5 Essential Blockchain Technology Concepts You Have To Know

5 Essential Blockchain Technology Concepts You Have To Know

It’s very possible that you already heard a lot of things about blockchain and it’s core. 

But do you actually know what is Blockchain ? Let me explain you before we get into our 5 topics. 

 

So, what Is a Blockchain? 

A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party. 

Blockchain technology can enhance the basic services that are essential in trade finance. The blockchain core relies on a decentralised, digitalised and distributed ledger model whic allows the substitution of a single master database. It keeps an immutable record of all transactions, back to the originating point of transaction. This is also know as the provenance, whic is essential in trade finance, allowing financial institutions to review al transaction steps and reduce all the risks of fraud. 

 

1.Blockchain and Bitcoin 

Since the introduction of blockchain technology, it has been extrapolated for use as a ledger solution in many other industries related to assets other than a currency. These fields include healthcare with patient records, trade finance and owner of an invoice or purchase order, as well as insurance and who has the title to a house or car. 

Bitcoin is known as a cryptocurrency and the first decentralized digital currency of its kind. It was launched as an open-source solution to work without a central repository or single administrator. Bitcoin transactions are transferred and saved using a distributed ledger on a shared network that is open, public, and anonymous. Blockchain is the underlying technology that maintains the transaction ledger for Bitcoin transactions. 

Blockchain technology for example the one used for Bitcoin allows for the recording of transactions on a distributed ledger across a network of users. The open-source technology allows for the storage of data from the transactions into blocks. Each block includes a time-stamped record of the transactions with each block linked to the previous one, thus creating a chain. The information stored on the blockchain is fully transparent and permanent without the ability to change or remove previous transaction data from the distributed ledger. This characteristic and solution can be used to solve many inefficiencies in different applications and industries. 

Whilst blockchain is an excellent choice for a digital currency, it can be used to keep a trusted audit trail of ownership of a vast range of asset types. These can be both intangible (e.g. trade finance assets) and tangible (e.g. diamonds) assets. 

 

 

2.Data stored in blockchain is public 

Well, I don’t want to bother you but this statement is partially correct. Why? Some of public blockchains are open and others are private ( accessible only to a specific group of users ). 

The use case will determine which type of blockchain is needed. So, we have three types of blockchain: 

  1. Public blockchains 
  1. Private blockchains 
  1. Hybrid blockchains ( work as public and also private ) 
  1. Public blockchains

In a public blockchain, a user can become a member of the blockchain network. This means they can store, send and receive data after downloading the required software on their device. Allowing anyone to read and write the data stored on the blockchain as it is accessible to everyone in the world. 

A public blockchain is completely decentralised. The permissions to read and write data onto the blockchain are shared equally by all connected users, who come to a consensus before any data is stored on the database. 

The most popular example of a public blockchain is Bitcoin. The digital currency allows users to use a platform for making transactions directly between them. 

  1. Private blockchains

In a private blockchain, permission to write, send and receive data is controlled by one organisation. Private blockchains are typically used within an organisation with only a few specific users allowed to access it and carry out transactions. 

The organisation in control has the power to change the rules of a private blockchain and may also decline transactions based on their established rules and regulations. 

An example of this is a blockchain deployed by a corporation to collaborate with other divisions or a few permissioned participants. 

  1. Hybrid blockchains 

A hybrid blockchain, also called permissioned blockchain between the low-trust offered by public blockchains and the single highly-trusted entity model of private blockchains. Instead of allowing any user to participate in the verification of the transaction process or on the other side just allowing one single company to have full control, in a consortium blockchain a few selected parties are predetermined. It only allows a limited number of users the permission to participate in the consensus process. 

For example, imagine a group or network of ten banks, each of which is connected to the blockchain network. In this example, we could imagine that for a block to be valid, seven of the ten banks have to agree. 

Although there is some degree of centralisation in this structure, users can grant permissions to read or write to other users. This leads to the partially decentralised design of consortium blockchains. Similar to private blockchains, the consortium blockchains keep the privacy of the data, without consolidating power within a single organisation. 

