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A blockchain is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority.
Guardtime, a company that sells blockchain-based products and services to enterprises and governments including Ericsson AB and the country of Estonia, explained its approach like this:
Assume an organization has 10 transactions per second. Each of those transactions receives its own digital signature. Using a tree structure, those signatures are combined and given a single digital fingerprint -- a unique representation of those transactions at a specific time. That fingerprint is sent up the tree to the next layer of infrastructure, such as a service provider or telecom company. This process happens for every organization in the network until there is a single digital fingerprint that encompasses all the transactions as they existed during that particular second. Once validated, that fingerprint is stored in a blockchain that all the participants can see. A copy of that ledger is also sent back to each organization to store locally. Those signatures can be continuously verified against what is in the blockchain, giving companies a way to monitor the state and integrity of a particular asset or transaction.
The term blockchain today usually describes a version of this distributed ledger structure and distributed consensus process. There are different blockchain configurations that use different consensus mechanisms, depending on the type and size of the network and the use case of a particular company. The bitcoin blockchain, for example, is public and permissionless, meaning anyone can participate and contribute to the ledger.
Bitcoin was the first application built on top of blockchain, said Marley Gray, director of technology strategy for financial services at Microsoft In 2008, a person or group of people known as Satoshi Nakamoto published a paper describing bitcoin and how it could be used to digitally send payments between any two willing entities without the need for a third-party financial institution. Each transaction was recorded on the blockchain ledger, the newest block tied to the ones before it using a digital signature. To ensure trust in the ledger, participants on the network ran complicated algorithms to verify those digital signatures and add transactions to the blockchain.
The next few years for bitcoin were tumultuous, including the collapse of the prominent bitcoin exchange, Mt. Gox, and an increasingly sour reputation as the currency fueling the underground online drug bazaar Silk Road. But many companies saw opportunity in the underlying technology - the blockchain - that made bitcoins existence possible.
- Building Blocks:
The consensus mechanism is a set of rules the network uses to verify each transaction and agree on the current state of the blockchain. For the bitcoin blockchain, the consensus mechanism is called proof of work, in which participants on the network run algorithms to confirm the digital signatures attached to blocks verify each transaction. In private or permission blockchain networks, the consensus mechanism may be less stringent since each participant is known. In those cases, you don't need the blockchain to establish trust, it already exists, said Jamie Steiner, general manager for financial services at Guardtime. At this time there is no universally agreed-upon consensus mechanism.
A transaction manipulates ledger data based on rules described by business logic, said Arvind Krishna, senior vice president and director of IBM Research. After a transaction is executed on a node, the result is a proposed modification of the ledgers data. Before committing the answers to anodes ledger, the answer is validated locally with other nodes in the network. Approved transactions are packaged into a block and re-distributed to all the nodes in the network, which re-validate to ensure their records match. Typical transactions can execute in milliseconds.
- Getting rid of the Middleman:
The blockchain architecture allows a distributed network of computers to reach consensus without the need for a central authority or middleman. A good example is in financial services, where trades are often verified by a central clearinghouse that maintains its own central ledger. Using that process, it can take days to settle a transaction, and the clearinghouse typically collects some kind of fee.
- Blockchains Challenges:
There are not yet clear standards to govern how blockchain will be implemented across the enterprise. Some companies may choose to use the bitcoin network, while others may opt for permission or semi-private blockchains. The development of the technology also will bring its own regulatory hurdles and potential cybersecurity threats, experts say.
Many questions around security and privacy still linger. In financial services, for example, it's still unclear exactly how much information about a trade each participant needs to be able to see to verify a transaction while still keeping the contents of a particular trade private.
- The Blockchain Ecosystem:
A number of startups and industry groups are working at different levels of the blockchain, from underlying infrastructure to blockchain-based applications. Some companies continue to develop on the public Bitcoin blockchain, but many also are exploring how they can deploy their own blockchain on smaller permission networks.
Financial institutions are experimenting with many different blockchain implementations from different vendors. Under the R3 consortium, a recent test of a private blockchain among 11 banks took place on a private instance of open-source blockchain technology from Ethereum and hosted on a virtual private network in Microsofts Azure cloud.