Blockchain

Definitions

Blockchain is

• "a public ledger of all transactions using the Bitcoin protocol."

• "the ledger (book of records) of all transactions, grouped in blocks, made with a (decentralised) virtual currency scheme."

Blockchain is

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a type of distributed ledger, comprised of unchangable, digitally recorded data in packages called blocks (rather like collating them on to a single sheet of paper). Each block is then ‘chained’ to the next block, using a cryptographic signature. This allows block chains to be used like a ledger, which can be shared and accessed by anyone with the appropriate permissions.

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is a digital ledger that allows parties to transact without the use of a central authority as a trusted intermediary. In this ledger, transactions are grouped together in blocks, which are cryptographically chained together in a way that is tamper-proof and creates a mathematically indisputable history.

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Overview

"The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the 'current' part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database."

A blockchain is a digital ledger that allows parties to transact without the use of a central authority as a trusted intermediary. In this ledger, transactions are grouped together in blocks, which are cryptographically chained together in a way that is tamper-proof and creates a mathematically indisputable history. "When applied to cryptocurrencies, the blockchain allows the validation of transactions to occur by a decentralized network of computers."

Blockchain is not a new technology; rather it is an innovative way of using existing technologies. The technologies underpinning blockchain are asymmetric key encryption, hash values, Merkle trees, and peer-to-peer networks. Blockchain allows parties who may not trust each other to agree on the current distribution of assets and who has those assets, so that they may conduct new business. But, while there has been a great deal of hype concerning blockchain's benefits, it also has certain pitfalls that may inhibit its utility.

With blockchain, as transactions are added, the identities of the parties conducting those transactions are verified, and the transactions themselves are verifiable by other users. The strong relationship between identities, transactions, and the ledger enables parties that may not trust each other or an individual computing platform to agree on the state of resources as logged in the ledger. With that agreement, they may conduct a new transaction with a common understanding of who has which resource and their ability to trade that resource.

Blockchain is not a panacea technology. A blockchain records events as transactions when they happen, in the order they happen, and in an add-on only manner. Previous data on the blockchain cannot be altered, and users of the blockchain have access to the data on the blockchain in order to validate the distribution of resources. Though there are benefits to blockchain, there are also pitfalls and unsolved conditions which may inhibit blockchain use. Some of those concerns are data portability, ill-defined requirements, key security, user collusion, and user safety. As with adopting any technology, users must examine the business, legal, and technical aspects of that technology.

Blockchain is currently being tested by industry, but at this time does not appear to be a complete replacement for existing systems. Although the adoption of blockchain is in its early stages, Congress may have a role to play in several areas, including the oversight of federal agencies seeking to use blockchain for government business, and exploration of whether regulations are necessary to govern blockchain's use in the private sector.

Some federal agencies are seeking to better manage identities, assets, data, and contracts through the adoption of blockchain technology. In addition, some federal agencies are issuing guidance on industry use of blockchain, and whether or not the current legal framework governs blockchain use.

How it works

Blockchain uses asymmetric encryption, hash values, Merkle trees, and P2P networks to build a ledger. The transactions captured in that ledger are not limited to financial ones (e.g., trading currency for goods and services). Those participating on a blockchain have a common understanding of how transactions are added and build upon one another, who can participate on the network, and how conflicts are resolved.

Transactions in a blockchain

Blockchains consist of a series of blocks of transactions. A transaction is an event in which a resource or asset changes possession from one party to another. These individual transactions are signed by the users engaging in those transactions through the use of public-private key encryption. Because the private key is necessary to release and accept a resource in a transaction on the blockchain, the users transacting on the blockchain are, in effect, signing the transaction to ensure its security. Transactions are grouped together and made into a block. In some blockchain implementations, these are validated upon its creation through the act of mining for the creation of blocks. The integrity of the entire ledger is ensured by each block having a hash value which is dependent on the previous block's own hash value. Each of these three steps relies on strong cryptography which ensures the ledger's validity.

Transactions may not post immediately to a blockchain. If a lot of transactions are occurring in a short amount of time, the blockchain platform may create a pool of pending transactions which are processed in accordance with rules of that blockchain — which may allow for fees, user priority, or some other method to post certain transactions into a block before others.

Blockchain governance

A blockchain can be public or private. In a public blockchain, anyone can create a public-private key pair and download a copy of the blockchain. This is usually accomplished through a software package which governs transactions on the blockchain. In a private blockchain, the membership of users on the blockchain is controlled. In private blockchains, the users authorized to participate may be bound by contractual relationships with each other, their blockchain addresses may be closely tied to their real-world identities, or participation on that blockchain may be agreed upon by other members in the blockchain. In any case, members of a private blockchain may be more trusting of each other than in a public blockchain.

