What you need to know about blockchain

For all the recent buzz surrounding the cloud and big data, it remains a fact that at the heart of much business computing there is still some form of database. In particular the operation of digital currencies like Bitcoin relies on databases that are able to track large volumes of transactions and keep them secure.

The solution used by digital currencies -- though it’s increasingly finding other applications too -- is the blockchain. First implemented in 2009, blockchain technology consists of blocks that hold batches of timestamped transactions, each block is linked to the previous one, thus forming a chain.

How It Works

A blockchain system consists of two types of record, transactions and blocks. Transactions are simply the actions carried out in a particular period, these are stored together in a block. So far, so conventional database.

What makes Blockchain different is that each block contains the cryptographic hash of the previous one, thus forming a chain. What a cryptographic hash does is take the data from the previous block and transform it into a compact string. Since these strings are impossible to predict it means that any tampering with the chain is easily detected.

This method means that blocks don’t need to have serial numbers, the hash allows them to be uniquely identified as well as verifying their integrity. Each block confirms the validity of the previous one right back to the so called "genesis block" at the start of the chain.

The linking of blocks isn’t the only thing that keeps the chain secure, however. It’s also decentralized, each computer with the software installed has a copy of the blockchain which is constantly updated with new blocks. There is no centralized server holding the transactions and because each new block must meet the requirements of the chain nobody is able to overwrite previous transactions.

Other transaction requirements can be added to define what constitutes a valid entry. In Bitcoin, for example, a valid transaction has to be digitally signed, it has to spend one or more unspent outputs of previous transactions, and the sum of transaction outputs cannot exceed the sum of inputs.

Blockchain 2.0

While initial applications of Blockchain have been restricted to digital currency, Blockchain 2.0 introduced in 2014 offers a programmable blockchain. This second generation technology allows the blockchain to be set up to respond to certain triggers. For example invoices could be set to pay themselves automatically when goods are delivered, or smart contracts could trigger payments when parts of a project are completed.

Blockchain 2.0 has the potential to open up the technology for use in other industries beyond pure finance. In the music business, for example, Blockchain 2.0 could be used in managing copyrights and collecting royalties from digital streaming and downloads. It could be employed for asset registers, managing things like property, vehicles or machinery and introducing the ability to charge accurately based on usage.

Because the blockchain can’t be tampered with it opens up the way for smart contracts. This allows companies to enter into contracts confident in the knowledge that they can’t be changed. This should also reduce the cost of entering into a contract with multiple third-parties because all will be subject to the same conditions. On the other side of the coin smart contracts may prove to be less flexible when it comes to adapting to changing conditions and could be difficult and expensive to revise.

Why It’s Important

Blockchain offers the possibility of creating a fraud-proof system for transacting exchanges. It therefore has potential for use outside of the digital currency sphere and is attracting interest among traditional financial institutions and elsewhere.

A key part of the attraction is that Blockchain, and all Blockchain 2.0 applications to date, are open source. This makes the technology transparent, meaning that each user has the ability to check the integrity of their copy of the chain against that of other users. Similarly any node is able to determine the validity of a transaction without reference to a central authority.

Blockchain can also be implemented in such a way as to preserve the privacy of the user. This is one of the reasons why Bitcoin is the payment method of choice for cyber criminals as a Bitcoin network node doesn’t have to reveal the identity of the person making or receiving payments. In Blockchain 2.0 scenarios this is obviously less desirable. It is possible to include user details in the chain but this would be accessible to anyone using the application -- and indeed it would create problems when complying with data protection legislation.

This is both a problem and an opportunity. Methods will need to be developed to carry out transactions in confidence whilst still maintaining an audit trail. The legal department is likely to want to take an interest in how Blockchain 2.0 contracts are coded and there will be interesting issues surrounding how a smart contract may be challenged in court.

What Next?

There’s no doubt that digital currency has gone from being a novelty to something that’s now accepted by many mainstream businesses. The future of blockchain technology therefore seems assured.

Alternative blockchain applications (altchains) are also starting to appear for specialist applications like crowd funding (Swarm) and car sharing (LaZooz). Blockchain 2.0, as we’ve seen, has the potential to operate in many areas where a ledger system is needed to collect sales and usage data, track digital rights or follow the movement of products though a supply chain.

The advent of smart contracts could bring more significant change to the very way we do business. However, any company considering the adoption of Blockchain 2.0 smart contracts has to recognize that they don’t exist in isolation from the legal frameworks governing conventional contracts. As the technology takes off it’s likely to spark a considerable overlap between the legal and coding worlds, perhaps opening up new career opportunities.

Blockchain technology is still in its infancy, but we’re going to see a major expansion in its use over the next few years. Already the Ethereum Solidity contract programming language is available to users of Microsoft Visual Studio, and software company ConsenSys in conjunction with professional services company Deloitte has announced plans for a digital bank. It seems certain that the biggest impact of Blockchain is yet to come, but as a business it isn’t something you can afford to ignore.

Published under license from ITProPortal.com, a Future plc Publication. All rights reserved.

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