Definition of “Blockchain”: A blockchain is a shared, non-manipulable registry (also referred to as an account ledger, transaction ledger, or ledger) that facilitates the process of recording transactions and tracking assets across an enterprise network. An asset can be either tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, trademarks). Almost anything of value can thus be tracked and traded using a blockchain network, significantly reducing risks and costs for all parties involved.
A blockchain is an example of distributed ledger technology (decentralized ledger of accounts technology) or DLT, and is similar to the journal of accounting in the way it works. The blockchain is therefore also referred to as the “Internet of values” and lays the technical foundation for cryptocurrencies such as Bitcoin.
A blockchain can be used in accounting when agreement on the current and error-free state must be established in a decentralized network with many participants (see also: Byzantine error). What is documented is irrelevant to the notion of blockchain. What matters is that later transactions build on earlier transactions and confirm them as correct by proving knowledge of the earlier transactions. This makes it impossible to manipulate or erase the existence or content of the earlier transactions without simultaneously changing all later transactions as well. Other participants in the decentralized ledger will then recognize a manipulation of the blockchain by the inconsistency of the blocks.
The first principles for cryptographically secured chaining of individual blocks were described in 1991 by Stuart Haber and W. Scott Stornetta, in 1996 by Ross J. Anderson, and in 1998 by Bruce Schneier and John Kelsey. In 1998, Nick Szabo also worked on a mechanism for a decentralized digital currency, which he called “Bit Gold”. In 2000, Stefan Konst developed a general theory on cryptographically secured chaining and derived various solutions for its implementation.
The concept of blockchain as a distributed database management system was first described in 2008 by a person or group of people under the pseudonym Satoshi Nakamoto in the white paper on Bitcoin. The following year, “Satoshi Nakamoto” published the first implementation of the Bitcoin software, thereby launching the first publicly distributed blockchain.
Central elements of a blockchain
Distributed Ledger Technology (DLT)
All network participants have access to a distributed ledger containing records of transactions that cannot be manipulated. This shared ledger records transactions only once, eliminating the duplication of effort typical of traditional enterprise networks.
None of the participants can change or manipulate a transaction after it has been recorded in the shared account book. If a transaction record contains an error, a new transaction must be added to correct the error, and both transactions are subsequently visible.
To speed up transactions, a set of rules – called a smart contract – is stored in the blockchain and executed automatically. For example, a smart contract can define terms for the transfer of corporate bonds, terms for travel insurance to be paid, and more.
Here’s how the blockchain works
As each transaction occurs, it is recorded as a “block” of data.
These transactions show the movement of an asset, which can be either tangible (a product) or intangible (intellectual property). The block of data can record information of your choosing – who, what, when, where, how much, and even conditions such as the temperature of a food delivery.
Each block is linked to the blocks before it and after it.
Thus, these blocks form a chain of data as the asset in question moves from one location to another or ownership changes. The blocks confirm the exact time and order of transactions, and the blocks are securely linked so that no block can be changed and no block can be inserted between two already existing blocks.
Transactions are joined together in blocks in a chain that cannot be changed: a blockchain.
Each additional block strengthens the verification of the previous block and thus the entire blockchain. This makes the blockchain tamper-proof and ensures its crucial strength of immutability. The possibility of manipulation by malicious actors is eliminated and a digital “account book” of transactions is created that you and other network members can trust.
Advantages of blockchain
The problems: Operations often waste valuable work time maintaining duplicate records and validating other vendors. Traditional systems of record can be vulnerable to fraud attempts and cyberattacks. Limited visibility can hinder data verification. And the IoT has caused transactional data volumes to explode. All of this slows business, hurts the bottom line – and means we need better methods. That’s where blockchain comes in.
With blockchain, as a member of a member-only network, you have the peace of mind that you will receive accurate and timely data, and that your confidential blockchain records will only be shared with the other network members to whom you have explicitly granted access.
Consensus on the correctness of data is required from all network members, and all validated transactions cannot be manipulated because they are permanently recorded. No one, not even a system administrator, can delete a transaction.
With a distributed account book shared by members of a network, the need for time-consuming record reconciliation is eliminated. And to speed up transactions, a set of rules – called a smart contract – can be stored in the blockchain and executed automatically.
