Blockchain Concept with an example
What is Blockchain
It has been said that Blockchain will do for transactions what the Internet did for information.
Blockchain is a decentralized distributed database that enables recording transactions and tracking assets in the network. Asset can be tangible or intangible and anything of value can be tracked on a blockchain network. Every transaction that happens across the business value chain is recorded in the database (referred as ledger) and used to track the asset and ownership across all participants involved.
Blockchain stores information across the network of personal computers making them decentralized and distributed which means no central system or person owns the system yet everyone can use the information and run it.
How Blockchain works
Before we understand how Blockchain works, would like to explain the terms used in the Blockchain technology.
Asset – Anything that has value is considered as an Asset. Asset can be tangible like – Cash, Car, property or intangible such as documents, patents, branding. Any asset can be tracked using Blockchain technology and replaces the traditional methods of tracking like telephone calls, banks, credit cards, Internet, mobile, documents etc, where the time between transaction and closure is long. The traditional systems involved parallel tracking, hence duplication of efforts and was prone to errors.
Peer-to-Peer Network – With the rise of eCommerce sites, online banking, Mobility and Internet of things- the volume of transactions are increasing exponentially. Hence, the number of participants and computers/devices involved in a particular transaction has grown. Peer-to-peer network is a distributed network with group of participants (computers/devices –Nodes) involved in the business who can receive or send transactions.
Bitcoin – Bitcoin is the first application using Blockchain technology. It is a digital currency not printed form but mined by people & businesses across the world using a software that solves mathematical puzzles. There is no monetary authority like banks to manage the money and it’s the peer-to-peer network that enables the process by each participant verifying and approving the transaction. Blockchain is the shared ledger used to record bitcoin transactions.
Mining – It is the process of adding transaction records to the blockchain
You must have witnessed the huge number of transactions that happen when purchasing a house or vehicle or elaborate tests at a hospital.
Taking one example to explain how Blockchain works – Real estate domain Buying a house or property.
In this example, asset is the house/property, network consists of the participants party A to E (Node)
In a traditional method of buying a property, each participant in the network keeps their own records and ledgers and track the asset individually. This method involves parallel tracking and is inefficient because of the delays in executing agreements and each participant maintains documentations and different copies of ledgers. This method is also vulnerable to mistakes and fraud.
Figure 1 – Traditional Method
In the Blockchain architecture, each Participant (node) can send or receive transactions and has the ability to share the ledger that is updated with all the participants in the network through peer-to-peer replication each time a transaction occurs.
Each transaction is put into a block on the database and each block is connected to the one before and the one after it forming the sequence of blocks, hence the name blockchain. The database is synchronized across the network and every participant in the network has a replica of the database/ledger. Every participant in the network can check the state of the property at any given time.
The participants in both the traditional and Blockchain approach are same. The major change in Blockchain is the way the transactions are recorded and managed and allows all parties to agree on the current state without any possibilities of dispute.
The owner moves from one participant to another depending on the status of the asset. The record is stamped by a trusted participant who created the record on the block. And the record is dependent on the previous record. If any record is deleted from the chain of record, it can very quickly be recognized due to a inbuilt algorithm and so no record can be deleted or tampered with once its created. That’s the reason Blockchain ledger is immutable.
Figure 2 – Using Blockchain
In this example the ownership of property moves from builder to buyer after government body completes the registration process and the financing participant provides the finance. The process involves executing agreements between participants. The agreements consists of sale agreement between buyer and builder, a loan agreement between buyer and financer, a registration agreement between government authority and parties etc. Similarly digital agreements are created and stored called smart contracts which consists of set of rules/contractual clauses as part of the transaction.
By using Blockchain technology
- Every participant can monitor the status of the purchase/asset and send or receive a transaction
- There’s a consensus taken from all participants after which the transaction is considered as valid.
- If any transaction has to be reversed a new transaction has to be initiated
- Security is enabled by providing the permissions to required participants using cryptography
- Trust – Builds high level of trust among network participants. Every transaction builds on every other transaction, any fraud is easily identified and everyone in the network is made aware
- Transaction data is saved on a block in the ledger/database and all blocks are linked together to form a chain (hence the name Blockchain)
- Each block is time stamped and saved using a unique identification number called Hash.
Figure 3- Blocks linked in a Blockchain using Hash
- Decentralized architecture – All participants in the network have a replica of the ledger on real time . It is a shared and distributed ledger.
- Practical Byzantine Fault Tolerance (PBFT) is an algorithm used to settle disputes among participants
- On public Blockchain, consensus is achieved among participants using the proof of work concept. Participants with identical ledgers form a team to solve a puzzle and the team that solves the puzzle first wins and accordingly the ledger is updated on all nodes of the network.
- Permissioned Blockchain– Participants are authorized to view only some of the transactions. Cryptography technology makes this possible and makes use of digital certificates
- Permissionless Blockchain- When users can join the blockchain without permission, Anonymous parties can read or write into the Blockchain. Examples include Bitcoin and Ethereum
- Blockchains can be public (like the internet, all the participants are anonymous) or private (like an intranet, all the participants are from one organization).
Major Blockchain Protocols
- Bitcoin – is a virtual Currency also call cryptocurrency
- Ethereum – Ethereum is a public, open-source and block chain oriented distributed computing protocol that features smart contracts (scripting) functionality
- Ripple Consensus Network – An open-source distributed consensus ledger, Internet protocol, and native currency termed as XRP(ripples)
- HyperLedger – a Linux foundation project
- R3’s Corda – Corda by the Company R3 is the distributed ledger protocol developed for recording, supervising and synchronizing the financial agreements among regulated financial institutions
- Symbiont Distributed ledger – a software development kit for the Assembly, which is the permitted distributed ledger part of Symbiont’s smart contracts system
- HyperLedger Fabric- Framework on open source technology for developing Blockchain solutions , Pluggable implementation and container technology
How to determine the need to implement Blockchain
Check out the below questions to determine if implementation of Blackchain will help streamline your business. If answers to one or all the below questions is yes then implementing Blockchain will add value and enhance your business.
- Does your business deal with large number of contractual agreements
- The time taken to complete the transaction is taking very long
- Does your business involve transactions between three or more parties
- Does your business require a authority’s approval to complete the transaction
- Does your business involve too much of manual processing
- Is the existing system vulnerable to Fraud
Next Article – Blockchain implementations across various industries