Why It’s Called Blockchain

Blockchain owes its name to the way it stores transaction data — in blocks that are linked together to form a chain (see Figure 1). As the number of transactions grows, so does the blockchain. Blocks record and confrm the time and sequence of transactions, which are then logged into the blockchain within a discrete network governed by rules agreed on by the network participants.

Figure 1 - Blockchain stores transaction records in a series of connected blocks.

Each block contains a hash (a digital fngerprint or unique identifer), timestamped batches of recent valid transactions, and the hash of the previous block. The previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks. In this way, each subsequent block strengthens the verifcation of the previous block and hence the entire blockchain. The method renders the blockchain tamper-evident, lending to the key attribute of immutability.

To be clear, while the blockchain contains transaction data, it’s not a replacement for databases, messaging technology, transaction processing, or business processes. Instead, the blockchain contains verifed proof of transactions. However, while blockchain essentially serves as a database for recording transactions, its benefts extend far beyond those of a traditional database. Most notably, it removes the possibility of tampering by a malicious actor (for example, a database administrator). 

What Makes a Blockchain Suitable for Business?

Instead of having a blockchain that relies on the exchange of cryptocurrencies with anonymous users on a public network (as is the case with Bitcoin), a blockchain for business is a private, permissioned network with known identities and without the need for cryptocurrencies. To further understand how a blockchain for business works, and to appreciate its potential for revolutionizing business networks, you need to understand the four key concepts of blockchain for business (Shared ledger, Permissions, Smart Contract, Consensus).

Shared ledger

Ledgers are nothing new; they’ve been used in double-entry bookkeeping since the 15th 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 has the following characteristics: Records all transactions across the business network; the shared ledger is the system of record, the single source of truth. Is shared among all participants in the network; through replication, each participant has a duplicate copy of the ledger. Is permissioned, so participants see only those transactions they’re authorized to view. Participants have identities that link them to transactions, but they can choose the transaction information that other participants are authorized to view.

Permissions

Blockchains can be permissioned or permissionless. With a permissioned blockchain, each participant has a unique identity, which enables the use of policies to constrain network participation and access to transaction details. With the ability to constrain network participation, organizations can more easily comply with data protection regulations, such as those stipulated in the Health Insurance Portability and Accountability Act (HIPAA). Permissioned blockchains are also more effective at controlling the consistency of data that gets appended to the blockchain.

With the ability to restrict access to transaction details, more transaction detail can be stored in the blockchain, and participants can specify the transaction information they’re willing to allow others to view. In addition, some participants may be authorized to view only certain transactions, while others, such as auditors, may be given access to a broader range of transactions. (With a public blockchain, by contrast, the level of transaction detail may be limited to protect confdentiality and provide 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 of the asset transfer. If an auditor or regulator joins the network, confdentiality services can ensure that the auditor alone sees full details of all transactions on the network. Cryptographic technology — this time through the use of digital certifcates — makes this possible.

Just like a passport, a digital certifcate provides identifying information, is forgery resistant, and can be verifed because it was issued by a trusted agency. The blockchain network will include a certifcation authority who issues the digital certifcate.

Consensus

In a business network where participants are known and trusted, transactions can be verifed and committed to the ledger through consensus (agreement). Consensus mechanisms vary from blockchain to blockchain, but include the following: 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 by reducing incentives for attack and making it very expensive to execute attacks.

Multi-signature: A majority of validators (for example, three out of fve) must agree that a transaction is valid.

Practical Byzantine Fault Tolerance (PBFT): PBFT is an algorithm designed to settle disputes among computing nodes (network participants) when one node in a set of nodes generates different output from the others in the set.

Blockchain for business requires pluggable consensus — a way to implement whichever consensus mechanism is deemed best for any given industry segment.

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. For example, a smart contract may defne contractual conditions under which corporate bond transfer occurs; it could also encapsulate the terms and conditions of travel insurance, which may be executed automatically when a flight is delayed by more than six hours, for example.