What is blockchain?
Blockchain is best known as the technology underpinning the controversial Bitcoin cryptocurrency. Bitcoin and by extension blockchain were created by someone using the nickname Satoshi Nakamoto. There is a lot of speculation about Nakamoto's real identity.
Blockchain is a public ledger consisting of all transactions taken place across a peer-to-peer network. It is a data structure consisting of linked blocks of data, e.g. confirmed financial transactions with each block pointing/referring to the previous one forming a chain in linear and chronological order. This decentralised technology enables the participants of a peer-to-peer network to make transactions without the need of a trusted central authority and at the same time relying on cryptography to ensure the integrity of transactions.
Blockchain in Bitcoin cryptocurrency
In Bitcoin, the blockchain refers to all transactions that have ever been executed in the network. The list constantly grows bigger as more blocks are added to it. Each new block consists of the confirmed transactions that have been executed at a certain time. Once a transaction is executed it propagates to the peer-to-peer bitcoin network but it does not become part of the blockchain until it is verified through a process called mining. In mining, certain nodes of the network called "miners" compete with each other to validate the unconfirmed transactions and add them to a new block by trying to solve a difficult mathematical problem based on the cryptographic hash SHA256 (called the proof-of-work algorithm).
Each block of the blockchain is identified by its hash (called block hash or block header hash). Each block refers to the previous block called the parent block by including the parent block's hash in a special field of its header. Essentially this means that each block contains its parent's hash inside its header thereby affecting its own hash. If the parent block is modified, its hash changes causing a change in the current block's hash as well. This means that once a block has a lot of subsequent blocks in the chain, if modified it would automatically force all subsequent blocks to be recalculated and for each subsequent block new proof-of-work would have to be provided. This would require computational power that surpasses the capacity of individual nodes even if they work together. This feature is the key to blockchain's security, which ensures the integrity of transactions.
Traditional payment systems usually depend on a central authority trust model responsible to verify all transactions. Blockchain is an authoritative record that everyone trusts within the network without the existence of a central authority. Every node in the network, can arrive at the same consensus by sharing information and assembling a shared, global and public ledger trusted by everyone.
In a nutshell, trust is shared and it is based on the following processes:
- The verification of each transaction against certain criteria when received by each node and before it is propagated to the rest nodes of the network
- The validation of transactions into new blocks through mining – the solution of the proof-of-work algorithm
- The validation of the newly generated blocks by all nodes against a comprehensive list of criteria
- The addition of the newly generated blocks to the chain with the highest computational effort demonstrated through proof-of-work
Blockchain as a technology
While businesses – especially banks – have treated the Bitcoin currency with great scepticism and have mostly steered clear of it, they have started exploring the underlying blockchain technology recognising its potential as a new business process.
Blockchain technology could be used in directly transferring ownership of either digital assets, financial assets, e.g. stocks and bonds or physical assets e.g. car rentals/sales turning into a global registry of ownership extending even to health records, voting, intellectual property, etc. Every dataset and digital transaction could potentially use blockchain, creating a digital fingerprint and a trail updated by consensus and trusted by everyone without the need for a central authority.
Blockchain technology is advertised as very promising; however, it faces several challenges towards its wider adoption:
- Limitations in education and expertise around the technology, how it works, how it can be utilized by organizations and how consensus is reached in the absence of a central authority or intermediary are the first obstacles in exploring blockchain and investing in it.
- The distributed nature of blockchain enables organisations within the same sector to work together on common issues and problems. What currently happens is fragmentation: a collection of discrete projects ("silos") all working on the development of individual private blockchains and applications that run on top. This overthrows the original purpose of a global distributed and public ledger. Furthermore, it might be less efficient than existing approaches.
- Blockchain as a business process represents the transition of trust from central authorities to decentralised networks. This shift may mean that certain entities, e.g. banks are likely to shed some of the control they have on data which might cause conflicts of interest.
- The cost associated to maintaining and updating blockchain is significant.
- Existing regulatory frameworks need to be reviewed as they may have to be adapted to accommodate the needs of stakeholders in terms of blockchain. The EU parliamentary Committee on Economic and Monetary Affairs agreed that regulating blockchain is not an immediate concern and that monitoring it is a much preferred approach.
- Privacy issues may come under the spotlight when individuals become indisputably linked to blockchain applications.
Blockchain is a cryptographic tool to ensure the integrity of a sequence of events with minimal trust assumptions in a distributed system. It became overly hyped by the success of Bitcoin, which is based on this technology. Blockchain is regarded a disruptive technology and many are willing to embrace it in spite of its shortcomings. It is too soon to tell whether blockchain will live up to its promise. Monitoring its development is a first step for organizations while analysing challenges and making sure it suits their business needs and purpose is a logical step prior to adopting it.