How do businesses record, track, and verify transactions?
In a ledger. Ledger is a system of record for a business. Every business will have a ledger for each of its business network and certain common ledgers as well. A contract defines the condition for a transaction to occur. A transaction is an asset transfer on or off the ledger.
Diagram 1 shows how each participant maintains their own ledger. For every transaction the ledger must be updated by each participant. This methodology is expensive due to duplication of efforts. The amount charged by intermediary services such as auditing, tax services, and transactional costs is quite high. The transactions are vulnerable to change due to fraud or cyber-attack. This consumes a lot of time between the intermediaries to reach a settlement.
Diagram 2 shows that participants have multiple shared ledgers. This network is private to the parties concerned and permission is required to join. Security is provided using cryptographic technology to make sure participants only see what they are allowed to see. This is a distributed ledger called Blockchain.
So basically, blockchain is a shared ledger of all transactions that have been executed. The blocks are added to the blockchain in a linear, chronological order. Each node performs the task of validating and relaying transactions. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed block.
Setting the context - Few key concepts:
Why Blockchain?
The wave of internet was expected to reduce transaction cost inside a firm because of global accessibility. However, in certain areas such as contracting, tracking, the cost reduction was limited. With Blockchain, the transaction would help with the following:
Search Costs: Finding the right information, people, resources to create something
Coordination Costs: Getting people to work together efficiently
Contracting Costs: Negotiating the costs for labour and materials for every activity in production, keeping trade secrets and policing and enforcing the agreements
Is Blockchain the new database?
Blockchain is not a new database, however it changes the way the databases synchronize between each other.
“Blockchain technology” in simple terms is “cryptographically enabled distributed database”.
Blockchain follows a distributed architecture with the management system decentralized i.e. not controlled by a single server and managed by multiple peers.
The centralized databases can be used for limited functionalities in blockchain by enabling cryptography on them.
The cryptography is used as a new mechanism to enforce auditability & accountability.
How does Blockchain change the traditional applications operational behaviour?
Key differences in Architecture needed:
Middleware solutions are need to provide integration of applications with new technology of distributed Ledger
For example: Microsoft and IBM are providing developer platforms in this space for better integration
In my next blog, I will throw some light on IBM HyperLedger Technology Stack and Microsoft Blockchain as a Service. We will also understand the evolution of Blockchain ( Beginning of Bitcoin to Distributed autonomous agents and enterprises in the future )
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