This is a 2-part series on blockchain technology. In part 1, we will explore what blockchain technology is and provide a simplified explanation of how it works. In part 2, we will identify when to expect enterprise blockchain adoption, and what you should be doing in order to prepare.
The internet, smartphones, cloud computing… blockchain? Three of these innovations have revolutionized the way consumers and companies interact, transact, and exchange information. If you have been paying attention to the news for the past year, you have likely heard the same industry-disrupting claims applied to blockchain technology.
Stories about the blockchain’s ability to revolutionize all aspects of life — both public and private– have been easy to come by these days. With Bitcoin reaching all-time highs, and blockchain based companies raising millions of dollars via Initial Coin Offerings (ICOs), interest from businesses, governments, and individuals has grown exponentially in the last year. This has left many scratching their head and asking themselves, “Should I care about the blockchain?”
Is it all hype, or does blockchain technology have the potential to completely change the way we think about the management and exchange of information around the world?
What is the Blockchain and How Does it Work?
For the majority of us, we equate blockchain technology with Bitcoin, and for good reason — blockchain technology was developed as the accounting backbone for the digital currency. Since Bitcoin, new blockchain platforms and have been developed which have added enhanced utility to the core functions of blockchain technology, including “programmable” (smart) contracts, increased speed/transaction capacity, and the ability to digitize physical assets into tokens which can be exchanged on the blockchain. With the amount of hype surrounding this technology, including its potential to “change the world”, and the inherent complexity of how it works, it is important to spend some time understanding what blockchain technology is and is not so that we can get a better understanding of what it could become in the near future.
Also known as distributed ledger technologies (DLT), blockchain technology is meant to provide an immutable and auditable record of all transactions that occur within the network. A system of computers, or “Nodes,” which participate in the network are all responsible for validating and maintaining the quality of the data stored within and written to the network. When functioning as expected, the blockchain allows for self-managing and validating systems that do not require the need for an intermediary to serve as the arbiter of “truth” in the network. Traditional data networks rely on a centralized intermediary (governmental institution, banks, even services like Google or Facebook) to validate and maintain the data stored on the network and serve data requests to users.
On a blockchain network, there are no intermediaries to serve as a single point of truth to maintain and validate data. This means that transactions which used to take days can now be executed faster (near instantaneous), cheaper, and with the same level (or even more) of security and confidence of data quality for the end user. Note: the term “transaction” is not used here purely in the financial sense (i.e. transfer of money). In terms of the blockchain, a transaction can be any exchange of data (reading from or writing to a database), sending information between parties, etc.
At a minimum, and for simplicity, let’s think of all blockchains as the following: a form of distributed ledger technology that is used to digitally record and facilitate the exchange of information between parties via a decentralized network of computers (nodes).
A ledger (or database) is used to record and store both static and dynamic information: financial transactions, inventory levels, ownership, personal information). Traditionally, the ledgers that maintain this information are managed by trusted 3rd parties (banks, governments, inventory management systems). As consumers of this information, we trust that the parties which manage the information will maintain accurate records on our behalf (account balances, social security numbers, vehicle registration information) and provide us access to it when requested. We pay fees to these 3rd parties to ensure our access to and quality of the information stored (account fees, licensing fees, taxes). In this sense, the responsibility for maintaining these records is centralized to the institution that manages the ledger.
Image via NESAD
The distributed ledger removes the responsibility of maintaining accuracy of records from a central institution and instead spreads it to all the participants on the network. Each participant maintains a complete copy of the ledger, which is updated in real time. This means that the responsibility for ensuring data quality and processing data requests can be spread between the network participants – essentially moving “trust” from a single entity to the network as a whole.
The redistribution of trust from one to many raises a very important question, “How can I trust the information provided by a network of computers around the world, especially when I have no formal economic relationship with any of them?” In other words, “How are network participants incentivized to provide accurate information?”
Blockchains solve this problem by using a combination of economic incentives and computational-intensive cryptography to ensure that information is protected from unauthorized access, and that the data contained in the chain remains accurate. The process by which the network participants validate transactions and ensure that the previous record of transactions stored in the chain has not been changed is known as “consensus.” For Bitcoin, you may have heard of this called “mining,” which has grown to be an extremely profitable industry for both the miners and for the manufacturers of the graphical processor units (GPUs) which are used for it.
Mining is a means by which network participants contribute computing power in order to perform the mathematical proofs which validate new transactions and ensure the accuracy of data stored on the blockchain. Miners are rewarded for their effort in maintaining the chain in the form of Bitcoin. Other blockchain protocols use different methods of consensus which do not require mining, but rather rely on other economic incentives to ensure accuracy of data. You can learn more about different consensus protocols here. Due to the cryptographic methods utilized in encoding the data, network validators can ensure the accuracy of the transactions without actually knowing the details of the transaction, ensuring data privacy.
As transactions are validated, the record of it is added as another data block in the chain. All blocks reference back to each other. Because all network participants possess a complete version of the ledger, any attempt to modify the details contained within a previous block in the chain will be identified and rejected. The following image summarizes the relationship between blocks.
Image via FundSociety
Taken all together, the blockchain provides a perfect record of information which cannot be modified after the fact, and allows information to be validated without reliance on one single entity. It allows for data to be exchanged and validated faster, cheaper, and with more security than traditional centralized networks. For as much attention as blockchain technology has received in the media, the actual applications of it, and our interactions with it, will be relatively invisible. Blockchain protocols will be another piece in the arsenal of existing back-end network protocols, programming languages, and databases that power the modern internet and global IT infrastructure.
The potential efficiencies that the blockchain can offer have caught the eye of many individuals, organizations, and governments who are looking to develop the next generation of public and private digital services and utilities.
Who are the Players?
In addition to Bitcoin, some of the larger blockchains include Ethereum, Bitcoin Cash (this is not a typo — you can read about why there are two flavors of Bitcoin here), Ripple, IOTA, NEM, and NEO (amongst a growing list of others).
Each adds in some unique functionality which improves upon the original vision of Bitcoin. Ethereum was the first blockchain to bring smart contracts — the ability to create programable, self-executing contracts that can facilitate the automatic exchange of assets between parties upon execution of the agreed upon terms. Other blockchain technologies, hope to address the speed and scaling issues that plague other blockchains by using new methods of validation that require less computational “work” in order to verify the authenticity of transactions and maintain the ongoing ledger, or “chain”.
The space is growing rapidly, and there is no shortage of blockchain platforms in development. As the current protocols continue to be improved upon, and as new platforms emerge, it will be exciting to see how adoption of blockchain technology grows. Will certain protocols lend themselves better to certain types of tasks? Will there be new enhancements which allow for integration of different blockchain protocols? It is still too early to tell which (if any) blockchain protocol will emerge as the preferred standard for enterprise use, but I can assure you that there is an intense interest in this technology from individuals and organizations alike. The next 5 years will be instrumental in shaping the adoption and perception of blockchain technology around the world.
In part 2 of this blog post, we will explore when we can expect to see large-scale enterprise adoption of the blockchain, and provide some insight on what you should be doing now in order to prepare your organization for the future.
If you would like to learn more about blockchain technology, you can reach Sam Schieber at [email protected].