Blockchain buzz: But what is it?
By Lee Yu Kit June 9, 2016
- At its core, it is a distributed, shared ledger with strong cryptographic controls
- It is not a silver bullet for all transactions, some are more suitable than others
IF you’ve been keeping up with what’s happening in the world of technology, you’ll realise there’s a lot of buzz around blockchain technology.
Blockchain is trending upwards and like all nascent technologies, it is in the hype phase of its lifecycle.
But what is it?
Blockchain is best known for its association with the shadow crypto-currency Bitcoin – which is the only industrial application of blockchain technology.
The concept of blockchain technology was first described by the mysterious founder of Bitcoin, known only by the pseudoname Satoshi Nakamoto (the identity of Satoshi Nakamoto has only recently been claimed by an Australian entrepreneur, Craig Wright).
Leaving Bitcoin aside, why the fascination with blockchain? And what is it?
A shared ledger of accounts
At its core, blockchain is a distributed, shared ledger with strong cryptographic controls.
Ledgers are accounts of transactions, and we are used to centralised ledger systems – for example, in the records of a bank.
Different parties to the transaction will have their own versions of the ledger – Party A records that he made a payment of $XX to Party B, so his ledger reflects that payment. Party B will have his own version, showing receipt of the payment from Party A.
In a more complex business transaction involving multiple parties, each party keeps its own version of the transaction in his own ledger.
The transaction mentioned above involves multiple ledger systems, with duplication of effort. If the central ledger is compromised or hacked, or a mistake is made in recording the transaction, the whole business transaction is affected.
Also different ledger systems capture their versions of events, so that reconciliations may be needed in cases of dispute.
Blockchain implements a distributed ledger system that provides everyone with a common view of the common ledger at the same time.
The technology provides for replication across all copies of the ledger, and permissions built into the system allow participants to see only what they are ‘permitted’ to see.
This aspect of the technology ensures privacy protection since transactions are secure and authenticated with only appropriate access.
Blockchain is an append-only ledger with strong cryptography against altering the entries, which take place by consensus – that is, all parties to the transaction implicitly agree to the entries that have taken place at the same time.
The history of the transaction is captured and becomes an audit trail. The technology is such that ledger entries cannot be altered and adds to the history of the whole transaction.
Because the ledger is common and shared, all parties to the transaction see the same version, eliminating the possibility of different version of the truth, and the need to reconcile different ledger systems.
Appended data forms a ‘block’ which is attached to earlier records of the transaction, forming a ‘chain’ – hence, blockchain.
Elegant … and disruptive
Why is this of such interest? The potential of the technology is to significantly alter the way that transactions are done today, potentially reducing the time from days to minutes, lowering the cost of transactions, and reducing the chances of fraud due to the security built into the system.
By providing a common, trusted view, it eliminates disputes arising from differences in the different ledgers recording the same transaction.
It incorporates other elements that render it quite elegant in reducing waste – for example, the terms of the transaction (such as the conditions for release of funds) are embedded in the transaction itself.
To be sure, blockchain is not a silver bullet or fix-it-all, and it is more appropriate for certain transaction types than others.
It is not suited to high-volume, low-value sorts of transactions, for example, nor is it an obvious choice for high-performance type transactions.
Rather, it is more appropriate for multi-party, high-value transactions which involve the transfer of assets – whatever those assets are, whether physical or virtual (for example, a piece of land or rights to a piece of work).
Early examples involve financial transactions, such as letters of credit, cross-border remittances, and trade financing.
Transactions where the history of the transaction need to be tracked also appear to be good candidates – for example, land-record keeping and transfer in many cases involve multiple claimants with a long and involved process.
Similarly, the traceability of transactions appear to lend particular applicability to fields such as audit, and even to supply chain management where components of a larger whole need to be tracked – as in assembling a complex piece of machinery.
Despite all the interest, blockchain is still in its infancy, with plenty of details to iron out, not the least of these being regulatory ones as well as those related to technology.
The financial services industry has taken an early lead with a number of projects or proofs-of-concept underway to develop the application of this interesting technology.
Lee Yu Kit is a technologist with IBM Malaysia. He blogs on technology and other topics at Zen and Nonzense.
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