 

  1. Smart Contracts are legal documents

The term Smart Contract is misleading. They are neither “smart” nor a “contract” typically construed as a legal document. Smart Contracts, which were first introduced as a term by cryptography researcher Nick Szabo in 1994 are basically scripts or software codes written by developers and deployed onto a blockchain. They are written as transaction instructions usually triggered by events. As an example, if goods arrive at this customer’s warehouse by this date, release payment to the supplier. Thus, automatically by companies updating shipments and receipts Smart Contracts can automatically perform tasks. This eliminates the need to manage time-consuming and costly manual business processes.  

  

A smart contract is a digital program that automates the execution of business logic, obligations, and agreements.  

  

A smart contract can be used to represent almost anything- an electronic warehouse receipt, a bond, an invoice, a unit of electricity, a unit of currency, a futures contract, a share of risk, and much more. These cryptographically unique assets can be created, traded, and settled in real-time by users on the network. Each smart contract can be written to include almost any type of business logic. This business logic can be enforced automatically in accordance with the terms and conditions of the agreement.  

  

As mentioned, Smart Contracts are typically not legal agreements. However, they can execute terms based on prior or separate agreements between parties. In addition, since legal agreements tend to follow a logical format such as if-this-then-that, similar to code, paper-based agreements could be replaced with computer-based programs which automatically execute the terms of a contract. Therefore, Smart Contracts play an important role in operating blockchain models. Specifically where processes between different parties can be automated by using automated rules, embedded smart contracts, thereby fulfilling the contractual intentions of parties with speed, clarity, and efficiency. 

 

  1. Private Information is visible to everybody in the Blockchain

People often think that all their information and transaction details posted on to the blockchain are public, based on the fact that the distributed ledger is public. This is not correct. 

  

Though visibility depends on different use cases and the technology deployed. Narrowing the scope to this question – for business to business purposes, all transactions are private and only visible with the appropriate permissions. A company leveraging a blockchain to distribute data to its suppliers does not mean its competitors can see its suppliers or what they are buying. Nor can the suppliers see other suppliers’ data. It is all private and secure and the suppliers only see the data the buyer has permitted them to see. 

  

Whilst some transactional information can be made public, what is stored on the distributed ledger is nothing more than the amount of the transaction and a hash. The hash is a code generated by running the actual transaction details through a cryptographic method. Therefore, it is impossible to have access to more information on the transaction.   

 

  1. There is only one Blockchain

The term blockchain is most often used to describe a ledger technology, not a specific product or solution. A blockchain solution will have the same common denominators such as being distributed and underpinned by cryptography and having some form of consensus mechanism. 

However, there are various blockchains that come in public, permissioned or private versions. Today, there are dozens of different protocols, considered as blockchains and can be classified as distributed ledger technologies. For example Ethereum, Corda from R3, Fabric from IBM and Ripple. 

Some are similar while others differ greatly from one another. Each blockchain solution will have specific advantages and disadvantages for the specific use, different use cases and applications.   

 

Conclusion 

Blockchain is a real technology available today. Currently, blockchain is being tested with proof of concepts (POCs) in many different industries and regions around the world. Also, keep in mind this is still the early days for this technology. Several blockchain providers, like IBM and R3, released version 1 of their solutions in 2017. So, this is all very new and emerging right in front of us. 

Indeed, blockchain has become arguably an overused term and is covered daily in multiple media and press outlets. This does not mean that it is just a buzzword as the investment numbers speak for themselves. 

In 2016, over $280 million was spent on blockchain technology by capital markets firms with 90% of North American and European banks exploring blockchain solutions During the same year, over $1.4 billion was invested globally in blockchain start-up companies. Already today, approximately 50% of leading banks are working with a technology company to augment their blockchain capabilities. 

 

References:  

  1. PWC 
  1. Let’s Talk Payments 
  1. Greenwhich Associates 
  1. Marco Polo Network