Blockchain is revolutionary software. Blockchain is an Internet protocol that tells the Web how to transfer the rights of money and assets from one to another. The blockchain is a software layer. On top of that layer lies applications. Blockchain is a distributed database. Blockchain is a distributed peer-to-peer ledger. The ledger is just a repository of various types of transactions. Since the database is distributed and peer-to-peer, each participant has the same authority as every other participant and every participant has a complete copy of the database. There is no middleman authority. Every transaction has been declared “valid” only after a majority of participants have validated it. The database has a continuously growing list of ordered records. Records cannot be deleted.

One such application is Bitcoin. Bitcoin is just one of many applications that use the blockchain. Blockchain and Bitcoin are not the same thing. Blockchain defines the underlying Internet transportation instructions layer. Blockchain is part of the Internet pipes just like SMTP (Simple Mail Transport Protocol)is part of the Internet pipes that defines how we send emails to each other, without regard for the specific client software we may be using, such as Outlook, gmail or hotmail. Blockchain defines the bits and bytes configuration that, for example, enables the transfer of Bitcoins from my wallet to your wallet without regard for the particular wallet we each are using.

Here is one difference between emails and bitcoins. Emails can easily be copied and forwarded. With bitcoins running on the blockchain, they must only be spent one time. This has been a long time challenge in computer networks. This is the double-spend problem. Blockchain solves the double-spend challenge.

We need a system in the background that checks and confirms that the money goes to the right place and is only spent once. In other words we need to build trust. How do we do this? How do we securely transfer value over the Internet? Remember that the Internet was never designed with security in mind. It was originally designed to transfer public information. Blockchain builds trust within the design and functioning of the network, not relying on trust between individual entities. The entities don’t need to trust each other when they transact, they just need to trust the network software: blockchain.

Computer Networks

Blockchain is a decentralized network. At the heart of a blockchain network is a distributed ledger that records all the transactions that take place on the network. A blockchain ledger is often described as decentralized because it is replicated across many network participants, each of whom collaborate in its maintenance. In addition to being decentralized and collaborative, the information recorded to a blockchain is append-only, using cryptographic techniques that guarantee that once a transaction has been added to the ledger it cannot be modified. This property of immutability makes it simple to determine the provenance of information because participants can be sure information has not been changed after the fact. It’s why blockchains are sometimes described as systems of proof. Blockchain is a shared, replicated transaction system which is updated via smart contracts and kept consistently synchronized through a collaborative process called consensus.

Before discussing Blockchain in detail and how blockchain works, we need to define a few words. When we attempt to define blockchain we find that we are using words that need further definition, so it is better to simple start with a list of words and define them.

Definitions

This will help in the understanding of how bitcoin and blockchain work. Here are a few: provenance, escrow, authority, validate, hash, algorithm, crypto, ledger, scalability, democracy, governance, protocol, crowdfunding, pseudonymous, PKI, digital wallet, peer to peer network, daemon.

Provenance

The place of origin or earliest known history of something.

Escrow

Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. Money, securities, funds, and other assets can all be held in escrow.

Algorithm

A described process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer. A self-contained sequence of actions to be performed.

Validate

To check or prove the validity or accuracy of something. To confirm, corroborate, substantiate, verify, or authenticate. To make something officially acceptable or approved, especially after examining it

Authority

The power or right to give orders, make decisions and enforce obedience. The power to influence others especially because of one’s commanding manner or one’s recognized knowledge.

Pseudonomous

Bearing a false or fictitious name. A pseudonym, which is a fictitious name or alias.

Anonymous

Without any name acknowledged, as that of author, contributor, or the like

Journal

A book of original entry. In accounting, a journal is a place where transactions are recorded, one after the other.

Ledger

A book or other collection of financial accounts of a particular type. A book of final entry. In accounting, a ledger is a holding place for financial transactions of a particular account type. A ledger is an account.

Daemon

In multitasking computer operating systems, a daemon is a computer program that runs as a background process, rather than being under the direct control of an interactive user.

Digital Certificate

An attachment to an electronic message used for security purposes. The most common use of a digital certificate is to verify that a user sending a message is who he or she claims to be, and to provide the receiver with the means to encode a reply.

Public Key

PKI

A public key infrastructure (PKI) is a set of roles, policies, and procedures needed to create, manage, distribute, use, store, and revoke digital certificates and manage public-key encryption. A public key infrastructure (PKI) supports the distribution and identification of public encryption keys, enabling users and computers to both securely exchange data over networks such as the Internet and verify the identity of the other party.

Smartnetworks

Blockchain ushers in a new area of networking. Currently we are able to securely transfers data between parties over networks such as local area networks or the Internet. Smatnetworks are more complex than regular networks. Algorithmic methods are used to check and confirm the transfer of ownership of assets. With smartnetworks we are not just transferring information and data, but we are transferring value. Blockchain is scaleable all over the world because it rides on the Internet. Financial services using digital wallets will be rolled out, over time, to those under-services communities in areas where bricks and mortar banks do not locally exist.

Long Tail

The website Investopedia defines the long tail this way: “The long tail, in business, is a phrase coined by Chris Anderson in 2004. Anderson argued that products in low demand or with low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters but only if the store or distribution channel is large enough.” With the Internet, the distribution can be world-wide. For example, on a popular website like ebay, buyers and sellers of very specific and unique products and services can meet. Sellers in the long-tail can be successful in their business ventures.

What does the long tail have to do with blockchain? For financial services, the Internet and blockchain can bring together people looking for very specific and unique financial services with sellers of unique financial services. The “intermediary” is now the blockchain network, which is likely to be much cheaper than traditional intermediaries.

Blockchain is a global peer-to-peer software network.

Blockchain Constituencies

The are five main constituencies of blockchain: developers, mineers, exchanges, wallet companies and merchants.

Scalability

Scalability is probably the biggest problem with blockchain technology. Blockchain evolves over time. Because there are so many people involved and having a voice in the advancement of blockchain, evolution is a slow process. It is difficult to get everyone to agree. Each constituent is voicing their concerns for their own cause. On one hand this is a good thing because there is much debate and discussion before decisions are made, however it is a political process where the most owerful players have the loudest voice, which in the long run may or may not be the best for the technology as a whole.

Here are the key parts of blockchain, according to an IBM article I found.

• – Business Networks connect businesses
• – Participants with Identity
• – Assets flow over business networks
• – Transactions describe asset exchange
• – Contracts underpin transactions
• – The ledger is a log of transactions

The source of content of this post was partly obtained from a course at udemy.com. If you complete a course you can download a certificate of completion as shown below.

Books

For more information on blockchain have a look at IBM’s version of Blockchain for Dummies. A very popular book on Blockchain is titled Blockchain Basics: A Non-Technical Introduction in 25 Steps by Daniel Drescher.