Technology is changing every walk of life including business, financial transactions and the entire World. For instance – innovation of the Internet protocol suite (TCP/IP) has standardized the networking protocol and at the same time it revolutionized the voice and data communication. Hyper text transfer protocol (HTTP) became the most common language between clients and servers. And now, is the turn of ‘Blockchain’ protocol, a new entrant in the technology block. Blockchain would rewrite the way transactions happen and revolutionize the world of economy. While TCP/IP is a communication protocol, Blockchain is a value exchange protocol.
Blockchain is chain of digital signatures and just another kind of database for recording transactions – one that is copied to all the computers in a participating network. Data is stored in fixed structures called the “blocks”.
Features of Blockchain
- Transactions are grouped into blocks – called the block chain
- Transactions are grouped based on time
- Each block points to the previous block (single parent)
- Keeps the entire transactions secure
- Each block contains new confirmed transactions
- Old transactions or old blocks are never removed like Bitcoin Blockchain contains all transactions since Jan 3, 2009.
- Blocks – can be created by anyone
Now, let’s understand Blockchain in very simple terms.
Scenario 1: I have a pen and I give this pen to you. The transaction happened does not require any 3rd person verification. I can’t give this pen to someone now, as I have already given it to you and you have the full control of it.
Scenario 2: Now, let’s think that instead of pen, I have a digital pen (say pen image) and I share it with you electronically. Digital exchange is slightly complicated because – Is there any way that you can find out that I have not created copies of it or have not shared it with anyone else but you – perhaps NO. This is technically called double-spending problem.
Now, let’s see how Blockchain addresses this problem – Blockchain creates a distributed ledger. All digital or electronic exchanges go into this ledger and are tracked and someone will be an incharge of the same. If that ledger is only with you and me, I can still cheat. However if the ledger copy is with everyone and all transactions are recorded, there is no chance of my duping you. It is not controlled by one person, so no one can cheat. Rules of the system are defined in the beginning in the blockchain code.
Here, also trust could be broken and colluders could rewrite historical records or create local records regardless of other parties’ interests and protests. Other parties may not even detect that colluders altered the historical record. There are many mechanisms to address this problem as well, one is called proof of stake or proof of work. We will take this topic in our next blog on the same subject.
Irrespective of the type of blockchain, all have the following attributes
- Decentralized and digitally distributed across computers in almost real time
- Uses many participants to reach consensus
- Uses cryptography and digital signatures to prove identity
- Blockchain has mechanisms to make historical records editing hard
- All transactions are time-stamped
- Blockchain is programmable
Types of Blockchain
- Public Blockchain
- Anyone can read from or write data to the ledger if appropriate software is being used.
- Parties to transaction can be anonymous
- Typically requires additional mechanisms to arbitrate disputes among participants and protect integrity of the data
- Secured by cryptoeconomics
- Added complexity
- Fully centralized
- Public blockchains are open, and therefore are likely to be used by very many entities and gain some network effects
- Private Blockchain:
- Permissioned or trust based
- Participants are known, trusted and have permission to update the ledger
- Read permissions can be public or restricted
- Transactions are cheaper due to lesser validating nodes
- Nodes are trusted to be well connected and faults can be quickly corrected
- Consortium Blockchain
- Permissioned or permission-less
- Consensus process is controlled by pre-selected set of nodes
- Partially decentralized
- Hybrid between low-trust provided by public block-chains and single highly trusted entity model of private block chains
It is difficult to monitor asset ownership and transfers in a trusted business network – this is inefficient, expensive and vulnerable. However blockchain provides a solution by providing a shared, permissioned and replicated ledger which provides consensus, proves the transaction is immutable and is final
- Currently this technology can process 4-7 transactions per sec. whereas current digital transactions happen 10K X times more
- Regulations are under scrutiny
Seeing the value of Blockchain, deputy governor of RBI, HR Khan announced that central bank may soon setup a committee to study the use of ‘Blockchain’ technology to reduce the use of paper currency. This statement came on 24th June 2016. RBI, IDRBT (Institute for Development and Research in Banking Technology) and people from industry would work on this. Similar statement came from Rama Gandhi, Deputy governor on 19th July, in 12th IDRBT awards in Hyderabad.
Though Blockchain is a new, non-conforming disrupter, government is quite open and willing to explore this, as it has got a tremendous potential.