What is the Blockchain?
Blockchain /ˈblɒktʃeɪn/: a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly
2.1 Introduction
In 2008, while the rest of the world faced the biggest financial crisis in decades [29], a paper was circulated among a small group of cryptography enthusiasts [30]. In this paper, Satoshi Nakamoto [31] explained the concept of a cryptocurrency called Bitcoin1 and a solution to the long-standing problem of double spending (where digital tokens representing unique value can be spent more than once) [32]. For years, double spending has been one of the main barriers to the widespread adoption of digital money. In 2008, the domain name Bitcoin.org was registered, and at the start of 2009, the genesis block for bitcoin—that is, the first block in a blockchain—was created [30]. At that point in time, nobody foresaw the impact that Nakamoto’s [31] underlying technology would have on the world’s largest organizations, trusted intermediaries, and society at large [33].
Since Nakamoto’s paper, distributed ledger technology, also known as blockchain technology,2 has rapidly gained popularity. Although ledgers have been around for millennia, for the first time in history they can be updated across multiple organizations and computer networks simultaneously through the use of blockchain technology. This functionality significantly reduces the possibility of ‘gaming’ the system, that is, the distributed and decentralized nature of the blockchain ledgers prevents any single party from controlling, and therefore manipulating, the ledgers. The cryptography underlying blockchain ensures a ‘trustless’ system, thereby removing the need for intermediaries to manage risk. This is a true paradigm shift and it is why so many organizations are exploring Blockchain’s potential use to improve their tracking and audit systems.3 Although blockchain technology has only been around for less than a decade, businesses, government organizations, and consortia alike have significantly invested in this modern phenomenon, with a view to exploiting it for their financial or political gain [31]. Marc Andreessen, from the well-known venture capital firm Andreessen Horowitz, calls it as big an invention as the internet. Polychaeta [34], a research analyst from BNP Paribas, compares the creation of Blockchain to the invention of the steam or combustion engine, whereas The Economist predicts that it will be as important an innovation as the invention of Limited Liability Corporations [35].
The extent to which Blockchain is affecting our world is evidenced by the R3 Partnership’s investigation into how the distributed ledger technology affects players in the financial industry. The R3 Partnership is a consortium of 80 of the biggest financial institutions. The R3 Partnership described its December 2015 launch as the product of frustration among banks and other financial institutions with the multiple generations of disparate legacy systems that struggle to interoperate. In addition, six of the biggest global banks, led by Swiss bank UBS, have developed a ‘Utility Settlement Coin’ (USC) [36], which is the digital counterpart of each of the major currencies backed by central banks. Their objective is to develop a settlement system that processes transactions in (near) real-time, rather than days. The aim of the project is to enable global banks to conduct various transactions with each other using collateralized assets on a custom-built blockchain and to make financial markets more efficient [37]. A third example is Australia Post, which has released plans for developing a blockchain-based e-voting system for the state of Victoria, Australia [38]. The possibilities for the Blockchain are enormous and it seems that almost any industry that deals with some sort of transaction or tracking mechanisms can and will be disrupted by Blockchain. However, to understand how we should use Blockchain for social good, let’s first take a deep dive into the technology.
A blockchain is a shared and decentralized public or private ledger that describes a single version of the truth of ownership [39–41]. It is a distributed ledger that uses database technology to record and indefinitely maintain an ever-growing list of data records [42], which cannot be tampered with and are irreversible, verifiable, and traceable [33, 42, 43]. At first, these data records were bitcoin transactions, but applications have now moved to any type of online transaction across any industry. Blockchains can serve as a record keeper for societies, including registration of any type of document or property [44]. Data records are stored chronologically in blocks that are chained together cryptographically. Every node in the network has a copy of the block and, in order for a transaction to be added to a chain, there has to be a consensus among the nodes in the network.
The result is that peer-to-peer transactions become possible, without the need for a centralized certifying authority, such as a bank, which usually takes a small commission to carry out the work. The removal of third parties, and the ability of organizations and consumers to execute peer-to-peer transactions almost instantaneously, is a true paradigm shift. In essence, this is what makes Blockchain so important.
There are different types of blockchains and the type of blockchain selected determines how actors in the network interact with each other [33]. There are permissioned and permission less blockchains, each with different characteristics, rules, and actors. Permission less blockchains are public blockchains. The best-known example is the bitcoin blockchain. Trust within the system is created through game-theory incentives and cryptography [33]. This means that anyone interested in joining a particular permission less blockchain can do so by simply connecting his or her computer to the decentralized network, downloading the application, and starting to process transactions. It is not necessary to have a previous relationship with the ledger and you do not need to be approved to join. If you want to start mining Bitcoin and supporting the Bitcoin network, simply go to https://bitcoin.org/en/full-node and get started. A public, permission less Blockchain is not owned by anyone and everyone can contribute.
On the other hand, permissioned, or private, blockchains do not require these artificial incentives because all actors in the network are known to each other [33]. New actors have to be approved by existing participants in the network, which enables more flexibility and efficiency in validating transactions [33]. Private blockchains are generally used by organizations that like to keep a shared ledger for settlement of transactions [45], such as within the financial services industry. They are owned and operated by a group of organizations and transactions are visible only to members of the network [45]. A good example of a private Blockchain is the Blockchain Settlement System developed by UBS and five other major banks in 2016 [36]. This Blockchain enables the four participating banks to discernibly improve settlement times among them and no other party has access to the Blockchain or can contribute to it.
Private and public Blockchains are the two flavors that have been around and, for both options, the main feature is that, once a transaction is approved and on the Blockchain, it cannot be changed or edited. Some of the larger fintech institutions (including China’s first private and fully digital bank, We Bank) are considering layering their online banking on to combinations of public and private blockchain networks [46]. However, since 2016, a third option has been developed. Accenture has patented an ‘editable Blockchain’, the history of which can be adjusted by a central authority. This is a bit of a contradiction, because the power of the Blockchain is that data, once validated, cannot be altered. However, Accenture claims that this type of Blockchain would be for private permissioned Blockchains only—used, for example, by the banks, where a central authority can manage the network under agreed governance rules [47]. This type of Blockchain would offer a ‘safety button’ that could, in fact, make the Blockchain safer to use.
The type of blockchain that an organization could opt for depends on the objective of the organization and the type of transactions that need to be stored on a blockchain. Some transactions, such as financial transactions, should not be visible for the general public, whereas other transactions, such as ownership of (digital) goods and land titles, benefit more from a public blockchain [48]. Regardless of the type of blockchain, the data stored becomes immutable, verifiable, and traceable, due to four key components of Blockchain: cryptographic primitives, consensus mechanisms, transactions, and smart contracts. We address each of these components separately below.