A blockchain can be permissioned or permissionless, which is independent of whether the blockchain is public or private. A permissioned blockchain is one in which the permission of a user is assigned to them. Some users may only be able to view a whole or portion of the blockchain; others may be able to add new blocks. In this system, the administrator(s) do not serve as a central authority, since they do not govern the creation of blocks on the blockchain, just the rights of users on the blockchain. In a permissionless blockchain, all users have equal rights, with any one able to download the full blockchain and have an opportunity to potentially add additional blocks.

Discussing a blockchain as public or private refers to the level of freedom users have to create identities on that blockchain. Discussing a blockchain as permissioned or permissionless refers to the level of access the user would have on that blockchain. Users on the blockchain must reach consensus on the rules for creating and publishing new blocks and resolving disagreements.

Blockchains have users and nodes on the blockchain platform. The users on a blockchain could be the individuals, businesses, or other identities which have a public-private key pair and conduct transactions. A node is a computing system on that blockchain. A user may have a node (e.g., an individual's computer or a business's computing network), or a group of users could pool resources to create a single node (e.g., users who share their computing power to mine for new blocks on the blockchain). In a blockchain platform that uses a CSP, the CSP is a node on the blockchain, but may also be a user.

The creation and publication of a new block in the blockchain is called mining. In mining blocks, users seek to add the next block to the chain. Mining is incentivized by improving the user's standing in that blockchain, through either a monetary, reputational, or stake award for adding new blocks. New blocks may be added to a blockchain through a variety of methods. Three such methods are proof of work, proof of stake, and round robin.

• In a proof of work scheme, those seeking to add a block to the blockchain are presented a difficult computational problem. By solving the problem, they win the opportunity to post the next block and possibly a reward for doing so. Their solution is broadcast to others users who can validate it immediately without going through the same resource intensive computation required to solve the problem. In this scheme, the problem is frequently a direction that the hash value contains certain elements (e.g., the value begins with four zeros). In order to produce a hash value with those elements, additional information is added as an input (along with the previous block's hash value, the transactions in the block, data and time information, etc.). This additional information is called a nonce, and could be as simple as a number which would alter the hash value. Finding the nonce value that solves the problem wins for that miner the right to publish the next block.

• In a proof of stake scheme, the next block may be awarded to the user who has an appropriate stake in that block. This may be because the block contains transactions regarding that user. Or, the user has an X percentage of stake in that blockchain, so they are awarded the right to publish X percent of blocks to that blockchain. Proof of stake schemes are computationally less resource intensive than proof of work.

• In the round robin scheme, users on the network take turns adding new blocks. Because some level of trust is necessary for round robin schemes to work, they are used in permissioned blockchains.

If there is a disagreement in the blockchain, most users on the node will consider the longest chain on the block to be the valid ledger and use that one as the basis for future transactions. In the event that two different miners publish blocks at the same time, and those blocks contain different information, blockchains may allow both blocks to be published for that round, then allow the system to resolve itself upon the publication of the next block, which would then create the largest chain of transactions, and therefore, the most trusted ledger. Another way of resolving disagreements is through using byzantine fault tolerance, whereby users on the blockchain platform will vote on which block they choose to accept and the plurality of votes determines the next block to be published.

Applications

Blockchain is not a panacea technology. A blockchain records events as transactions when they happen, in the order they happen, in an add-on only manner. Previous data on the blockchain cannot be altered, and users of the blockchain have access to the data on the blockchain in order to validate the distribution of resources. However, if an entity has critical data that it wants to share (e,g,, sensitive corporate information from one facility to another), then a combination of current database, cloud, and identity management technologies will likely be adequate for its needs. But if the entity seeks to have its data be immutable and auditable, then a blockchain may be appropriate. While an entity may find immutable and auditable transactions enticing, the inability to edit those transactions (even in cases of error, when an additional invalidating transaction will be necessary) may make blockchain a suboptimal record keeping technology. Examples of blockchain uses that are in use, are being piloted, or have been discussed are listed below, in alphabetical order.

Source

• In the Overview, How it works, Transactions in a blockchain and Blockchain governance and Applications sections: Blockchain: Background and Policy Issues.

See also

• Blockchain Economics Research Lab
• Blockchain-as-a-Service
• Blockchain: Background and Policy Issues
• Cryptocurrency
• Hash value
• Merkle tree

External resources

• Marco Iansiti & Karim R. Lakhani, The Truth About Blockchain, Harvard Bus. Rev. (Jan-Feb 2017) (full-text).