Understanding the blockchain technology - Part II

One security feature enforced by the rules in the blockchain operating system is worth noting. If an unruly computer in the network attempts to alter an entry in the blockchain, this will force the altering of every subsequent entry, as explained in last week’s article. Otherwise, the digital signatures embedded in the data will show a mismatch. This alteration cannot be allowed unless all people running the connected computers in the network accept or ignore the mismatch.

The three parts of a generic blockchain are: peer-to-peer connections of the computer in the blocktrain network, the rules (agreements) that the connected computers have to adhere to, and the data (blockchain) handle. While various blockchain technologies essentially have the same three parts, and I have used the bitcoin for illustration; two aspects may differ from bitcoin: the shared data and the fact that the consensus mechanism may involve different design choices. Quoting Peter Van Valkenburgh in his 25 April 2017 article, “Here’s how the data can differ. Instead of being a list of bitcoin transactions, the shared data could be votes in an election, or identity credentials (think of it like a tokenized driver’s license or proof of a credit score). Or the data could be the current state of a running computation.”

There are three design choices that could make the consensus mechanism different from bitcoin’s. The choices respectively involve whether or not: a) anyone can join and participate, or participation is limited to identified parties on the network, b) the consensus mechanism puts data privacy above data transparency and auditability, and c) the consensus mechanism puts security at the edge of the network or at the center. As Valkenburgh points out, “open blockchain networks like bitcoin have consensus mechanisms that push the responsibility for security to the edge, to the individual computers owned and controlled by users.”

“So if you receive bitcoins on your smartphone using a software wallet, for example, your device is the only device on the whole network that can now spend those bitcoins. Without the secret key generated on your phone, the bitcoins can never move. This is in sharp contrast to pre-bitcoin electronic payment systems where an intermediary, like a credit card company, could step in and reverse a transaction or move funds out of your account without needing you to take any action with your card or banking app.”

On item b) above, remember that all the computers must reach agreement on the shared data. If data is private to a handful of individuals then only those individuals on the network would be able to verify and agree on the data.

Being decentralized, open, and cryptographic; blockchain implementation allows people in the network to trust each other and transact peer to peer, thereby nullifying the need for intermediaries. As stated by Collin Thompson, this also brings unprecedented security benefits: “Hacking attacks that commonly impact large centralized intermediaries like banks would be virtually impossible to pull off on the blockchain. For example-if someone wanted to hack into a particular block in a blockchain, a hacker would not only need to hack into that specific block, but all of the proceeding blocks going back the entire history of that blockchain. And they would need to do it on every ledger in the network, which could be millions, simultaneously.”

The business case for blockchain is presented in the January/ February 2017 issue of the Harvard Business Review (HBR). The article contends that blockchain is actually not a “disruptive” technology that can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Rather, blockchain is a foundational technology which might take decades to transform some industries. The analogy between blockchain and TCP/IP (transmission control protocol/ Internet protocol) is drawn with the assertion that, as the latter took 30 years to move through all the four phases of adoption, the former will also not be adopted overnight as both are foundational technologies.

Smart contracts, which automate payments and the transfer of currency or other assets as negotiated conditions are met, is used in the HBR article to illustrate the long-term requirement for the adoption of blockchain. The article suggests that “a smart contract might send a payment to a supplier as soon as a shipment is delivered.” “A firm could signal via blockchain that a particular good has been received - or the product could have GPS functionality, which would automatically log a location update, that, in turn, triggers a payment.” While smart contracts are already being developed using blockchain, the HBR article contends that we are decades away from the widespread adoption of smart contracts.

Another example discussed in the HBR article is the application of blockchain to stock exchange: “If a stock transaction took place on a blockchain-based system, it would be settled within seconds, securely and verifiably.” In the standard system, the ownership transfer of stock - or settlement - could take up to a week or longer. The potential usefulness of the blockchain technology is obviously of immense significance.