BLOCKCHAIN
What is blockchain?
Blockchain today exists as one of the most hyped technologies, yet it is understood only by a few. Initially associated with the infamous Bitcoin, a cryptocurrency introduced by Satoshi Nakamoto (2009), it is now becoming popular independent of the coin and gaining traction in academic and corporate circles alike. Distributed Ledger Technology is what seems to have caught most attention.
Blockchain is a type of a database that enables multiple parties to share it, and to make changes to it, even if they don’t trust each other.
What makes blockchain different from other databases is that it has a consistent and reliable record of events among the users. Therefore, a consensus mechanism is established between users without needing to trust the other members.
This consensus mechanism takes place without the need of a central intermediary and avoids the “double-spending” problem. Each member has the same view as the other on the state of the shared database.
An improper entry on the database is immediately detected by the members and rectified. Thus, members can independently verify the integrity without the help of a trusted third party. This consistent view of the database presents itself as the main value proposition of the blockchain.
The key components of a blockchain:
1) Cryptography
2) P2P Network
3) Consensus Mechanism
4) Ledger
5) Validity rules
The tamper resistant record keeping of blockchain provides clarity around asset ownership. Each recorded asset comes with its associated private key giving owner the control of the asset.
Use cases of Blockchain
Blockchains are most effective when the degree of trust between counter-parties is low and the dependence on an intermediary to establish trust is not sought. Blockchains bridge this trust-gap by introducing accountability through public auditability.
Blockchain builds a secure value transfer system that introduces a secure environment for data records, consistent view of data and a real time audit trail.
Blockchain Myths
The hype surrounding blockchain has given rise to myths that make it seem like magic with only pros and no cons. These should be put aside first.
Firstly, as claimed, blockchains are not trustless. They reduced the need for trust but do not eliminate it. The trust must be placed in the underlying cryptography or in the operators of permissioned blockchains. Therefore, blockchains are trust minimizing.
Secondly, blockchains are thought to be immutable or tamper-proof, this is false as circumstances can arise when enough nodes in a blockchain decide to collude. Blockchain is not an append only system, though legal contracts in permissioned blockchain and heavy computational power required otherwise serve as a disincentive.
Thirdly, another myth about blockchains is that they are 100% secure. This is false as the cryptography underlying them do not automatically make them more secure. The weakness lies in compromised “private keys” and in the “51% attack”, where miners controlling more than fifty percent of the mining power compromise the blockchain.
Lastly, blockchains are not “truth machines”. This implies to situations where the authenticity of what is stored on the blockchain as defined by the input is called into question. Therefore, the inputs must be accurate.
Open vs Closed Blockchain
Permissioned or Closed Blockchains: These emerged as public blockchains were found unsuitable for regulated enterprises due to reasons such as scalability, settlement finality, governance and safeguards among others. But as the data structure underpinning blockchains, facilitating audit trail, was found attractive, many organizations moved towards developing a hybrid version that they could adopt. They substituted anonymous miners and replaced the energy efficient proof of work with known participants and less computationally difficult consensus algorithms respectively.
The main difference between open and closed blockchain relates to the security and threat model. Open or permission less blockchains rely on “crypto-economics” to incentivize participants to behave fairly. Permissioned or closed blockchains vet and know their participants and rely on legal contracts to hold their participants liable.
