BlogMay 9, 2018
Blockchain: Beyond the Basics
Blockchain holds the possibility of providing immense value to the marketplace, very little of which has yet to be realized. Some of that may be due to lack of mature technology offerings, or a scarcity of well-established vendors in the space providing related services, but some of it may also be due to the need for blockchain enthusiasts to share more information with the public in terms of explaining what blockchain is in general, and specifically how it may help solve business problems.
Firstly, a blockchain is a database of sorts, although not a relational database with which you may be familiar. Rather, it is a database of records, called blocks, that are a list of sequential transactions organized in chronological order. This list of transactions is often referred to as a ledger. Often these transactional records are public, transparent, and easily audit-able, but a blockchain can be designed to incorporate varying levels of privacy.
The Peer-to-Peer Network
A blockchain is typically managed by a peer-to-peer network adhering to a protocol for both inter-node communication and as a means to achieve and maintain consensus on the state of the ledger without reliance upon a central source of truth. A blockchain accomplishes decentralized consensus, without the need for a trusted third party, nor a centralized authority, using a set of rules to determine the legitimacy of all new and previous blocks recorded to the blockchain. This allows the blockchain to operate autonomously, and in a trust-less manner. The most notable blockchain network would be Bitcoin, which contains about 10,000 nodes in more than 100 countries, and has operated without interruption for nearly 10 years.
Secure by Design
Each block in a blockchain usually contains a cryptographic hash of the previous block, a timestamp, and data for that block. Because the cryptographic hash typically would be generated from the previous block's data, a timestamp, and possibly other information, each hash is ensured to be unique. Each node that makes up the peer-to-peer network participates in an often computationally-expensive validation process of both old blocks and each new block in a manner defined by the protocol that governs the network. This consensus mechanism ensures the integrity of the data. Since this rules-based system would require the collusion of a majority of the participating network to alter old data, and correspondingly require large scale computational effort, it is extremely difficult to change the contents of previous blocks, if not impossible. This is generally why blockchains are considered immutable, which is something that could be quite important when you are storing medical records, committing financial transactions, or recording land transfers between different parties.
The decentralized consensus mechanism behind blockchain allows the participants to verify and audit transactions inexpensively. The use of blockchain technology introduces the idea of digital scarcity and the possible creation of scarce digital assets, which was previously impossible, given the often-infinite reproducibility of data. As value is difficult to maintain or transfer, without first ensuring scarcity and uniqueness, the manner in which blockchain works confirms that each unit of value was transferred only once, solving the long-standing problem of double spend problem. In addition to comparing blockchain to a database, blockchains have been described as a value-exchange protocol. For this reason, digital currencies have provided the basis of the internet of value, as the internet transitions from primarily transferring information, to possessing the ability to transfer value at scale.
Every year, massive sums of money are lost to the production and distribution of counterfeit products. Food distributors struggle with safety issues when there are gaps in understanding where fish or poultry might be coming from, and how long they were stored, and where. Drug manufactures face regulatory challenges when accounting for the distribution of their products through various channels, and to the final consumer. Although supply chain management might not be a glitzy consumer-facing use case, the need for a transparent means to track and audit products from, let's say, the diamond mine to your local jeweler, are necessary to ensure quality, regulatory compliance, and accountability in multiple industry silos, which are often complicated by transnational networks of commerce where trusted third parties might not always be available. Now that General Corporation Law in Delaware has been amended to explicitly allow for the use of blockchains to maintain corporate share registries, it will soon be much easier to make a case for blockchain as a means of ensuring the legitimacy of chains of custody and the products that are delivered to consumers.
Given that blockchain operates in a manner that is transparent, decentralized, and without trust, it makes it easy to perform transactions that would otherwise require the use of a middle-man. A smart contract is code that is deployed to a blockchain and operates autonomously. Smart contracts contain the rules, conditions, and penalties often associated with a contract, but are programmed to automatically enforce those obligations, particularly when no trusted third party is available, or is costly. It is easy to see how something like escrow services can easily be disrupted in the near-future, given the ability to deploy smart contracts to a blockchain combined with being able to transfer value in a cheap and reliable manner.
The Trust Mechanism
Modern commerce relies upon extensive supply chains, credit systems, communication networks, and numerous third parties to facilitate the flow of capital and goods globally. Maintaining what amounts to a vulnerable web of trust between market participants is a risk that must be mitigated, and risk mitigation requires time, people, and money. Although not a cure-all to every business challenge, code-based rules, decentralized consensus mechanisms, transparency, immutability, peer-reviewed open source software, and proven security practices goes a long way towards letting businesses focus on their core missions, rather than worry possible points of failure in their daily interactions with consumers, suppliers, and partners.
Technologists and business analysts are being presented with a new tool to solve recurring challenges in the form of blockchain. New solutions are presented daily when it comes to resolving issues pertaining to transparency, security, reliability, provenance, trust, and complex financial and process-oriented obligations between numerous parties, often without a reliable third-party authority to facilitate cooperation or enforce rules. CapTech is exploring the rapidly evolving technology that defines the blockchain landscape. In the months ahead, we will be presenting additional thoughts and findings regarding how this new technology may provide solutions for you in new and innovate ways, and most importantly, how it will impact your bottom line.