Ten years after its release with the Bitcoin network, distributed ledger technology (DLT) or blockchain technology seems set to take the world by storm. Mainstream media reports on blockchain adoption are on the rise, and adoption itself has made leaps and bounds in areas like trade and supply chain tracking as well as fraud prevention.
But not everybody likes it when they see the word “blockchain” describing distributed ledger technology being used to track shipping containers, for example. Some people don’t feel that this type of network constitutes blockchain at all, simply because it’s distinct from the Bitcoin version of blockchain tech.
They’re right, it is different – and the disagreements and misunderstandings over the meaning of the word blockchain mostly come from the semantic difference between the various forms of DLT.
- Anyone can access, view, and use
- Anyone can mine and verify transactions
- It typically has a cryptocurrency token
- Nobody is in charge (decentralized)
This is blockchain in its original incarnation.
A public blockchain is accessible by all who wish to join, mine (verify transactions and receive rewards), and audit or monitor the data. Nobody owns or controls public blockchains, and decision making or consensus is shared out democratically throughout the community. A public blockchain is distributed across computers called nodes which together form the blockchain network. The nodes store all of the data on the blockchain.
Because anyone can own these nodes and they have no central authority or computer server dictating any rules, this kind of system is said to be distributed and/or decentralized.
To reach a decision, the majority of the community must agree. In fact, the most common type of attempted attack on a blockchain is a 51% attack which artificially creates the appearance of half the community agreeing on something (such as whether or not to validate a transaction that is actually fraudulent)
Let’s dig a little deeper into how blockchain works using Bitcoin as an example.
The Bitcoin protocol was made public in 2008. The purpose of the network was to allow people to transfer value to each other, peer to peer, without needing to go through a service like Paypal or traditional banks.
Part of the reason those services exist is to act as a trusted third party and a means of transferring digital money. The centralized (as opposed to distributed) nature of traditional financial services like a bank is such that the organization can freeze or suspend accounts, cancel or halt transfers, and can also fall prey to being hacked or attacked to disrupt services, something which happens to banks all the time.
Bitcoin was invented to eliminate this need for trust, allowing people to control their own funds without anyone handling the transfer for them. The network is nearly impossible to attack – it’s so widely distributed that even if attackers had the hardware and skills to bypass the security measures in place, the cost of launching an attack would be in the billions of dollars.
The Bitcoin network is stored on multiple nodes which record transaction information and in some cases (mining nodes) validate transactions. Every node in the world stores the history of every transaction ever made on the distributed ledger/blockchain which updates constantly to add new transactions.
Transaction data is encrypted (or “hashed”, as in scrambled) and verified by multiple mining nodes – when enough transactions have been verified, they are entered into a “block” of data and submitted to the blockchain where the information can never be removed. Agreeing that these transactions are valid requires consensus, and the Bitcoin form of consensus is called Proof of Work (PoW).
The PoW process of verifying Bitcoin transactions is expensive and consumes a lot of energy – the mining nodes must solve complex algorithmic puzzles to verify transactions (this is by design, making it very expensive to launch an attack on the network). The miners are rewarded with Bitcoin when they enter a new block, which ideally allows them to cover their costs and profit from their activities.
The network is decentralized meaning no one entity controls it. It’s not possible to destroy or censor Bitcoin without somehow gaining access to thousands of computers all across the world, some of them in very secure locations, making it nigh indestructible and above the interference of government authorities. The data on the blockchain is transparent, allowing anyone to read it and trace transactions if they wish. Public blockchains can also allow for anonymous or pseudonymous participation (Bitcoin is pseudonymous with no name or personal info required to use the network).
This method is extremely inefficient in terms of data storage and energy consumption. The Bitcoin network consumes more energy each day than the island of Ireland, and while there are less energy-hungry forms of consensus like Proof of Stake, the data inefficiency is also problematic. Because each node stores a complete and growing history of all transactions and because the platform is open to all, the amount of data nodes must store gets greater every day resulting in scaling issues and slowing things down. Granting anyone access allows malicious actors to attempt to disrupt activities on the blockchain.
- Permission is required to access
- Mining, incentives, and tokens are not a necessary feature
- The owner and operator of the blockchain is in charge (centralized)
Private blockchains are also sometimes referred to as enterprise blockchains, and that’s exactly what they’re used for.
The benefits of having an immutable ledger of data that cannot be altered or deleted are great and have applications in many industries. Some blockchains also have smart contract capabilities – autonomous programs that execute based on certain parameters without human oversight. These contracts allow businesses to streamline logistics an operation considerably in some cases.
However, there are aspects of public blockchains that simply aren’t necessary or useful for enterprise businesses, and some of them would be downright counterproductive.
No enterprise wants a deliberately engineered lack of accountability built into their databases – they want to be able to track employee activity and monitor who did what when etc. The shipping industry is one example – blockchain can be used to track the chain of supply from source to destination with less paperwork, delays, and human involvement.
It’s still important that the shipping company be able to monitor which employee signed off on the delivery of a shipping container to avoid fraud or loss of cargo. It’s not necessary to incentivize miners with cryptocurrency to validate transactions or data input, as the cost of the network can be budgeted for internally.
The consensus mechanism used by Bitcoin (i.e., making the network so incredibly expensive to run that it’s equally expensive to attack) would probably give shareholders a heart attack, and in any case, the system is less vulnerable to people trying to attack it by virtue of being permissioned.
Example: HyperLedger Fabric
HyperLedger Fabric is a private blockchain being used by IBM to pursue applications in finance, banking, tax, IoT, supply chains, manufacturing, and technology.
HyperLedger is still distributed among businesses and business partners to make sure that the information is immutable and accurate. A consensus is reached by agreed-upon peers validating transaction proposals as they arrive. Let’s say a client wants to purchase an order of clothing from a wholesaler.
A request to purchase clothing is sent to multiple peers who represent both the buyer and seller. A transaction proposal is constructed and inspected by the peers to make sure it’s valid (well-formed, not a repeat of a previous order to prevent spam, etc). The proposal is then cryptographically signed by the peers and sent to an app for verification – proposal responses are then returned to the peers. If all proposal responses are the same, the consensus has been reached and the transaction is approved.
This particular system does not use mining, Proof of Stake, or cryptocurrencies.
This system is far more data and energy efficient than a public blockchain. If all participants choose, they could easily create a new chain removing some of the earlier information if the data storage became too great, something that would be very difficult to convince a public blockchain community to do. These systems are more cost-effective and better suited for enterprise use. Broadly speaking, anyone granted access to this system is less likely to be a malicious actor as well.
These systems are more centralized and thus more vulnerable to tampering, censorship, or destruction. They are not suitable for enabling, for example, trustless peer-to-peer transactions like on the Bitcoin network.
Some die-hard supporters of blockchain believe that if a network is centralized, it’s not a blockchain.
While this was the case with the original blockchain system invented to run bitcoin in 2008, much has changed since then. Instead of one blockchain, there are thousands, and they each serve a distinct purpose.
Bitcoin’s blockchain is designed to handle value transfer, but it doesn’t have the advanced smart contract capabilities required for many business applications.
Permissioned, private systems are blockchains, and just as they don’t appeal to decentralization supporters, public blockchains don’t have a strong use case for business either. The truth is that this technology is still incredibly new and developmental, with new versions and applications coming out every day. There are anonymous networks that will allow completely private transactions with no government oversight, and there are centralized networks that offer business solutions in many different industries.
Both versions are useful, both versions count as blockchain systems, and both of them will be instrumental in revolutionizing many areas of life as we know it in the coming years.