What is blockchain, and how does it work in business?

By-Nitin R Rathod 

A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree, where data nodes are represented by leaves). Since each block contains information about the previous block, they effectively form a chain (compare linked list data structure), with each additional block linking to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.

Blockchains are typically managed by a peer-to-peer (P2P) computer network for use as a public distributed ledger, where nodes collectively adhere to a consensus algorithm protocol to add and validate new transaction blocks. Although blockchain records are not unalterable, since blockchain forks are possible, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance.

A blockchain was created by a person (or group of people) using the name (or pseudonym) Satoshi Nakamoto in 2008 to serve as the public distributed ledger for bitcoin cryptocurrency transactions, based on previous work by Stuart Haber, W. Scott Stornetta, and Dave Bayer.The implementation of the blockchain within bitcoin made it the first digital currency to solve the double-spending problem without the need for a trusted authority or central server. The bitcoin design has inspired other applications and blockchains that are readable by the public and are widely used by cryptocurrencies. The blockchain may be considered a type of payment rail.

Private blockchains have been proposed for business use. Computerworld called the marketing of such privatized blockchains without a proper security model "snake oil" [8 However, others have argued that permissioned blockchains, if carefully designed, may be more decentralized and therefore more secure in practice than permissionless ones.

 

History

Cryptographer David Chaum first proposed a blockchain-like protocol in his 1982 dissertation, "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups." Further work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta.They wanted to implement a system wherein document timestamps could not be tampered with. In 1992, Haber, Stornetta, and Dave Bayer incorporated Merkle trees into the design, which improved its efficiency by allowing several document certificates to be collected into one block.Under their company, Surety, their document certificate hashes have been published in The New York Times every week since 1995.

The first decentralized blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008. Nakamoto improved the design in an important way by using a hashcash-like method to timestamp blocks without requiring them to be signed by a trusted party and introducing a difficulty parameter to stabilize the rate at which blocks are added to the chain. The design was implemented the following year by Nakamoto as a core component of the cryptocurrency bitcoin, where it serves as the public ledger for all transactions on the network.

In August 2014, the bitcoin blockchain file size, containing records of all transactions that have occurred on the network, reached 20 GB (gigabytes). In January 2015, the size had grown to almost 30 GB, and from January 2016 to January 2017, the bitcoin blockchain grew from 50 GB to 100 GB in size. The ledger size had exceeded 200 GB by early 2020.

The words block and chain were used separately in Satoshi Nakamoto's original paper but were eventually popularized as a single word, blockchain, by 2016.

According to Accenture, an application of the diffusion of innovation theory suggests that blockchains attained a 13.5% adoption rate within financial services in 2016, therefore reaching the early adopters' phase. Industry trade groups joined to create the Global Blockchain Forum in 2016, an initiative of the Chamber of Digital Commerce.

In May 2018, Gartner found that only 1% of CIOs indicated any kind of blockchain adoption within their organizations, and only 8% of CIOs were in the short-term "planning or active experimentation with blockchain." For the year 2019, Gartner reported that 5% of CIOs believed blockchain technology was a 'game-changer' for their business.

 

Types

Currently, there are at least four types of blockchain networks: public blockchains, private blockchains, consortium blockchains, and hybrid blockchains.

 

Public blockchains

A public blockchain has absolutely no access restrictions. Anyone with an Internet connection can send transactions to it as well as become a validator (i.e., participate in the execution of a consensus protocol). Usually, such networks offer economic incentives for those who secure them and utilize some type of proof-of-stake or proof-of-work algorithm.

Some of the largest and most known public blockchains are the bitcoin blockchain and the Ethereum blockchain.

 

Private blockchains

A private blockchain is permissioned. One cannot join it unless invited by the network administrators. Participant and validator access is restricted. To distinguish between open blockchains and other peer-to-peer decentralized database applications that are not open ad-hoc compute clusters, the term Distributed Ledger (DLT) is normally used for private blockchains.

Hybrid blockchains

A hybrid blockchain has a combination of centralized and decentralized features.The exact workings of the chain can vary based on which portions of centralization and decentralization are used.

 

Sidechains 

A sidechain is a designation for a blockchain ledger that runs in parallel to a primary blockchain. Entries from the primary blockchain (where said entries typically represent digital assets) can be linked to and from the sidechain; this allows the sidechain to otherwise operate independently of the primary blockchain (e.g., by using an alternate means of record keeping, an alternate consensus algorithm, etc.).

