Definition
Smart contract: It is an autonomous software
that can make financial decisions. The blockchain world is abuzz about smart
contracts because they’re both amazing and terrifying in their implications for
how the world economy operates. Smart contract programming requires a different
mindset than standard contract writing. There is no third party to make things
right if the contract executes in a way that you didn’t expect or intend.
Public blockchains, such as Bitcoin, are large distributed networks that are operated through a native token. They are open for anyone to participate at any level and have a community-maintained open-source code. Permissioned blockchains control the roles that individuals can play within the network. They are still large and distributed systems that use a native token. Their core code may, or may not be open-source. An example of this type of blockchain is Ripple. Private blockchains tend to be smaller and do not utilise a token. Their membership is closely controlled. These type of blockchains are used by associations and federations that have trusted members and trade confidential information.
The
simplest definition of Blockchain is “a system for creating and maintaining
records in a way that prevents any one single entity to have full edit rights.”
A more technically succinct definition is “A public, permanent, append-only
distributed ledger”. Originally, blockchain was just the computer science
concept for how to structure and share data. The concept was theorised and used
in computer science data structure texts as early as 1973 (this is the earliest
record generally noticed, but the term may be older). It's now common to call
blockchains as the “fifth evolution” of computing. Blockchain is not a new technology. Rather, its an
innovation away from the centralised method of the design to use of the distributed
database. Due to public interface and fad about the digital currency, most of the
blockchain is generally confused with Bitcoins.
It's a common misperception that has a bearing on the growth and adoption
of blockchain technology.
Where did Blockchain come from?
“I’ve
been working on a new electronic cash system that’s fully peer-to-peer, with no
trusted third party.” These are the words of Satoshi Nakamoto, the mysterious
creator of Bitcoin, in a message sent to a cryptography-focused mailing list in
October 2008. Included was a link to a nine-page white paper describing a
technology that some are now convinced will disrupt the financial system. Nakamoto mined the first bitcoins in January 2009, and with
that, the cryptocurrency era was born. But while its origin is still not clear
and widely debated, the technology that made it possible, which we now call
blockchain, did not arise out of nowhere. Bitcoin legendry mysterious founder Nakamoto
combined established cryptography tools with methods derived from decades of
research to enable a public network of participants who don’t necessarily trust
each other to agree, over and over, that a shared accounting ledger reflects
the truth. This makes it virtually impossible for someone to spend the same
bitcoin twice. This solves a problem that had hindered previous attempts to
create digital cash. Thus, it eliminates the need for a central authority like a central bank to mediate the electronic exchange of the currency.
Soon,
technologists realized that blockchains could be used to track other things
besides money. In 2013, 19-year-old Vitalik Buterin proposed Ethereum, which
would record not only currency transactions but also the status of computer
programs called smart contracts. Launched in 2015, Ethereum—and now a host of
competitors and imitators—promises to make possible a new generation of
applications that look and feel like today’s web apps but are powered by
decentralized cryptocurrency networks instead of a company’s servers. There are many more
applications getting developed and popularized almost on a regular interval.
Why Blockchain?
This
article not only deals with the basic concepts but also provides some technical
examples and a look at how blockchain can change the world. Blockchain is
creating a revolution in the manner the transactions take place and records are
stored. It facilitates contract management without intermediaries. Blockchains are paving way for the reduction in the
roles of intermediaries and enhancing trust as well as transparency. Larger
and longer-run blockchain projects that are being explored now include
government-backed land record systems, identity, and international travel
security applications. It would be appropriate to get familiarized with some
basic concepts of blockchain before moving further.
Some Basic Concepts
One must
get familiarized with the following core blockchain architecture components:
Node - user or computer within the blockchain architecture
(each has an independent copy of the whole blockchain ledger)
Transaction - the smallest building block of a
blockchain system (records, information, etc.) that serves the purpose of
blockchain
Block - a data structure used for keeping a set of transactions
which is distributed to all nodes in the network
Chain - a sequence of blocks in a specific order. A hash that links one block to another,
mathematically “chaining” them together. This is one of the most difficult
concepts in blockchain to comprehend. It’s also the magic that glues blocks
together, forms blockchains and allows for the high level of security and trust.
Hash- The hash in the blockchain is created from the data that
was in the previous block. It has a pointer which points towards the previous
block. The hash is a fingerprint of this data and locks blocks in order and
time.
Miners - specific nodes which perform the block verification
process before adding anything to the blockchain structure.
