Industries as diverse as finance, healthcare and fashion have gotten on board with blockchain. As the diamond trade joins them, it’s important to understand how this digital record-keeping technology works. Let’s examine the four key concepts of blockchain for business.
Shared ledger
Ledgers are nothing new; they’ve been used in double-entry bookkeeping since the 13th century. What is new is the concept of a shared, distributed ledger — an immutable record of all transactions on the network, a record that all network participants can access. With a shared ledger, transactions are recorded only once, eliminating the duplication of effort that’s typical of traditional business networks. The shared ledger:
Records all transactions across the business network, making it the single source of accurate records.
Is shared among all participants in the network. The data syncs seamlessly so that each participant has an identical copy of the ledger.
Is permissioned, so participants see only those transactions they’re authorized to view.
Permissions
Blockchains can be permissioned or permissionless. With a permissioned blockchain, each participant has a unique identity, which makes it possible to restrict network participation and access to transaction details as needed. That means organizations can more easily comply with data protection regulations, such as those stipulated in the Health Insurance Portability and Accountability Act (HIPAA). Permissioned systems also make it easier to set up mechanisms that determine the order in which transactions get appended to the blockchain (since there may be multiple transactions among different participants at any given time), and for rejecting bad transactions that are inserted into the ledger by mistake (or maliciously).
In addition, being able to restrict access to transaction details means the blockchain can safely store as many of those details as the participants want, since participants can choose which information other users are allowed — or not allowed — to see. Some participants may be authorized to view only certain transactions, while others, such as auditors, may receive access to a broader range of transactions. (With a public blockchain, the level of transaction detail may be limited to protect confidentiality and anonymity.)
For example, if Party A transfers an asset to Party B, both Party A and Party B can see the details of the transaction. Party C can see that A and B have transacted, but can’t see the details. If an auditor or regulator joins the network, privacy services can ensure that they see the full information on all transactions on the network.
This works thanks to a piece of cryptographic technology called a digital certificate — an electronic “passport” that gives a party secure access to the network. Just like a real passport, it provides identifying information, is forgery-resistant, and can be verified because it has been issued by a trusted agency — in this case, a certification authority that’s part of the blockchain network.
Consensus
In a private business network, where the participants are known and trusted (as opposed to a public blockchain, where anyone can participate), transactions can be verified and committed to the ledger through various means of consensus (agreement), including:
Proof of stake. To validate transactions, validators must hold a certain percentage of the network’s total value. Proof of stake might provide increased protection from a malicious attack on the network, since it reduces incentives for attacking and makes doing so very expensive.
Multi-signature. A majority of validators (for example, three out of five) must agree that a transaction is valid.
Practical Byzantine Fault Tolerance (PBFT). An algorithm designed to resolve disputes among computing nodes (network participants) when one node generates different output than the others in its set. For instance, in situations where multiple parties are trying to append their transactions to the blockchain at the same time, this is one of the mechanisms that determines which one goes first. That’s especially important because in some cases, a transaction is based on an earlier version of the blockchain and won’t go through properly if another transaction alters the blockchain data before it finishes processing.
Smart contracts
A smart contract is an agreement or set of rules that govern a business transaction. It’s stored on the blockchain and is executed automatically as part of a transaction. Smart contracts may have many contractual clauses that could be made partially or fully self-executing, self-enforcing, or both. For example, a smart contract may define conditions under which corporate bond transfer occurs. Or it may encapsulate the terms and conditions of travel insurance, automatically recording claims and paying compensation if, for example, a flight is delayed by more than six hours (or however long the contract stipulates).
A smart contract’s purpose is to provide security superior to traditional contract law while reducing the costs and delays traditional contracts entail. However, it doesn’t replace the human element. Most smart contracts include both digital and analogue sections — the former for outcomes that are easily automated, and the latter for unpredictable scenarios that call for decisions only a human party can make.
Leanne Kemp is founder and CEO of blockchain firm Everledger. everledger.io Article from the Rapaport Magazine - September 2018. To subscribe click here.