 

Consortium blockchain

A consortium blockchain is a type of blockchain that combines elements of both public and private blockchains. In a consortium blockchain, a group of organizations come together to create and operate the blockchain, rather than a single entity. The consortium members jointly manage the blockchain network and are responsible for validating transactions. Consortium blockchains are permissioned, meaning that only certain individuals or organizations are allowed to participate in the network. This allows for greater control over who can access the blockchain and helps to ensure that sensitive information is kept confidential.

Uses

Blockchain technology can be integrated into multiple areas. The primary use of blockchains is as a distributed ledger for cryptocurrencies such as Bitcoin; there were also a few other operational products that had matured from proof of concept by late 2016.As of 2016, some businesses have been testing the technology and conducting low-level implementation to gauge blockchain's effects on organizational efficiency in their back office.

In 2019, it was estimated that around $2.9 billion was invested in blockchain technology, which represents an 89% increase from the year prior. Additionally, the International Data Corporation estimated that corporate investment in blockchain technology would reach $12.4 billion by 2022. Furthermore, according to PricewaterhouseCoopers (PwC), the second-largest professional services network in the world, blockchain technology has the potential to generate an annual business value of more than $3 trillion by 2030. PwC's estimate is further augmented by a 2018 study that they have conducted, in which PwC surveyed 600 business executives and determined that 84% have at least some exposure to utilizing blockchain technology, which indicates a significant demand and interest in blockchain technology.

 

Cryptocurrencies 

Most cryptocurrencies use blockchain technology to record transactions. For example, the bitcoin network and the Ethereum network are both based on blockchain.

The criminal enterprise Silk Road, which operated on Tor, utilized cryptocurrency for payments, some of which the US federal government seized through research on the blockchain and forfeiture.

Governments have mixed policies on the legality of their citizens or banks owning cryptocurrencies. China implements blockchain technology in several industries, including a national digital currency launched in 2020. To strengthen their respective currencies, Western governments, including the European Union and the United States, have initiated similar projects.

Smart contracts

Blockchain-based smart contracts are contracts that can be partially or fully executed or enforced without human interaction. One of the main objectives of a smart contract is automated escrow. A key feature of smart contracts is that they do not need a trusted third party (such as a trustee) to act as an intermediary between contracting entities; the blockchain network executes the contract on its own. This may reduce friction between entities when transferring value and could subsequently open the door to a higher level of transaction automation. An IMF staff discussion from 2018 reported that smart contracts based on blockchain technology might reduce moral hazards and optimize the use of contracts in general, but "no viable smart contract systems have yet emerged." Due to their lack of widespread use, their legal status was unclear.

Financial services

According to Reason, many banks have expressed interest in implementing distributed ledgers for use in banking and are cooperating with companies creating private blockchains. According to a September 2016 IBM study, this is occurring faster than expected.

Banks are interested in this technology, not least because it has the potential to speed up back-office settlement systems. Moreover, as the blockchain industry has reached early maturity, institutional appreciation has grown that it is, practically speaking, the infrastructure of a whole new financial industry, with all the implications that that entails.

Banks such as UBS are opening new research labs dedicated to blockchain technology in order to explore how blockchain can be used in financial services to increase efficiency and reduce costs.

 

Other uses

Blockchain technology can be used to create a permanent, public, transparent ledger system for compiling data on sales, tracking digital use, and making payments to content creators, such as wireless users or musicians. The Gartner 2019 CIO Survey reported that 2% of higher education respondents had launched blockchain projects, and another 18% were planning academic projects in the next 24 months. In 2017, IBM partnered with ASCAP and PRS for Music to adopt blockchain technology in music distribution. Imogen Heap's Mycelia service has also been proposed as a blockchain-based alternative "that gives artists more control over how their songs and associated data circulate among fans and other musicians."

New distribution methods are available for the insurance industry, such as peer-to-peer insurance, parametric insurance, and microinsurance, following the adoption of blockchain. The sharing economy and IoT are also set to benefit from blockchains because they involve many collaborating peers.The use of blockchain in libraries is being studied with a grant from the U.S. Institute of Museum and Library Services.