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The Basics of Blockchain

Blockchain is roaming in the world of buzzwords for quite some time now and despite the strong critic it received from its numerous skeptics its popularity among innovators, investors, the public and authorities is continuously increasing. Deemed as the most innovative database technology developed in the recent years it led to the emergence of a new tech industry and multiple new business models led by startups and established cloud-providers. Having a basic understanding of the technology and the idea behind the concept is therefore highly recommended. This article briefly examines Bitcoin’s origin, what blockchain is, how businesses can get access to it and what it is good for.

Crypto is not the same as blockchain

Although Bitcoin and Blockchain are separable one cannot talk about Blockchain without keeping in mind that it has its roots in the idea of digital currencies. The idea of a digital currency existed long before Bitcoin and Blockchain. Bitcoin is not the first attempt at a digital currency, which has been tried many times over the last 40 years. It is merely the end product of a decades-long brainstorming process on how a digital currency and the underlying technology should work.

A digital currency (digital money, electronic money, or electronic currency) is any currency, money, or money-like asset that is managed, stored, or exchanged primarily through digital computer systems, especially over the Internet. (Source: Wikipedia)

In 2008 Satoshi Nakomoto published his whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System" proposing a solution to the problem and giving the name "Blockchain" or alternatively "Decentralized Ledger Technology" (DLT) to the technology. He published his idea on various forums and made a first transaction of 10 BTC in 2009 on his Bitcoin Blockchain to Hal Finney, who had downloaded the Bitcoin software the day it was released.

Since then, Satoshi has disappeared from the stage. He has never revealed his identity. Therefore, it is not known whether Satoshi is a single person (male or female) or a group of people. Over time, he has become a mysterious cult figure and several people have either been wrongly assumed to be Satoshi or have tried to impersonate him after Bitcoin gained popularity.

What exactly is Blockchain?

What Satoshi outlined in his white paper was a solution to the double spending problem of a digital currency, which points out that it is necessary to guarantee that the same value of a currency cannot be spent more than once. If one owes one dollar to each person A and B it is important that this one dollar can only be given either to person A or B while still owing the other. Paying off two dollars of debt with one dollar would undermine the efficiency of the overall economy and would lead to major socio-economic problems.

To ensure that duplicate issues do not occur, one needs to run the transactions on a system where one could create and read a record registering the transaction, but not update or delete it. This is what essentially distinguishes blockchain from an ordinary database, on which one can not only create and read records but also update and delete them.

In the blockchain, these last two operations are intentionally removed. This is what gives the blockchain the property of immutability and makes the blockchain so unique. The property of immutable recording allows to record ownership or the transfer of assets. The blockchain is therefore a data storage whereas the cryptocurrency or token (Bitcoin) is the medium (a file or protocol) that enables the transfer of data within the blockchain.

What else makes the Bitcoin Blockchain special is that it is decentralized and disintermediated. When we talk about decentralization, we mean a solution architecture that works in a peer-to-peer network where there are no owners, no administrators and no regulators. This is why there is no CEO of Bitcoin. It is a collaborative project that anybody can freely join and that all members of the network own together. Satoshi intentionally designed the blockchain as a decentralized peer-to-peer protocol, since he believed that all past failed attempts of creating a digital currency were due to the centrally controlled nature of the systems running the protocol.

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them." – Satoshi Nakamoto

Furthermore, Bitcoin and cryptocurrencies are also known as "disintermediated" assets, meaning that transactions are enabled without the need for or dependence on third parties and intermediaries, such as banks. Since there are no intermediaries that need to be trusted to carry out a transaction, the Bitcoin blockchain as well as any other blockchain is said to be trustless.

The transaction carried out on the blockchain, however, must be validated, which means that it must be ensured that the value has not already been spent once, and must be registered in the system. The type of validation mechanism - or “consensus mechanism” as it is called in the blockchain community - used on the Bitcoin Blockchain is called Proof-of-Work (PoW). The first reusable Proof-of-Work system (RPoW) was developed by Hal Finney in 2004, the same person who was involved in the first Bitcoin transaction by Satoshi Nakamoto.

Proof-of-work is not the only existing type of consensus mechanism, though. Other blockchains use different consensus mechanisms such as Proof-of-Stake (PoS), Proof of Coverage, Proof of Activity, Proof of Burn, Proof of Capacity, Proof of Elapsed Time or Proof of Authority. The main difference between these validation methods is the scale and speed at which transactions can be executed.

Since the inception of the Bitcoin blockchain many different types of blockchains have developed. The Bitcoin blockchain is public, open, permissionless and decentralized. However, there are also blockchains on the other end of the spectrum that are private, closed, permissioned and centralized. Best known for this type of blockchain is IBM's Hyperledger.