Consensus (consensus protocol) - a set of
rules and arrangements to carry out blockchain operations. Any new record or
transaction within the blockchain implies the building of a new block. Each
record is then proven and digitally signed to ensure its genuineness. Before
this block is added to the network, it should be verified by the majority of
nodes in the system.
Network: The network is composed of “full nodes.” Think of them as
the computer running an algorithm that is securing the network. Each node
contains a complete record of all the transactions that were ever recorded in
that blockchain. Nodes can be located anywhere in the world. When you hear the term “mining” its the use
of a node and its computing power for the processing of a blockchain algorithm.
Smart bond: It is a type of smart contract
that can hold and release an object of value on its own, while also monitoring
payments in various currencies using spot price data feeds. In simple terms, a
smart contract is a written contract that has been translated into code and
build as complex if-then statements. The contract can self-verify that conditions
have been met to execute the contract. It does this by pulling trusted data
from outside sources.
Figure
1: Blockchain constructs
Key
Constructs of Blockchain Technology
This technology may be used to record, facilitate or validate
transactions. There are not less than two players in any transaction.
Transaction necessarily consists of a change of ownership of records, goods or
services which may be broadly classified as a tangible or intangible asset.
Blockchain technology records transactions in a distributed ledger. A distributed ledger is a book of records. This ledger is shared across a business network
consisting of the stakeholders. Multiple transactions are recorded and placed
together in a block. Recording of transaction and sharing of data calls for
business logic and rules. These rules are embedded in the ledger which can be
triggered when certain defined conditions are met. These rules and logics are
operated through smart contracts. In order to record transactions and make it
secure, cryptography is required. Every transaction is made secure through
encryption and hash is used as pointers to the encryptions connecting one block
with the other and forming a chain. Thus encryption is done and pointers are
passed on to the next block. These blocks and chains are operated through nodes
which are points to facilitate transactions.
Blockchain Platforms and
Technologies
There are
different types of blockchain platforms and blockchain applications. We can
start by considering the three major types:
Figure
2: Types of Blockchain
Platforms
Public blockchains, such as Bitcoin, are large distributed networks that are operated through a native token. They are open for anyone to participate at any level and have a community-maintained open-source code. Permissioned blockchains control the roles that individuals can play within the network. They are still large and distributed systems that use a native token. Their core code may, or may not be open-source. An example of this type of blockchain is Ripple. Private blockchains tend to be smaller and do not utilise a token. Their membership is closely controlled. These type of blockchains are used by associations and federations that have trusted members and trade confidential information.
All the
above three types of blockchains use cryptography to allow each participant on
any given network to manage the ledger in a secure way without the need for a
central authority to enforce the rules.
This aspect of the absence of central authority from the database is one
of the significant and very powerful feature of blockchains.
Ripple
is revolutionizing banking and fintech globally. It is an exchange network and
a trading platform with a blockchain backend. Institutions use the protocol to
clear transactions through Ripple’s distributed ledger. The Ripple network
finds a trusted path to exchange all the different types of value within its
distributed network. It is somewhat centralized, but it will become more
decentralized over time.
Factom
blockchain which is a powerful tool that will help industry scale blockchain
technology. It’s different from other public blockchains and has unique
properties that make it ideal for publishing data streams and securing systems.
Factom is a publishing platform. At its core, it was designed to publish and
validate any data. All other tools on it are built around these simple
functionalities.
DigiByte
is the blockchain that is owning the gaming space. Hyperledger is a
community of software developers and technology enthusiasts who are building
industry standards for blockchain frameworks and platforms. Their work is
important because they’re the main group shepherding the blockchain industry
into the mainstream and commercial adoption. Hyperledger is identifying and
addressing the important features and requirements missing from the blockchain
technology ecosystem. Hyperledger’s first incubation project, Fabric, is
a permissioned blockchain platform. It works like most blockchains in that it
keeps a ledger of digital events. These events are structured as transactions
and shared among the different participants. It has a modular architecture.
Blockchain initiatives of IBM
technologies, such as Bluemix, is a
full Platform as a Service (PaaS) for application building. Watson is its
supercomputer. IBM is now offering blockchain technology that integrates with
its traditional offerings and there are developments in the field of financial
technology.
Advantages of Blockchain
Blockchains
create permanent records and histories of transactions, but nothing is really
permanent. The permanence of the record is based on the permanence of the
network. In the context of blockchains, this means that a large portion of a
blockchain community would all have to agree to change the information and are
incentivized not to change the data.
