, it can be registered by the manufacturer in a supply chain blockchain network representing its beginning of life. After that, they can track each aspect of interaction with that device on the blockchain—from the sale, to repair, products revisions, recall notices, warranty notices, and eventual end-of-life. The devices can engage in complex transactions such as the use of smart contracts to barter power with one another or as a collective with the energy provider, check the provenance of adjacent parts, order supplies, run safety checklists—all without human intervention. For example, IBM developed with Samsung Electronics the Autonomous Decentralized Peer-to-Peer Telemetry (ADEPT) proof-of-concept, which demonstrated a Samsung washer autonomously reordering detergent, reordering service parts, negotiating power usage, and displaying advertising content. The blockchain technology will transform IoT into “Economy of Things” by not only enabling devices to autonomously engage in marketplaces but also supporting complex marketplace transactions. [IoT and Blockchain]
• Establishing automation economy : Blockchains create excellent platforms for new ways of working. New ways to monetize and capitalize on things such as support for micropayments and skipping the intermediary fees, monetization of data itself, and giving rise to a sharing economy built around automation. In automotive insurance, rather than going straight to an insurer to get their vehicles covered, customers may now opt for a peer-to-peer style policy. Everything from factories to fleet could be shared, used, and capitalized on the blockchain. Hospitals are considering how they could share expensive equipment like a Magnetic Resonance Imaging (MRI) machines to mutual advantage. Blockchains, an Explorer CHRO in Healthcare from the U.S. observed, could “democratize the sharing economy by making it cheaper to create and operate a platform.” Autonomously distributed markets could effectively distribute production resources between individual products and components in an ever-adjusting ad hoc basis, and smart contracts in blockchain would ensure enforcement of business rules around transactions and regulations as agreed upon by the network participants.
• Decentralized Autonomous Organizations : The combination of smart contracts and cryptocurrency has enabled the rise of Digital Autonomous Organizations (DAOs) that operate as a system with no external human guidance, according to an incorruptible protocol specified in computer code and enforced on the blockchain. DAO’s goal is to codify the rules and the decision-making apparatus of an organization, eliminating the need for documents and people in governing, creating a structure with decentralized control. Perhaps the most famous example is The DAO, conceived and programmed by the team behind German startup Slock.it, which is a company building “smart locks” that let people share their things (such as cars, boats, apartments) in a decentralized version of Airbnb. The DAO is the most successful crowdfunding project as of today (launched on 30th April 2016), raising over $150m from over 11,000 enthusiastic members. However, it also suffered an attack exploiting a recursive call bug that resulted in a loss of $50m value in post-theft valuations.

The full scope of the implications of this technology can take a while to understand but consider that all businesses today rely on central networks with trusted intermediaries in all aspects of our lives. We depend on trusted intermediaries that have become accepted mores, but we would be rid of them in a heartbeat if provided with the opportunity.

What is a cryptocurrency?

Traditional currencies (also known as “fiat” currencies) are a legal tender backed by the government that issues it. Organizations like central banks control the money supply and add counterfeit prevention measures to deter attackers. Law enforcement agencies are used to stop nefarious actors.

Cryptocurrency is a digital currency that uses encryption techniques to regulate the generation of currency units and peer-to-peer networking to prevent double spending, maintain accounts, balances, and transactions. Cryptocurrencies use advanced mathematical functions like cryptographic hash to raise the difficulty of attack and encode in a mathematical protocol the rules of creation of new units of the currency. Special entities in cryptocurrency networks called “miners” confirm transactions, after which the transactions are added to every node in the network. The miners are rewarded with a token of the cryptocurrency for confirming the transactions and maintaining the ledger.

Blockchain vs. Distributed Ledgers

The terms “blockchain” and “distributed ledger” are sometimes used interchangeably, but there is a subtle difference between the two.
A distributed ledger is a database that is spread across several nodes or computing devices. Each node replicates and saves an identical copy of the ledger.

The groundbreaking feature of distributed ledger technology is that the ledger is not maintained by any central authority. Updates to the ledger are independently constructed and recorded by each node. Once consensus has been reached, the distributed ledger updates itself and the latest, agreed-upon version of the ledger is saved on each node separately.

Blockchains are one form of distributed ledger technology. Not all distributed ledgers employ a chain of blocks to provide a secure and valid distributed consensus. Since it is a distributed ledger, it can exist without a centralized authority or server managing it, and its data quality can be maintained by database replication and computational trust. Data on a blockchain is grouped together and organized in blocks. Its append-only structure only allows data to be added to the database: altering or deleting previously entered data on earlier blocks is impossible. Blockchain technology is therefore well-suited for recording events, managing records, processing transactions, tracing assets, and voting.

Blockchain vs. Distributed Databases

Distributed database management systems (DDBMS) are collections of multiple, interrelated databases over a computer network. DDBMS use consensus mechanisms to ensure fault-tolerant communications and provide concurrency through locking and/or time-stamping mechanisms. Examples of DDBMS include NoSQL databases such as MongoDB and Riak.

Distributed ledgers are distributed databases that leverage cryptography and provide a decentralized concurrency control and maintain consensus about the existence and status of shared facts in trustless environments.

DDBMS are optimized for speed, not security. A distributed database is not optimal for entities that want to form a consortium of known participants but may not trust each other. A distributed database used as a “common consortium database” can run into problems—for example, if the server of an entity in a consortium is compromised, the whole system goes down since distributed databases are not designed to handle such scenarios.

In a consortium, one company will install and operate the database and will offer API access to other members. In this proven approach, one member becomes “more equal than others” because they host the database. Therefore, the host may have leverage over others, such as the ability to see information before others, having access to a more complete dataset, ability to restrict others, and so on.

Consortium members can create a new company to host the database, but it may be expensive. It does not motivate consortium members who do not host the database to contribute to its development because they feel they do not have complete access (since they only can use an API) and they feel it is just a product provided by the consortium leader. One may be using a distributed database, but it is still managed by a single company, which can shut it down, or fall victim to an attack.

Therefore, distributed databases may be more efficient, but have governance asymmetry, and may create a single point of failure.

The solution to this is to give each member of the consortium a copy of a database and implement an algorithm that synchronizes changes while also validating their authenticity. And this is “blockchain” or “distributed ledger technology.”

The two main differences in distributed ledgers are:

• Decentralized control of the read/write access when compared to DDBMS.
• The ability to secure transactions in competing environments, without trusted intermediaries. The trust boundaries in a distributed ledger are redrawn to the organizational boundaries of each participant member of a consortium.
• The figure below shows the relationship between blockchain, distributed ledgers, and cryptocurrencies.

what is blockchain technology