Breaking down blockchain

JON WALSH: "The idea behind decentralisation is that we don’t need middlemen, and by removing them, we can eliminate censorship and authoritarianism as well as reduce friction in trades"

Although I’m sure that many of the readers of this site have a pretty good knowledge about cryptocurrencies, I felt that taking a step back in my column and going through the three key pillars of what defines the underlying technology of blockchain would be useful.

It is important to note that all cryptocurrency requires blockchain, but blockchain is more than just cryptocurrency – this is an important distinction to make, when considering blockchain as a business strategy.

Pillar #1: Distributed

Blockchain is part of a larger family of technologies known as Distributed Ledger Technology (DLT). The idea is that there are a large number of identical copies of the ledger and that these copies are distributed across a large number of people.

In contrast, many of today’s systems rely on a single copy of the ledger, sometimes called the ‘golden record’, and everyone agrees to trust the person or company that holds this one central ledger. Part of the reason that we trust these central parties is that some of them are heavily regulated and thus the regulators protect the interest of the consumers and ensure that their trust is well placed.

In blockchain, there is no central authority. The ledger is distributed across a large number of computers. These computers, known as nodes, work together to reach consensus on the list of transactions contained within the ledger. By distributing the ledger to thousands of separate computers it protects the blockchain from corruption either by accident or malicious actors.

Another positive aspect of distributing the blockchain across thousands of nodes is that this creates a network which is inherently highly-available. The blockchain can have one, or many, nodes go offline without having a negative effect on the network. Unlike with a centralised ledger where if the bank goes offline, no one can transact until the database comes back online.

Some companies deploy blockchain internally just to take advantage of these unique design features of distributing both copies of the data as well as computing power and networking.

Pillar #2: Immutable

The concept of immutability is surely one of the key features of blockchain. Once something is written into the blockchain it cannot be deleted or edited. It cannot be changed. The immutable nature of data written into the blockchain is one of the key differences between blockchain based data and data stored in a traditional database. But why should data on a blockchain be immutable?

The first use of blockchain technology was Bitcoin. Bitcoin requires that information written into the blockchain be immutable in order to prevent people tampering with the ledger that records all Bitcoin transactions. Once a transaction has been written into the blockchain it is permanent. This means that no one can come along later and amend or delete that transaction. The transaction is immutable.

When it comes to using blockchain technology for improving supply chain transparency, it is also important that the data is immutable. When a record is added to the blockchain identifying a specific transfer of goods including the origin of the goods and their quality, this record is immutable. It cannot be edited or amended and this reduces the opportunity for fraud or corruption and also provides a reliable audit trail.

What if you need to make a change because some of the information entered is wrong? 

Immutable doesn’t mean correct, it only means unchangeable. Sometimes mistakes happen and records have to be amended. In the world of Blockchain, records are amended by adding new records to the blockchain which identify that a prior record should be updated or possibly an adjusting transaction is added to the blockchain to allow for the ledger to be corrected. Blockchain allows for change by adding new records rather than amending existing records.

Pillar #3: Decentralised

Decentralisation may be the most interesting feature of blockchain to many, but what does it really mean?

Ultimately, and kind of obviously, a decentralised business or ecosystem means that there is no single point of control. With no one single point of power, and a governance model where the majority of the constituent players need to agree on transactions, it puts the control in the hands of those individuals (nodes) and therefore creates a more harmonic and fairer way of ensuring that the ecosystem “works”.

This concept feels revolutionary. We have grown up in a world where we are forced to trust central points of authority, whether it be government, the banking system, and even the social media platforms where we share our lives and interact with our friends and peers.

All of these trusted third parties can deny you access to their service any time they want for any reason they want and there is pretty much nothing you can do about it. Governments can revoke passports, social media platforms can censor you, and banks can refuse you access to your money.

In blockchain technology, decentralisation is about control. Specifically, who can control the contents of the ledger? Who can approve or reject transactions? Who has control over the protocol? Who has control of the majority of any cryptocurrency? Is control spread out amongst multiple individuals or organisations? The idea behind decentralisation is that we don’t need middlemen, and by removing them, we can eliminate censorship and authoritarianism as well as reduce friction in trades.

A few worthwhile final thoughts on all this…

Enterprises faced with data being distributed may feel that they are losing control of their data. Good blockchain design and architecture can allow for the benefits of distribution without commercial risk.

Blockchains *can* be built to be fully GDPR compliant in spite of immutability.

Decentralisation requires structure and agreement. Decentralisation is achieved through good governance. Governance is one of the most important and least discussed topics in Blockchain technology.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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