When data
is recorded in a blockchain, it’s extremely difficult to change or remove it.
When someone wants to add a record to a blockchain, also called a transaction
or an entry, users in the network who have validation control verify the
proposed transaction. This is where things get tricky because every blockchain
has a slightly different spin on how this should work and who can validate a
transaction. Blockchains
are now recognized as the “fifth evolution” of computing, the missing trust
layer for the Internet. This is one of the reasons that so many people have
become excited about this topic.
Blockchains
can create trust in digital data. When information has been written into a
blockchain database, it’s nearly impossible to remove or change it. This
capability has never existed before.
When
data is permanent and reliable in a digital format, you can transact business
online in ways that, in the past, were only possible offline. Everything that
has stayed analogue, including property rights and identity, can now be created
and maintained online. Slow business and banking processes, such as money wires
and fund settlements, can now be done nearly instantaneously. The implications
for secure digital records are enormous for the global economy.
Blockchains
enable is impeccable record keeping. They can be used to create a clear timeline
of who did what and when. Many industries and regulatory bodies spend countless
hours trying to asses this problem. Blockchain-enabled record keeping will
relieve some of the burdens that are created when we try to interpret the past.
Limitations of
Blockchain and Some Misconceptions
While
advocating blockchain one must be informed of the limitations of the BITCOIN.
Blocks that make up the Bitcoin blockchain are limited to 1MB in size. This
limits the number of transactions that the Bitcoin blockchain can handle to
seven transactions per second. Further, there is significant conflict around
the core development of Bitcoin. Dubbed the Bitcoin Civil War or the block size
limit debate, the general conflict is between keeping Bitcoin core as it is and
enlarging the functionality of the software. Apart from genuine limitations,
there are some common Bitcoin misconceptions like hacking of bitcoin, which
never happened, bitcoin being used to extort people. Because of the
semi-anonymous nature of Bitcoin, it’s used in ransomware attacks. Hackers
breach networks and hold them hostage until payment is made to them. Many
people believe that Bitcoin is a pyramid scheme whereas Bitcoin is the opposite
of a pyramid scheme from the point of view of Bitcoin miners. The Bitcoin
protocol is designed like a cannibalistic arms race. Another very common
misconception is that Bitcoin will collapse after 21 million coins are mined.
Bitcoin has a limit to the number of tokens it will release. That number is
hard-coded at 21 million. The estimated date of Bitcoin issuing its last coin
is believed to be in the year 2140. Enough computing power could take over the
Bitcoin network. This is true, but it
would be extremely difficult, with little to no reward. The more nodes that
enter the Bitcoin network, the harder this type of attack becomes.
The
Ethereum protocol can do just about anything that an average programming
language can do, except it’s built inside a blockchain and has the added
benefits and security that comes with that. Almost every software project can be
built on Ethereum. Smart contracts and decentralized organizations hold a lot
of promise. The pure democratic and hyper-rational nature of them is very
appealing.
Applications of Blockchain in Public
Sector:
Governments are
plagued with frequent scams and fraud. How blockchain will help governments in
fighting back against cybercrime and identity theft is being discussed very
widely. Smart cities are taking advantage of modern technology to enhance
infrastructure function, and safety, and improve things like traffic and air
quality. Smart satellite cities in India
are being
developed as India’s economy industrializes and the population becomes more
urbanized. State intervention in the form of centrally planned cities is
necessary in order to prevent the existing cities from becoming overcrowded and
unlivable. India is particularly vulnerable to climate change because of its
immense and impoverished population. Because of this, it’s important that these
cities are sustainable and smart. They need low-energy housing materials,
intelligent grids, planned transportation, integrated IT systems, e-governance,
and innovative water harvesting. It will be good to visit the efforts made by
China and Dubai in this field. Blockchain in Dubai is planned in a big way and
cover almost all sectors of governance including healthcare, diamond trade,
Title transfers, Business registration, Tourism and Shipping. Proof of concept
in the Ministry of Rural Development in internal audit document management system has been
attempted.
Some efforts made in implementing Blockchain:
1. RBI constituted a group to study on Blockchain and released a whitepaper
on its application in Banking
2. IBM and Mahindra have collaborated to create a Blockchain solution for
Supply Chain Finance.
3. SBI along with 9 other commercial banks and 27 financial and technical
institutions created a Bankchain pilot.
4. ICICI, AXIS and Yes Bank among private banks adopting Blockchain
technology in the digital banking space has also been doing the rounds.
