An Introduction to Blockchain Technology
Setting the Stage for Blockchain
Business runs on information. For hundreds of years, people have been tracking information using ledgers. Ledgers are chronological lists of data. The faster and more accurate information is received, the better. As technology has progressed, we have discovered many ways to track, synchronize, and send data. Over the past century record keeping has become digitized as we moved away from using paper to computers.
The digitization of record keeping has opened many possibilities. The use of databases (systems of enhanced, interconnected, electronic ledgers) have enabled us to search, sort, share, and transport data in a global manner. Every digital service today is built on top of an electronic database.
Unfortunately, databases were developed using principles that pre-date the internet and are limited in their usefulness in this current global era. Most of today’s databases and electronic ledgers need to be upkept by a central party who has the authority to maintain them and verify what is contained in them. For example, Facebook has recently made headlines for censoring what users can post on their platform.
Today’s centralized ledgers are inefficient, expensive, and vulnerable to misuse and tampering. An overall lack of transparency combined with susceptibility to corruption and fraud often leads to disputes. Resolving disputes is costly, time intensive, and can lead to missed opportunities. Additionally, there is an increased need to involve multiple, unrelated groups on a single, shared ledger. Traditional ledgers incentivize people to edit shared data which can also lead to costly disputes. Incorrect or out-of-sync data can lead to uninformed or poor decision making, and pose serious business risks. As the world became increasingly globalized, we needed a solution that was more robust and trusted on a global scale.
Invented in 2009, blockchain was built to address the limitations of our current digital ledgers. Blockchain is an ideal way to keep data synchronized across multiple, independent stakeholders in an immediate, shared, and completely transparent manner. Because members can agree on and maintain a single dataset, all details of transactions can be viewed end-to-end and gives everyone more trust and confidence in the entire process.
What is Blockchain?
An immutable, single source of truth
A blockchain by nature is a distributed ledger that is an immutable, single source of truth. Immutable means that anything written into this ledger can never be changed or deleted. Blockchains are open and transparent networks that are created by users who want to share data and information. The network is created by running the same blockchain software on each computer. As data is sent onto the network, it is grouped into what are known as “blocks”.
Each transaction is recorded as a “block” of data and added to an irreversible chain
Each block on a blockchain network needs to be verified and confirmed as accurate. Verification of the data takes place at regularly scheduled intervals. For example, verification time on the Bitcoin network takes 10 minutes on average. In order for verification to be completed, each computer on the network must approve the block of data. This is known as a “consensus protocol.” If the entire network agrees that the data is valid, the block is accepted and added to the system. Each time a validated block is added, it is linked to the previous block and creates a digital “chain” of data. This is why the technology is called “blockchain”.
Blockchains are stored in a distributed manner across every computer on the network. New data is added to the chain through the use of complex cryptographic functions. To add a new block to the chain, the system not only verifies the new block, but also all previous blocks on the chain before it. This feature makes it easy to tell if any past transactions have been altered in even just the slightest way.
Trust in the system
A key feature of blockchain technology is the decentralized nature of governance. Instead of trusting in a counterparty or a central party, trust is placed in the system itself. This allows for the possibility to conduct peer-to-peer transfer of value without the need for intermediaries. The appearance of Bitcoin in 2009 reshaped the possibilities for peer-to-peer transfer of value and produced a framework for an entirely new ecosystem to develop. In order for blockchain systems such as Bitcoin to be successful, there needs to be a high enough volume of participating computers. Participation in blockchain networks is driven through a process called “mining”.
Mining is the backbone of any blockchain network because it is the process in which the verification of transactions takes place. It is referred to as mining because it is analogous to the process of mining commodities like gold. The mining process for blockchains such as Bitcoin takes place through what is known as “proof-of-work.” Proof-of-work is necessary to achieve verification of transactions without a third party. A proof-of-work is a complex computational algorithm that is solved by blockchain miners. When a miner solves this complex algorithm, the transaction is verified and added to the blockchain.
Anyone can apply to become a blockchain miner. Miners install special mining software that enables their computers to communicate with the entire network. Once the computer installs the software, joins the network and begins the mining process, it becomes known as a “node”.
