By now you’ve probably heard the news stories of newly minted bitcoin millionaires, and the much-publicised climax when bitcoin reached its peak price at $19,783.06 in December 2017. Countless people have speculated and offered their opinions on the fate of bitcoin, altcoins and crypto assets. But aside from the media hype, many people are asking, what is bitcoin, what is blockchain and what is all this fuss about?
Blockchain provides a shared ledger technology (distributed database) that allows any participant in the network to see the one system of record or ledger. The record is often in real-time. By using blockchain technology, businesses can benefit from a more efficient transfer of goods and services. All the members of the blockchain network share a common ledger that is replicated across all the different members of the network. Only the members participating in a blockchain each has the permission to read/write on the ledger.
The key features of blockchain are:
- Consensus, at least 51% of participants need to agree
- Provenance, audit trail, a complete record of who has owned what asset throughout the asset throughout its lifecycle
- Immutability – once the blocks are written, it is impossible to tamper with the blocks. These boosts trusts across the network
- Finality – Once someone has committed into the blockchain, there is one single system of record, one single system of truth across the business network which means that disputes are very easy to resolve if and when they occur.
Blockchain technology is distinguished by two core components, the first is distributed ledger technology (DLT), and the second is smart contracts.
Distributed Ledger Technology
A blockchain is a distributed ledger with multiple users each having access and permissions to maintain the blockchain. A blockchain, like the many software programmes we are accustomed to such as spreadsheets, can be downloaded to a computer. Where blockchain is unique, is that each download allows each user some rights to maintain the blockchain amongst a network of other users, each user is called a node.
Each node is decentralised, so is not owned by a single user, computer, or entity, making it a peer network. Therefore, in order to execute commands on the blockchain, all users must verify and agree to the command, in other words, all users must give consensus. Events, such as new data being added to the blockchain, trigger notifications that alert the users in the network to take action. Only information agreed by each user via consensus is recorded and stored on the blockchain, trust is created only through this verification.
Each command or block of information is encrypted with a unique identification in the same way that a fingerprint us a unique identifier. Once a block of information is given consensus, it is stored on the blockchain but cannot be amended, making it immutable.
Any new blocks of information must also be verified by consensus, and can then be added to the existing information blocks that preceded it, forming a chain of information blocks that are all linked and can continually be appended with new information blocks. Hence the apt name of blockchain given to the technology.
Think of a distributed ledger as a shared database within your organisation, for example the Customer Relationship Management system (CRM) used by the sales function or the people management system used by HR. Usually these ledgers are owned by a central function and the data in these systems is periodically updated and synchronised in all stored locations.
These maintenance and programming functions are usually performed by the allocated IT teams, database administrator, etc. Blockchain is distinctive because the rights to update and maintain data is not owned by a single centralised function but rather each and every single user on the blockchain, can participate as an administrator.
Therefore, the difference between a traditional distributed ledger and blockchain ledger is that a blockchain ledger has decentralised administrators. All blockchains are distributed ledgers, however, not all distributed ledgers are blockchains
The second core component of blockchain technology is smart contracts. What should be distinguished here is that the bitcoin blockchain only allows bitcoin assets to be recorded on the ledger.
Given this limitation, Vitalik Buterin from the Ethereum Foundation, developed a new open source protocol called Ethereum, which unlike bitcoin blockchain, allows for other digital assets to be recorded on the ledger, and allows programmable instructions known as smart contracts.
Smart contracts are the rules and protocols that govern the information and transactions executed on the DLT. These rules are agreed collectively by all participants in the distributed ledger and form the basis of the underlying legal agreements of the transactions being managed by the DLT.
In a blockchain, the DLT keeps records of the assets being transacted and exchanged, whilst the smart contract executes the terms of the underlying legal agreements. Smart contracts are self executing in that when the collectively agreed legal terms for the transaction is verified by each node in the distributed ledger, the contracts can automatically settle the transactions.
The coming together of a distributed ledger and smart contracts is a powerful combination meaning that the value and legal terms of a transaction can be executed simultaneously and autonomously without the requirement of traditional physical intermediaries (such as lawyers or banks) to facilitate the transaction.
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