5. Dubai has come up with a long-term roadmap, titled The Dubai
Blockchain Strategy 2020 to bring 42 city governance entities on an open
and trusted digital platform for all transactions of all documents required.
6. UK government’s chief scientific advisor prepared a report on
Blockchain.
7. A working group for the World Economic Forum met in November
2016 to discuss the development of governance models related to
blockchain.
8. Honduras government engaged a technology company to build a system to
record the transfer of land titles using blockchain.
9. Regulators like the Financial Conduct Authority in the UK, the US Commodity
Futures Trading Commission, Monitory Authority of Singapore, Australian
Securities and Investments Commission, Korean Financial Services Commission,
and Institute for Development and Research in Banking Technology are in place.
Way Forward
One school of thought believes that it does not make sense to centralize technologies that are
initially decentralized. There shouldn’t be a particular scheme. The community
will come to efficient methods of self-organizing. We are witnessing the
brilliant example of crowd intelligence eg. Google photos, Google maps,
Wikipedia. It organizes the ecosystem not following any rules and schemes dictated
from the outside. In order to promote
blockchain and make it trustworthy following is needed:
• Adopting policies to encourage investment in blockchain research
and awareness through tax benefits and other incentives.
• Encouraging new forms of entrepreneurship through simplified regulations
• A critical sticking point is a security—like in the private sector, public
agencies cannot, under any circumstances, make sensitive data accessible
indiscriminately.
• Create an environment in which data can easily be shared across systems
• Incentivise investment in human capital:
A broad range of incentives exists for businesses to invest in R&D
or otherwise develop their capital. Something similar is needed to encourage
investment in human capital.
• Policymakers could accelerate the creation of jobs in general
through stimulating investment, and accelerate the creation
• Rethinking education, training, and learning: Policymakers working with
education providers could do more to improve basic science, technology,
engineering, and maths (STEM) skills through the school systems
• Rethinking income support and safety nets: automation (full or
partial) does result in a significant reduction in employment and/or greater
pressure on wages- skilling
• Blockchain presents challenges for IT decision-makers in government. Institutions
need to be created to handle it.
• There are no widely accepted standards for blockchain
technologies or the networks that operate them.
– Government IT organizations have a hard time assessing the quality
of available solutions.
– Many blockchain providers are small start-ups, it may be difficult for
IT and procurement departments to identify partners with staying power
• Even if governments could deploy blockchains that share data across
public networks, they would still need to ensure that current and future encryption
methods are strong enough to ensure user privacy.
• Leaders in government agencies will need to understand the legal and
regulatory implications of blockchain
• quickly establish standard business practices to attract mainstream
investors and business experts.
• It is essential to ensure that a mechanism is put in place to make smart
contracts binding. Can blockchain audit trails be used as evidence in court?
Should the use of blockchain be mandatory in certain fields?
In order to increase
blockchain acceptability, a mechanism for regulatory oversight with a positive
frame of mind by delinking it to bitcoin is needed. Darknet stigma, an era of integrity is required. We need to promote a powerful Blockchain ecosystem with robust
implementation mechanism and the spirit of integrity.
References:
Berryhill, J., T. Bourgery and A. Hanson (2018),
“Blockchains Unchained: Blockchain Technology and its Use in the Public
Sector”, OECD Working Papers on Public Governance, No. 28, OECD Publishing,
Paris, https://doi.org/10.1787/3c32c429-en
Deloitte, Blockchain Technology Stack (2017),
https://www2.deloitte.com/content/dam/Deloitte/
in/Documents/industries/in-convergence-blockchain-techstack-noexp.pdf; Joel
Monegro, The Blockchain Application Stack (2014),
joel.mn/post/103546215249/the-blockchainapplication-stack.
IBM Institute for Business Value.2016. Blockchain Rewires Financial
Markets. Somers, NY: IBM
Michael Pisa and Matt Juden, Blockchain and Economic
Development: Hype vs. Reality, Center for Global Development (2017), https://www.cgdev.org/publication/blockchain-andeconomic-development-hype-vs-reality.
Pike, Chris (2018), “Blockchain Technology and Competition
Policy”, OECD Issues Paper on Competition, https://one.oecd.
org/document/DAF/COMP/WD(2018)47/en/pdf
Savjee, Xavier (2017), “How Does a Blockchain Work – Simply
Explained”, YouTube video, https://www.youtube.com/ watch?v=SSo_EIwHSd4