Types of Blockchains

1. Public or Private

When we talk about public or private blockchain, it's really about who can write data to that blockchain.

  • Public: anyone or a very large audience can create a new record.
  • Private: only a small audience (selected stakeholders) can create new records.

2. Open or Closed

When we talk about closed and open blockchains, it's really about who can read data from that blockchain.

  • Open: Anyone or an extremely large audience can consume or read the ledger data.
  • Closed solutions or platforms only allow very small populations or groups to use that ledger data.

3. Permissioned or Permissionless

When we talk about permissionless and permissioned blockchains, we differentiate whether approval is required to join the network and view transactions (activities) on the network or not, i.e. degree of transparency of the network.

  • Permissionless: Does not require user approval to use the network, i.e. generally public blockchains. All data is shown and shared with everyone, all the time.
  • Permissioned: Requires user approval to use the network, i.e. private blockchains generally used for enterprise purposes. Data is not shown or shared with anyone at any time.

IBM’s Hyperledger is a ready-to-use out of the box solution for businesses who wish to have all the perks and benefits of a blockchain without the additional operational hassle of development and technical maintenance. This type of business solution is now commonly known in the industry as Blockchain-as-a-Service (BaaS).

Blockchain-as-a-Service (BaaS)

There are numerous interesting blockchain use cases for enterprises. Among the most prominent are:

  • the automation of transactions as well as manual and time-consuming processes like the clearing of securities or the settlement and payment of insurance claims,
  • linking together broader elements of an organization such as joining the back-office with the rest of the organization via real-time reporting for action, and
  • the management of assets in three specific ways: tracking, tracing and provenance.

Service providers such as IBM, AWS, Google and Microsoft have therefore integrated blockchain into their range of cloud-based products and services. Businesses can now capitalize on blockchain while letting the service provider manage tasks and activities related to the underlying system’s infrastructure.

Instead of setting up, managing the nodes and maintaining the back-end operations of the blockchain infrastructure, businesses delegate this responsibility to the service provider for a fee. In return they get access to a blockchain infrastructure ready to deploy and integrate into their own processes and value chain. Business can develop their own blockchain applications without writing the source code from scratch.

BaaS follows the same logic as any other cloud based as-a-Service solution and thus offers the same benefits:

  • Fast implementation: Cloud-based solutions require short integration times as they are immediately ready for use.
  • Scalability: Easily and quickly scale up or down cloud capacity according to operation and storage needs.
  • Cost Savings: The subscription-based model allows to plan costs ahead as well as avoid or reduce licensing fees as well as administration and infrastructure costs
  • Low Maintenance: The software provider takes care of software updates, regular upgrades, security patches and new features.
  • Anytime/anywhere productivity: Users can work with SaaS apps on any device with a browser and an internet connection.
  • Security: Sensitive or critical information is kept safe from cyber-attacks, insider threats and accidental exposure.
  • Customer Support: Dedicated customer support from the provider

In contrast to the Bitcoin blockchain, enterprise solutions are centralized and permissioned which means that they are administered by a central authority, which also holds the power to alter past transactions if necessary and allow or restrict access to the network.

Benefits of running a blockchain in your organization

1. Connectivity

Since the distributed nature of the blockchain allows nodes to interact with each other, its primary role is to serve as a uniting layer between points of the network and thus allow greater connectivity among areas that previously did not exist. This not only enables information to be accessed and move more easily between points of the network but also creates momentum for further growth of the network. As a result, data silos collapse, and otherwise compartmentalized information now becomes distributed. This leads to a new degree of transparency between stakeholders in an organization, where before rigidly kept data can now be easily used for analysis or any business related tasks.

Since the blockchain is a distributed peer-to-peer network and an asset-exchange mechanism there are two major fields of application for blockchain: asset management, and visibility and data protection. Assets can be defined as digital native assets, such as invoice numbers or IT-service tickets, or the information that describes the state of a physical asset.

2. Automation

Transactions can be automated with “smart contracts,” which are computerized transaction protocols holding contractual conditions encoded into their algorithm. Once the pre-specified conditions are met, smart contracts automatically trigger transactions or processes without human intervention or reliance on third parties to verify that terms of a contract have been met.

Smart contracts thus allow to increase efficiency and speed by automating time consuming, manual and repetitive tasks and processes prone to human error. As a result, blockchain allows organizations to cut costs by streamlining processes.

If you have any questions on blockchain or if you would like to know how your organization can benefit from the technology, please feel free to get in touch with me. My team at Detecon and I will be happy to support you or to exchange information on the topic.

Read more about blockchain in our english whitepaper "Tokenization: the contemporary token economy".