What is Blockchain? A Primer on Distributed Ledger Technology

What is blockchain? A primer on distributed ledger technology

Published on January Four, two thousand seventeen / Updated on August 28, 2017

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You’ve most likely heard of blockchain. It’s hard to navigate much of the web today without running across some kind of reference to it. After a while I thought, “Could I truly explain blockchain to someone if asked?” and if you’re in the same boat as I was, this post is for you.

The Problem

Any technology is useful only if it solves some business problem, and blockchain is no exception. There are several problems blockchain solves.

When two parties execute an agreement, there are several moving parts. But what makes the transaction efficient is trust. If you agree to buy X number of widgets from me at a certain price, and we have established trust, the transaction goes slickly. If not, then it gets complicated at best, and litigious at worst. There are many factors that establish an inherent trust like

Reputation – If you are a reputable vendor, I am more likely to trust you.

History – If we’ve been able to trust each other in the past, we are more likely to trust each other in the future.

Establishing trust inbetween two parties can be very difficult, time consuming, and largely subjective (you can’t truly quantify “reputation,” for example), and the larger the network involved in a transaction, the more difficult it is.

In our fictional deal, you have your ledger to record various aspects of the transaction and I have mine. But I don’t see your ledger and you don’t see mine. Thus, by its nature, the deal is opaque, so we will most likely have a contract to govern the terms of the deal. And other than the terms of the contract, that’s as see-through as the deal gets.

Since there is no transparency, it’s difficult to tell how things are going until the deal is done.

What happens if something goes wrong? Let’s say I don’t hold up my end of the deal (or vice-versa)?

To ensure the deal goes sleekly, you and I will very likely deal with middlemen:

Lawyers – To draw up a contract, and if necessary, to provide legal services should things get litigious.

Accountants – To keep the ledgers, and ensure the exchange of goods (and money) goes according to the contract, and is decently recorded.

Government – In some industries, there are government regulations and oversight mandates and other guidelines that have to be followed.

What blockchain is NOT

If you’re like me, the very first time you ever heard about a “block chain” it was in the context of Bitcoin. Bitcoin is the very first implementation of blockchain technology. Bitcoin is an electronic currency that was created to solve the problems of trust, transparency, and accountability inbetween two parties in exchanging money for goods and services over the internet.

The bitcoin blockchain is a public, distributed ledger of all Bitcoin transactions that have ever taken place. This ensures that everyone who participates in the Bitcoin network has access to all transactions, and thus everyone agrees on how every one of those transactions took place. Furthermore, the ledger (blockchain) is immutable, so nobody can switch it.

Since the Bitcoin blockchain is distributed among all participants in the Bitcoin network, it relies on no centralized authority. And through the use of cryptographic technology, all transactions are anonymous.

The Solution

Bitcoin is a disruptive – and arguably revolutionary – technology that relies on blockchain technology. But the blockchain we are hearing about nowadays takes it much further. While Bitcoin is a crypto-currency ensuring transparency and accountability of financial transactions, blockchain technology can be applied to many other types of transactions to solve the problems inherent in any transaction.

Blockchain technology is used in a peer-to-peer network of parties, who all participate in a given transaction.

At its core, blockchain technology uses a distributed ledger that is visible to all parties involved in the transaction. Through a consensus mechanism, the ledger is ensured to be consistent. Because the ledger is distributed, everyone involved can see the “world state” at any point in time and can monitor the progress of the transaction.

Through the use of cryptographic technology, the ledger is encrypted so that only parties permitted to view it may do so.

By its very nature, Blockchain tackles all of the problems inherent in a business transaction:

Trust – Through the use of blockchain, all the parties involved in a transaction only have to trust the technology.

Transparency – Because the ledger is distributed, all peers involved in the transaction network can view it (subject to security rights, of course).

Accountability – Since all parties in the transaction can view the distributed ledger, everyone can agree on how the transaction is progressing while it is ongoing, and how it went once it is finish.

Hyperledger

Primarily, blockchain technology was more concept than reality. Inject Hyperledger!

The Hyperledger is an open source, collaborative effort hosted by the Linux Foundation, to advance cross-industry blockchain technologies. Its community is composed of leaders across many industries including finance, Internet-of-Things, technology, and more.

One of its community-based projects is Hyperledger Fabric, a blockchain framework for business applications, to which IBM contributes code. Hyperledger Fabric uses container technology to enable “smart contracts,” which are implemented in “chaincode” that permit network members to create and manage assets involved in business transactions, and to create and manage the transactions as well.

The Bottom Line on Blockchain Technology

Blockchain technology has the potential to revolutionize the way business networks operate. By establishing trust, and providing transparency and accountability, blockchain makes the network and transactions more efficient. More efficient means quicker turnaround, enhanced profits, and more satisfied customers.

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