Category Archives: Blockchain

What is Blockchain? And how does it work?

The Genesis

The blockchain technology was invented by a person under the alias Satoshi Nakamoto, to support the cryptocurrency Bitcoin (Nakamoto 2007). For the first time it was possible for many users to trade values with each other over the Internet without the need for a third party or intermediary – typically a bank – to verify the transaction. A blockchain is a ledger of facts, replicated across several computers assembled in a distributed peer-to-peer network. Or put simply, a chain of blocks (Beck 2017). Anyone participating in a blockchain can review the entries in it; users can update the blockchain only by consensus of a majority of participants. Once entered into a blockchain, information can never be erased (Nakamoto 2007: 2).

Blocks are an order of facts in a network of non-trusted peers, similar to how Uber’s technology intermediates between suppliers and consumers of transportation. Facts are grouped in blocks, and there is only a single chain of blocks, which then is replicated in the entire network. Each block has a reference to the previous block, through the hashing cryptography that links the blocks. Some of the nodes in the chain create a new block with pending facts. They, in the case of bitcoin miners, compete to see if their local block is going to become the next block in the chain for the entire network, called proof of work. Then this block is sent to all other nodes in the network. All nodes run a check on that to see if the block is correct, then add it to their copy of the chain, and try to build a new block with new pending facts (Nakamoto 2007: 3).

But it has gradually become clear that the technique has much broader applications than just acting as the backbone of Bitcoin. One of the key elements is the ledger, which is a database of the content of the blockchain – whether it is bitcoin transactions, intelligent smart contracts, or something else (Boye 2016).

Blockchain is a type of electronic ledger created to ensure that once a party transfers a digital asset, he cannot transfer it to anyone else, prevent double spending. Unlike other ledgers, blockchain is owned by its participants, and decisions about what it records are subject to participant consensus.

Recording accuracy is ensured by duplication: every participant has a copy of the ledger. Discrepancy-resolution mechanisms ensure that all copies reflect an identical history. Though permissions can be managed with a fair degree of control, by default any permitted participant can view all transactions. Thus together with immutability, notarization and assured provenance, transparency is a core blockchain attribute (1).

There are many ways of applying a blockchain technology, in short, either as a public blockchain, a private blockchain, or as a consortium blockchain. A public blockchain is a blockchain that anyone in the world can read, through which anyone in the world can send transactions, and include transactions if they are valid, i.e. Bitcoin (Buterin 2015). A fully private blockchain is a blockchain where write permissions are kept “centralized” to one or few institutions, i.e. banks (Buterin 2015). A consortium blockchain is a blockchain where the consensus process is controlled by a pre-selected set of nodes. An example, is a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid. A consortium blockchain can be altered to fit the need of the one using it, ex that the R3 consortium want different “rules”, than the Hyperledger consortium or Ethereum Alliance (Buterin 2015; R3; Hyperledger).  

Public blockchains can offer advantages that a private blockchain and consortium simply cannot, and vice versa. The take-away with the different ways of adopting blockchain technology, in relation to COOP Trading, is what they want to gain from a blockchain solution, who should be a part of it, who should have read and write permissions and what data can’t be shared. One must have a high due diligence in order to research the possibilities and challenges with a blockchain solution.     

Factbox:

“A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the blockchain. The blocks are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.” (Investopedia)

Finally, blockchain isn’t simply a secure collective database. In addition to transactions, it also records and executes simple programs.

The idea of pre-programed conditions, interfaced between users, and then broadcasted to everyone, is called a smart contract. A contract is a promise that signing parties agree to make legally-enforceable. Proponents of smart contracts claim that many kinds of contractual clauses can be partially or fully self-executing, even self-enforcing, or both. The aim of smart contracts is to provide security, which is superior to traditional contract law and to reduce other transaction costs associated with contracting (Tapscott 2016: 105-108). Buterin explains it as: “(…) then we can cut costs to near-zero with a smart contract.” (Parker 2016).

Blockchain smart contracts may also influence, or be influenced by, product movements. For instance, a positive QA test indication can release a part for assembly. However, today that role is played by ERP systems. Blockchain technology doesn’t necessarily add value in such traditional operations management tasks (1).

Factbox:

“An asset or currency is transferred into a program and the program runs this code and at some point it automatically validates a condition and it automatically determines whether the asset should go to one person or back to the other person, or whether it should be immediately refunded to the person who sent it or some combination thereof.” (BlockGeeks)

  1. http://www.sdcexec.com/article/12247812/supply-chain-finance-on-the-blockchain-enables-network-collaboration

© 2018 Kristoffer Just Petersen