People in the industries used to say, Is it in the database? Today they will say, Is it on the blockchain?
What is it?
A distributed ledger is a type of database that is shared, replicated, and synchronized among the members of a decentralized network. The distributed ledger records the transactions, such as the exchange of assets or data, among the network subscribers.
How Blockchain works.
Participants in the network govern and agree by consensus on the updates to the records in the ledger. No central authority or third-party mediators, such as a financial institution or clearinghouse, is involved. Every record in the distributed ledger has a timestamp and unique cryptographic signature, making the ledger an auditable, immutable history of all network transactions. Today we are more connected and integrated, and economic activity takes place in business networks that span national, geographic, and jurisdictional boundaries. Business networks typically come together at marketplaces where producers, consumers, suppliers, partners, market makers/enablers, and other stakeholders own, control, and exercise their rights, privileges, and entitlements on value objects known as assets. The assets can be tangible and physical, such as cars and homes, or intangible and virtual, such as deeds, patents, and stock certificates. Asset ownership and transfers are the transactions that create value in a business network. Transactions typically involve various participants like buyers, sellers, and intermediaries whose business agreements and contracts are recorded in ledgers. A business typically uses multiple ledgers to track asset ownership and asset transfers between participants in its various enterprises. Distributed Ledgers are the systems of record for a business’s economic activities and interests.
What is blockchain?
A blockchain is a tamper-evident, shared digital ledger that records transactions in a public or private peer-to-peer network. Distributed to all member nodes in the network, the ledger permanently records the history of asset exchanges between the network peers in a sequential chain of cryptographic hash-linked blocks. All the confirmed and validated transaction blocks are linked and chained from the beginning of the chain to the most current block, hence the name blockchain. Thus, the blockchain acts as a single source of truth, and members in a blockchain network can view only those transactions relevant to them.
How blockchain networks work.
Instead of relying on a third party, such as a financial institution, to mediate transactions, member nodes in a blockchain network use a consensus protocol to agree on ledger content and cryptographic hashes and digital signatures integrity of transactions. Consensus ensures that the shared ledgers are exact copies and lowers the risk of fraudulent transactions because tampering would have to occur across many places simultaneously. Cryptographic hashes, such as the SHA256 computational algorithm, ensure that any alteration to transaction input — even the most minuscule change — results in a different hash value being computed, indicating potentially compromised transaction input. Digital signatures ensure that transactions originated from senders (signed with private keys) and not impostors.
A network is a collection of devices or systems connected that allows them to share resources between them:
- Centralized network — In the case of centralized networks, we have a central network owner. Within the centralized network, the owner is a single point of contact for information sharing. The biggest issue with a centralized network is with a single central owner. It also becomes a single point of failure. Further, with a single copy stored with the owner, every instance of access to the resource leads to an access issue with time.
- Decentralized network — As for the decentralized network, we have multiple central owners who copy the resources. Eliminating the biggest problem of a single point of failure with a centralized network. If a particular central node fails with multiple owners, the information can still be accessed from the other nodes. Further, with multiple owners, the speed of access to the information is also reduced.
- Distributed network — The distributed network is the decentralized network taken to the extreme. It avoids the centralization completely. The main idea for the distributed network lies in the concept that everyone gets access, and everyone gets equal access.
Business benefits of blockchain
In legacy business networks, all participants maintain their ledgers with duplication and discrepancies that result in disputes, increased settlement times, and the need for intermediaries with their associated overhead costs. However, using blockchain-based shared ledgers, where transactions cannot be altered once validated by consensus and written to the ledger, businesses can save time and costs while reducing risks. Blockchain consensus mechanisms provide the benefits of a consolidated, consistent dataset with reduced errors, near-real-time reference data, and the flexibility for participants to change the descriptions of the assets they own.
Because no one participating member owns the source of origin for the shared ledger’s information, blockchain technologies lead to increased trust and integrity in the flow of transaction information among the participating members. Immutability mechanisms of blockchain technologies lead to lowered cost of the audit and regulatory compliance with improved transparency. And because contracts being executed on business networks using blockchain technologies are automated and final, businesses benefit from increased speed of execution, reduced costs, and less risk, all of which enables businesses to build new revenue streams to interact with clients.