Blockchain Demystified – William Gaithersworth
Distributed ledger technology (DLT), the technology that started the various cryptocurrencies in circulation today, has created quite a buzz in many areas in the last few years.
Putting it simply, a DLT is a decentralized system for recording transactions with mechanisms for processing, validating and authorizing transactions that are then recorded on an immutable ledger.
Blockchain is one implementation of DLT. It is also referred to as an “Internet of value”, meaning a secure way to store and transact value — anything from currency, stocks, contracts and even votes — from one entity to another. It is also the underlying technology powering cryptocurrencies such as Bitcoin and Ether.
According to PwC, the financial sector stands to gain the most from blockchain-based service implementations, followed by industrial products and the manufacturing sector, energy and utilities and then the healthcare sector.
Nevertheless, a PwC survey of about 600 blockchain-savvy executives revealed that the biggest barrier to blockchain adoption was regulatory uncertainty. Interoperability and the potential failure of different blockchains to work together were identified as major challenges.
The blockchain basis
In the simplest terms, a blockchain consists of a linked chain that stores auditable data in units called blocks. Many commentaries online start by explaining that a blockchain is similar to a Google document spreadsheet where multiple authors can contribute because of the mechanism of locking.
Blockchain is a bit more complex than that example and has unique characteristics that make it an attractive technology for tagging, storing and tracking anything of value.
Bitcoin was one of the first and most popular implementations of blockchain technology.
To begin, a blockchain consists of blocks, each block containing the data (anything of value), its own hash value (a unique cryptographic value containing characters and numbers generated through a complex computational algorithm) and a pointer to the hash of the previous block.
Types of blockchain
Three major types of blockchain networks, each having their own characteristics are
consortium blockchain,
2. private blockchain and
3. public blockchain.
Consortium: A consortium formed by a group of members control this blockchain. Verifying and adding records to the blockchain is based on a consensus mechanism by a pre-selected set of nodes. Example: In regulatory related decision-making.
Private: This is controlled by a centralized entity. Only people with specific authentication and permission can be part of this network and thereby can verify and add records to the blockchain.
However, the blockchain could be publicly viewable. Participants in this blockchain know and trust each other. Also known as a permissioned ledger.
Example: A permissioned ledger between banks to settle inter-bank fund transfers and supply chain with well-defined roles for all actors.
Public: Public or permissionless blockchain are decentralized and are visible to the public, anyone can join or leave the blockchain and anyone can verify and append transactions to the blockchain.
This type of blockchain facilitates the dynamic collection of participants who may not know each other. Hence, stringent consensus mechanisms have to be implemented in this system. Examples: Timestamping, trading of renewable energy.
Smart contracts Smart contracts are self-executing agreements that are triggered on the basis of predefined and agreed events (for example rainfall of more than 200 mm, market price of commodity more than USD 100).
The “smart” in a smart contract comes from the fact that the clauses in the contract are evaluated and the appropriate code executed without human intervention. Settlements in smart contracts are automatically triggered if the pre-agreed conditions coded into the contract are met.
Imagine something along the lines of the automatic debit used by merchants to take payment from your bank account, based on pre-agreed conditions (full payment, part payment, minimum amount etc.) on a pre-agreed day or date (first Wednesday of the month, every 10 May etc.).
A key link between the physical world and blockchain is an oracle. This is a trusted intermediary and an integral part of the smart contract ecosystem and facilitates data feeds to the blockchain ecosystem.
By design, a blockchain cannot access data from outside its system and thus data to make the blockchain is supplied through a predefined entity called an oracle.
An oracle can be hardware-based, software-based, or consensus-based. Examples of hardware oracles are sensors, IoT and weather stations. Examples of software oracles are a New York Stock Exchange index, expiration date, output of some computation, etc. A consensus-based oracle works on the basis of consensus from a group of predefined nodes on a particular question.
A consensus-based oracle can also source data from several other oracles to trigger an event in a smart contract. Moreover, inbound oracles pass external data to smart contracts and outbound oracles communicate smart contract-based data to the outside world.
Ethereum is the first blockchain platform that focuses on providing a Turing-complete smart contracts-based system and decentralized applications. Hyperledger Fabric and R3 Corda are some of the other DLTs that are used to create smart contracts.
Some examples of the use of blockchain are:
In the financial sector: Disburse (www.disberse.com) provides an alternative financial infrastructure for the aid industry built on blockchain technology. It provides end to end real time tracking, providing complete and immutable data for reporting, auditing and compliance trails.
In providing a digital identity: Many companies have been trying to address the challenges in providing a system for decentralized identity management. IBM Blockchain Trusted Identity is working on creating a decentralized approach to identity management using blockchain built on top of open standards.
BanQu (www.banqu.com) created the Economic Identity Platform that enables a secure and immutable network for creating bottom-up economic opportunities for the bottom of the pyramid.
In the education sector: Learning Machine (www.learnigmachine.com) creates a lifelong learning record with verifiable, tamper-proof documentation and certifications.
This also facilitates instant decentralized verification. UNICEF has developed the Amply application platform to be able to replace the existing paper-based system to register children for a government-funded pre-school subsidy in SouthAfrica.
This blockchain application platform provides real-time service monitoring including verifiable digital identify registries for service agents and children and claims to reduce program administration costs.
In gender equality and women’s empowerment: UNWomen, together with partners, such as Innovation Norway, is exploring how blockchain could help refugee women on the move by storing and secure identity papers, medical records and documentation of ownership of assets.
In the logistics sector: companies such as Modum (www.modum.io) work by combining IoT sensors with blockchain technologies thereby providing data integrity for transactions involving physical products.
In the health sector: Minthealth enables patients to proactively manage their health by creating a self-sovereign health record and global unique identifier that facilitates seamless and secure transfer of clinical and behavioral data between patient- authorized stakeholders.
In the insurance sector: Allianz Risk Transfer and Nephila have successfully piloted blockchain technology for catastrophe swap. According to Allianz, the pilot demonstrates that transactional processing and settlement between insurers and investors could be significantly accelerated and simplified by blockchain-based contracts.
In the retail sector initiatives such as the Everledger are working on traceability solutions built on a blockchain-based platform for the diamond industry.
Similar initiatives are being piloted in the agriculture value chains to track products based on geographic indicators (GI) and other markers to empower consumers and to provide a way to encourage and reward good practices, and penalize illegal and unsustainable businesses.
Blockchain-based solutions also find use in providing traceability in bringing more transparency and efficiency to agriculture value chains.
In the energy sector: initiatives such as the Energy Web are working on an open-source, scalable blockchain platform that would provide a digital infrastructure for energy solutions.
Power Ledger is an Australian blockchain-based cryptocurrency and energy-trading platform that allows for decentralized selling and buying of renewable energy.
Given these, it is easier to see that blockchain technologies definitely have their uses in some contexts but would be simply too expensive, cause too many overheads, be unscalable and counterproductive in many other contexts.
The fact that regulators around the world are actively trying to define guidelines for DLT usage further strengthens the belief that this technology can bring about a change in traditional processes if key building blocks needed to sustain the solutions are implemented.
Published at Sat, 15 Feb 2020 07:54:28 +0000