People are incentivized to become part of the network by earning mining rewards. These rewards are typically in the form of cryptocurrency. These rewards are compensation for the computational power and electricity required to take part in the mining process. In the case of the Bitcoin network, miners earn Bitcoin upon the successful validation of a new block. The clever economic model means that transactions on the blockchain are validated and the ledger is maintained by the community and the community is in turn rewarded for their efforts.
By having the community of participating computers (and their owners) secure the network, there becomes no need for intermediaries to validate transactions. The process of mining makes decentralized governance on a blockchain possible. Mining also makes blockchain technology more effective, efficient, and secure than traditional, centralized methods.
Accessing and Using Blockchain Networks
Once a blockchain network has been established, users can access the network to exchange information and conduct transactions.
A common misconception is that users interacting with blockchain networks are anonymous. Instead, blockchain technology is “pseudonymous”, meaning that users on blockchain networks are assigned an alpha-numeric identifier. This code is associated with every transaction made by that user and is publicly available. The pseudonyms that users are assigned provide a layer of privacy. However, once someone knows your identifier, they will be able to associate all of your transactions on the blockchain with you personally. For example, you can view the balance of Vitalik Buterin’s (crypto-billionaire and creator of the Ethereum blockchain) Ethereum wallet at any time since the public now knows his identifying address.
Types of Blockchain Networks
There are several types of blockchain networks that each function in different ways.
- Public Blockchain Networks: Public blockchains are “permissionless”. This means that anyone can participate in the blockchain and exchange assets or information in a peer-to-peer manner. Public blockchains are the most common type of blockchain networks. An example of a public blockchain network is the Bitcoin network.
- Private Blockchain Networks: Private blockchains are “permissioned” meaning that they are governed by a single, central organization who controls who can participate in the network. Private blockchains are not open to the public at all. Only approved participants can execute consensus protocols and maintain the shared ledger. Private blockchains are typically used behind corporate firewalls or hosted on company premises.
- Permissioned Blockchain Networks: Permissioned blockchains are similar to private blockchain in that they are permissioned. However, they differ because they are still accessible to the public, but require users to either be invited or meet a certain criteria to join.
- Consortium Blockchain Networks: A consortium blockchain is developed and maintained by multiple organizations. Consortium blockchains are another example of a permissioned network. All organizations in the consortium share responsibility and determine who can join the network. Consortium blockchains are often used by enterprise companies.
Permissioned blockchains are typically faster in speed and more cost-effective than permissionless blockchain networks. However, permissioned blockchains are less secure and only partially decentralized whereas permissionless networks are much more secure and truly decentralized.
Benefits of Blockchain Technology
Blockchain increases trust, security, efficiency, and transparency for businesses, organizations, and consumers around the world. Regardless of the type of blockchain used, this technology has the potential to transform centuries old business models, pave the way for more legitimate governments, and create new opportunities for prosperity for everyday citizens.
Enhanced security: Blockchain is inherently resistant to fraud and unauthorized activity. Data is encrypted end-to-end making it so that information cannot be changed or altered.
Reduced costs, increased speed: Many processes can be streamlined using blockchain. This increase in efficiency, speed, and automation will ultimately lead to cost savings.
Transparency and traceability: Blockchain uses a distributed ledger which ensures that transactions and data are recorded identically across multiple locations. All network participants can see the same information at the same time, providing a fully transparent audit trail.
More than Just Tokens and Coins
Blockchain first became widely-known through popularization of Bitcoin, but the technology can benefit many industries.
Supply Chain Management: Drug Tracking, Food Transport, Shipping/Contracts/Signing
Financial Settlements: Remittance, Cross-Border Transactions, Internal Settlements
Identity Solutions: Permissioned Users, Resume Verification, Credentials, Voting, Governance
Asset Tokenization: Real Estate, Illiquid Assets, Stocks/Bonds/Securities (NASDAQ Linq), Ease of Transfer
The adoption of blockchain technology will have a profound impact on our world. It will lead to improved product safety and accountability, increased operational efficiency through accountability, and create access through global compliance.