This is the fourth in a series of blog entries about the concept of blockchain.
Blockchain is a decentralised database that keeps track of all transactions between participants in the system.
Blockchains are intended to help sellers and buyers, for instance:
1. Counterfeits can be prevented from entering a company’s supply chain, and
2. Consumer scams can be stopped before they begin.
♥ READ about blockchain in German and on the Vault Security Systems blog ♥
Nakamoto (pseudonym) stated that the objective of a blockchain was to provide users with:
an electronic payment system based on cryptographic proof instead of trust.
Interesting read: Nakamoto, S. (2008). Bitcoin, a peer-to-peer electronic cash system. Retrieved March 5, 2019 from https://bitcoin.org/bitcoin.pdf
The scope of use for such peer-to-peer crypto-currency platforms has grown considerably. Since the beginning, most blockchains have included five elements:
1. Anonymity of the blockchain’s users. This is accomplished by use of a public / private key pair. Each user of the blockchain is identified by the public key. Authentication is then completed by signing with the private key. This is neither a new procedure nor invented by blockchain.
2. Distributed but centralised ledger. Several transactions are stored together in what is called a block. Each block contains a part of the digital signature or hash of the following transaction.
The network of nodes (i.e. many computers) guarantee a unique order of transactions – for example, how they happened according to the timestamp, and validate the block of transactions.
The ledger contains all blocks of transactions. Once it is published on the network, it is immutable.
3. Consensus algorithm for mining (i.e. process of adding transaction records). This is a way to ensure all the copies of the ledger are the same. Each transaction must be approved by members of the community. Transactions are accepted when consensus between validating nodes has been reached.
This is expensive because it requires a lot of data storage and energy to maintain the system.
4. Single purpose focused. For instance, Bitcoin performs a single purpose only, i.e. to sell and trade its tokens. Such blockchains do not contain programming features to allow solving computational problems. The latter enables the blockchain to be used in a multi-purpose setting.
5. Trading of tokens. Tokens are used, for instance, to pay people who run mining operations that require much energy (see point 3). Investors or speculators buy and sell tokens to benefit from market up- or down-swings.
Transactions involving these tokens are stored on the ledger.
The above describes a blockchain such as the one used by Bitcoin to allow the trading of tokens. Its purpose is to maintain a ledger that accounts for who owns how many tokens. Moreover,
- owners of these coins remain anonymous,
- transactions cannot be reversed once they haven been executed, and
- if one loses one’s private cryptographic key, the tokens cannot be recovered – i.e. they are ‚lost‘.
Interesting read: Apple co-founder Steve Wozniak discovered that point 2 applies when he had $70,000 in Bitcoin stolen after falling for a simple, yet perfect, scam.
Lots of experts do not like such single purpose platforms, especially if they focus on trading tokens only. For instance, Bruce Scheiner wrote in February 2019:
“Honestly, cryptocurrencies are useless. They’re only used by speculators looking for quick riches, people who don’t like government backed currencies, and criminals who want a black-market way to exchange money.”
The above illustrates that single-purpose blockchains may not be that useful to businesses to protect their supply chain or provide additional data services to their clients. To illustrate, in the enterprise or global trade context, programming features need to be offered in order to process various computational problems in the blockchain.
Another reason why single purpose blockchains are not useful for companies is that if clients have an issue, nobody is there to mediate the dispute. In most business applications, it seems most feasible to implement a combination of features of a consortium / private-type blockchain to better protect and manage data, as well as goods and services being traded.
Table 2 – Checklist: Deployment Models for a Blockchain
|Type||Access||Key Characteristics||Typical Use Cases|
|Public||Unrestricted||Distributed (multiple copies, immutable), consensus algorithm and currency (i.e. token)||Cryptocurrencies, general purpose|
|Consortium||Restricted to consortium members (public may have read-only access)||Immutable and distributed||Consortium-specific cases, such as trade between members|
|Private||Restricted to single entity, read-only access can be public / unrestricted||Internal audit, database management, supply chain within corporation and its subsidiaries|
Note. Adapted and expanded upon from Uhlmann, Sacha (2017). Reducing counterfeit products with blockchains. Master Thesis, Univ. of Zurich. Accessed 2019-01 at https://www.merlin.uzh.ch/contributionDocument/download/10024
To illustrate, a replacement part is shipped from the original manufacturer. Each time the part enters the warehouse of the next party in the distribution chain, this is added to the block of transactions (e.g., wholesaler, importer). The final transaction occurs when the mechanic replaces the defective part in the car with the new, genuine one. Once this final transaction is stored on the block, the block is completed and digitally signed. The block is now ‚closed‘.
With this block of transactions, the car owner now has proof that the defective part was replaced with a genuine one – not a fake. On this blockchain, both parts are being tracked, as well as work provided by the car dealer and the repair shop. Reselling and other car servicing data will also be stored on the blockchain.
In short, a single purpose blockchain will not be the best strategy. Only a multi-functional one will permit all these different types of transactions to be stored safely on the blockchain.
Interesting read: Tabora, Vince (2018-08-04). A blockchain is a database, unfortunately a database is not a blockchain explains differences nicely.
What is your opinion?
Distributed ledger technologies are collectively known as blockchain. Blockchain is a decentralised database that keeps track of all transactions between participants in the system. Several transactions are stored together in what is called a block. These are connected to other blocks in chronological order according to their time stamp.
Any corruption of the chain of transactions after consensus was reached will quickly be discovered, because the corruption of this chain of transactions is visible. This also makes a blockchain very safe against fraudulent activity.
While they offer great opportunities, we have to separate the wheat from the chaff when it comes to blockchain hype. We hope this blog entry helps you in that process.
What do you think?
- Do you have experience with crypto tokens?
- Is your company trying to use blockchain technology to make its processes faster, more efficient or transparent for its customers or suppliers?
- What questions do you have about blockchain?
- What do you like or dislike about blockchain?
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The author declares that some of the companies mentioned herein are clients of CyTRAP Labs or subscribers of DrKPI® services.
This post is also available in: Englisch