Blockchain Overview - What are blockchains?

Blockchains enable secure transactions without the need for a central authority!

Blockchains are unchallengeable digital ledger systems implemented in a distributed fashion (i.e., without a central repository) and usually without a central authority. At their most basic level, they enable a community of users to record transactions in a ledger that is public to that community, such that no transaction can be changed once published. In 2008, the blockchain idea was combined in an innovative way with several other technologies and computing concepts to enable the creation of modern cryptocurrencies: electronic money protected through cryptographic mechanisms instead of a central repository.

Blockchain workflow

The first such blockchain based approach was Bitcoin. These currency blockchain systems are novel in that they store value, not just information. The value is attached to a digital wallet—an electronic device (or software) that allows an individual to make electronic transactions. The wallets are used to sign transactions sent from one wallet to another, recording the transferred value publicly, allowing all participants of the network to independently verify the validity of the transactions. Each participant can keep a full record of all transactions, making the network resilient to attempts to alter that record (or forge transactions) later.

As stated above, blockchain technology is the foundation of modern cryptocurrencies, so named because of blockchain’s heavy usage of cryptographic functions. Users employ public and private keys to digitally sign and securely transact within the system. Users of the blockchain may solve puzzles using cryptographic hashing in hopes of being rewarded with a fixed amount of the cryptocurrency. However, blockchain technology is more broadly applicable than its application to cryptocurrencies.

Organisations considering implementing blockchain technology need to understand important aspects of the technology. For example, what happens when an organisation implements a blockchain system and then decides they need to make modifications to the data stored? When using a database, this can be accomplished through a simple query (or major changes can be made by updating the database schema or software). However, on a blockchain, it is much more difficult to change data or update the ‘database’ software.

Organisations need to understand the great difficulty in changing anything that is already on the blockchain, and that changes to the blockchain software may cause forking of the blockchain. Another critical aspect of blockchain technology is how the participants agree that a transaction is valid. This is called “reaching consensus”, and there are many models for doing so, each with positives and negatives for a specific business case.

Some existing blockchain technologies focus on storing wealth, while others are a platform for smart contracts (software which is deployed on the blockchain itself, and executed by the computers running that blockchain). New blockchain technologies are being developed constantly to enable new use cases and to improve the efficiency of existing systems. Some blockchain implementations are open, meaning anyone can read and write to them. Other implementations limit participation to specific people or companies, allow finer-grained controls, and may be managed by a central body. Knowing these specifics allows an organisation to understand what will be most applicable to its needs.

Despite the many variations of blockchain systems and the rapid development of new technologies, most blockchains use some common core concepts. Each transaction involves one or more addresses and a recording of what happened, and it is digitally signed. Blockchains are comprised of blocks, each block being a group of transactions. All the transactions in a block are grouped together, along with a cryptographic hash of the previous block. Finally, a new hash is created for the current block’s header to be recorded within the block data itself as well as within the next block. Over time, each block is then chained to the previous block in the chain by adding the hash of the previous block to the header of the current block.

Blockchain process

Each technology used in a blockchain system takes existing, proven concepts and merges them together in a way that can address problems that were previously difficult.

Blockchains are a significant new avenue for technological advancements, enabling secure transactions without the need for a central authority. Starting in 2009, with Bitcoin leveraging blockchain technology, there has been an increasing number of blockchain based cryptocurrencies. Possibly more importantly, new applications beyond the realm of currencies are building upon the fundamentals of blockchain technology.

The first applications were digital currencies with the distribution of a global ledger containing all transactions. These transactions are secured with cryptographic hashes, and transactions are signed and verified using public/private key pairs. The transaction history is summarized with Merkle trees, to efficiently and securely record a chain of events in a way that any attempt to edit or change a past transaction will also require a recalculation of all subsequent blocks of transactions.

The use of blockchains is still in its early stages, but it is built on widely understood and sound cryptographic principles. Moving forward, it is likely that blockchains will be another tool that can be used to solve newer sets of problems. Financial organisations are likely to be the businesses most impacted by blockchains. They may need to adapt or even completely change their practices to focus on being platforms for value exchange and not just places to store value.

Blockchains are also digitizing assets other than money. Companies that need to maintain a public record, such as holding land title, marriage, or birth records, should consider how their problem sets might be addressed by blockchain technologies. Blockchains also have strong potential for storing and recording supply chain records. A blockchain can record each step in a product's life, from when it was created in a factory, to when it was shipped and subsequently delivered to a store, and finally to when a consumer purchased it. There may even be new industries, such as digital notaries who can prove a person had access to a specific piece of information by recording the hash of it into the blockchain. There are many potential uses and opportunities for blockchain technologies.

A blockchain relies on existing network, cryptographic, and recordkeeping technologies but uses them in a new manner. It will be important that organisations are able to look at the technologies and both the advantages and disadvantages of using them. Once a blockchain is implemented and widely adopted, it becomes very difficult to change it without forking. Once something is recorded in a blockchain, it is usually there forever, even when there is a mistake. For some organisations these are desirable features. For others, these may be deal breakers preventing the adoption of blockchain.

Blockchain technologies have the power to disrupt many industries. To avoid missed opportunities and undesirable surprises, organisations should start investigating whether or not a blockchain can help them.

Source: National Institute of Standards and Technology, U.S. Department of Commerce (Jan 2018)

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