Introduction
Let’s unpack blockchain and see what all the hype is about.
Firstly, Blockchain isn’t a solution. It’s a technology on which solutions can be built. Think of it in a similar light as the internet being a technology on which applications are built. It’s also worth stating that bitcoin and blockchain are not synonymous.
Blockchain technology was first introduced in a white paper entitled: “Bitcoin: A Peer-to-Peer Electronic Cash System,” by Satoshi Nakamoto in 2008. It’s interesting to note that the word “blockchain” doesn’t appear once in the paper, but the idea and mechanism was born out of Satoshi’s paper.
What is Blockchain and why is it important?
In simple terms, blockchain, also known as “distributed ledger technology”, is a decentralised, distributed database. In a traditional database, the data is stored centrally in tables (rows and columns), whereas blockchain maintains a continuously-growing list of records in ‘blocks,’ which are “chained” or linked together and stored over a decentralized network. Blockchain records are cryptographically secure from tampering and without the need to trust a central authority. We’ll get into this in a little more detail soon.
O.k so if Blockchain is just a database, then what is all the fuss about?
Some things to consider
Public blockchains are fully transparent. Not the case with traditional database silos.
Blockchain data is immutable giving greater integrity to the information stored. It cannot be changed or altered by anyone once recorded and is censorship resistant.
Blockchain doesn’t rely on a central point of control. This is a big one. Think of your existing interactions and the third parties that you trust in for the process to work. Blockchain takes away the need for this third party and means you can interact in a truly “Peer to Peer” way.
Blockchain was originally developed to prevent fraud in digital currency (double spending). The inherent characteristics like transparency, immutability and decentralization enhance security. It’s not centralized which means there’s not one point for attackers to target. In addition, the advanced cryptography can help in areas like identity fraud and authentication
When we talk about settlement we mean the process for settlement of asset classes like securities, which is often a complex and lengthy process behind the scenes in the back office of investment banks. Settlement risk is also something that blockchain can address though the use of smart contracts and immediate custody without an intermediary.
Shared and distributed ledger means participants don’t need to reconcile many different versions of the truth reducing costs and inefficiencies. In other words, we’re all singing from the same hymn sheet.
Blockchain tokens are flexible in a number of ways. Firstly, from a divisibility perspective you can break them down to any level of granularity you wish upon creation. In the case of bitcoin it is divisible to 8 decimal places and Ethereum is up to 18. If you create a new token you can decide the divisibility – potentially important when applied to hardware as part of the IOT.
Also tokens are flexible from a functional perspective in that they can be applied to different use cases. For example, you can create currency, utility or asset/investment tokens depending on your use case.
O.k, so with all this potential comes the possibility for lots of new business models to appear which will disrupt the traditional way of value creation.
How does blockchain work?
Let’s start with an analogy.
Spreadsheets are ubiquitous in the business world.
Alice, Bob and Nick work in the finance team of a large company. This team are responsible for maintaining track of all payments and expenditures, including purchase orders and invoices from suppliers. They do this by recording POs and invoices into rows in a spreadsheet. There is a “master” file which they share with each other via e-mail and version by post-fixing the file name v0.1, v0.2 etc. The file contains sensitive data that’s not anonymized so they have to be careful about sharing with people outside of the group. They decided that only one person at a time can make updates to avoid conflicts and the problems with merging and reconciling files. There has to be agreement that the data is correct and matching in order for invoices to be paid out to suppliers. In addition, suppliers also maintain their own accounts receivable spreadsheet and there needs to be monthly meetings to reconcile any differences. Sometimes, prior data in a cell is changed inadvertently and corrupts all subsequent data and reconciliations. Invoices are often delayed or an incorrect amount paid as a result. Additionally, mistakes in recording invoices and POs have resulted in erroneous payments to the wrong vendor.The shared ledger
They decided to move to a shared spreadsheet to try improve the process. What does this look like?
This shared spreadsheet is available to Alice, Bob and Nick and new invoices/POs are broadcast to all three. The system has a consensus protocol that ensures information is valid before it is appended to the spreadsheet.
They all have access to the same information in real time and there’s no risk that one of them can lose or corrupt the “master file”. Suppliers can also view the information, but names can be kept private using identifier keys.
Once verified, the information in the spreadsheet is immutable, which means there is a history that’s tamper-proof. Advanced cryptography ensures authentication, security and soundness in the process. There is no need for a third party. The next phase they are looking at automating the payments to suppliers using “smart contracts”.
Now lets see how a shared ledger might work from a technical perspective.
What's under the hood?
A block includes a list of data items that you want to record. Each block is connected using a something called a hash pointer. The hash stored in the pointer is the hash of the data contained in the previous block. These hash pointers is what gives the immutability characteristic. Hashing is a simple, but important technical concept so check this video out if you’re not familiar with the process.
“As later blocks are chained after it, the work to change the block would include redoing all the blocks after it.” Satoshi Nakamoto
Blockchain in a Nutshell
A Shared Ledger
Consensus Protocol
Advanced Cryptography
Smart Contracts
Use cases
The list of potential use cases is growing by the day: Payments, Stock Trading, Voting, Content Management, Data Ownership, Certification, Digital Assets, Digital Identity, Health Records, Energy Trading, Supply Chain, IOT…
See 50+ examples of blockchain applications here.
Blockchain Viewers
If you want to see a visual of a blockchain in action then check out these three examples:
Conclusion
This article gives a brief overview of of blockchain for the uninitiated. Obviously, from a technical perspective there’s a lot more going on under the hood. It’s also important to note that not all blockchains are created equal – you have Public, Consortium, Private and Hybrid.
There’s a lot of people who truly believe blockchain technology is the future and will change everything. There’s also a lot of skeptics and people who think it’s all a lot of hype. The truth is a bit of both.
Want to know more? or are you interested in developing a use case? Reach out to us here at Boinnex.