Especially when used as a cryptocurrency, there are practical limitations in terms of timing and communication and storage requirements. Anyone who wants to verify the credibility of a transaction or account balance for themselves needs to know the current blockchain all the way back to the Genesis block. To do this, each participant must store a complete copy of the previous accounting. The immense storage requirements could then be realized with archive servers, which are the only ones that store the entire blockchain. Building on this, fully validating servers work by initially loading the blockchain from the archive servers, but only working with a portion of it during operation. They take on the actual burden of the postings that occur. Participants could then run software to simplify payment verification and receive only partial information from the servers.
The limited rate for generating new blocks and the indeterminism of the consensus process can lead to unpredictably long confirmation times. In the proof of work procedure, fluctuations in the actual computing power operated and the scatter inherent in the principle lead to waiting times of transaction confirmations a multiple of the expected value. By adjusting the difficulty level at high frequency, these fluctuations can be kept low.
If in each block the hash value is stored over the complete predecessor, one needs in each case also the complete block, in order to examine the completeness of the chain. Thus, one needs the entire accounting, even if one is not interested in every single entry. To avoid this, hash trees are used. Instead of determining a hash value over the entire block, one can calculate hash values of individual transactions and organize them as a hash tree. At the root of the tree one receives thereby again a Hashwert, which secures all transactions together. With it a block header can be provided, which contains only the Hashwert of the predecessor, the Nonce and the root Hashwert of the own tree.
The individual block becomes larger thereby, but the gaplessness of the chain can be checked now alone on the basis of the comparatively small block header. These headers can therefore be conveniently stored and their storage requirements are not dependent on the number of transactions carried out.
The blockchain is thus a series of hash trees, where initially only the root and its concatenation are of interest. If an SNI application wants to check a single transaction, it only needs the subtree relevant to it in order to be able to check the hash value of the transaction using the values of this subtree up to the root. The fully validating server or archive servers from which the subtree is obtained need not be trusted. The subtree, with its hash values, represents the verifiable link between the individual transaction and the block header of the block in which it was posted. This procedure allows the validity of a booking to be checked with very little effort, without having to know the rest of the accounting.
The relatively small block headers are part of the reason that specialized hardware can be used extremely efficiently for mining in proof of work. Only the hash value of the small block header is calculated for each new nonce, not the entire block. Thus, the memory requirement is very small. This is exactly what newer hash functions like scrypt try to avoid by artificially increasing the memory requirement and thus reducing the impact of specialized hardware on, for example, the currency.
Types of blockchain networks
Several options exist for developing a blockchain network. This can be public, private, created with an authorization system, or created by a consortium.
Public Blockchain Networks
With a public blockchain, anyone can join and participate, such as with Bitcoin. Potential drawbacks include significant computational overhead required, little to no transaction privacy, and weak security. These are important considerations for enterprise use cases of blockchain.
Private Blockchain Networks
A private blockchain network, much like a public blockchain network, is a decentralized peer-to-peer network. However, a company or other entity exists to govern this network and control who may participate, execute a consensus protocol, and maintain the shared ledger. Depending on the use case, this can significantly increase trust between participating parties. A private blockchain can operate behind an enterprise firewall and even be hosted locally.
Authorized blockchain networks
Companies that set up a private blockchain will generally also set it up as an authorized-access blockchain network. However, a public blockchain network can also be set up with authorized access. This introduces restrictions on who can participate in the network and on which transactions.
Multiple companies or entities can share the responsibility of maintaining a blockchain. These pre-selected entities decide who can submit transactions and access data. Consortium blockchains are ideal for transactions where all participants must be authorized and share responsibility for the blockchain.
Risk management systems for blockchain networks
When developing an enterprise blockchain application, it is important to have a comprehensive security strategy that uses cybersecurity frameworks, auditing services, and best practices to reduce risks from attacks and fraud attempts.
Use cases and blockchain applications
Improving cryptocurrency security for financial services.
INBLOCK issues Metacoin cryptocurrency based on Hyperledger Fabric, making transactions for digital assets faster, more convenient and more secure.
Professional team of medical scientists in a laboratory gathered around a wall monitor discussing the impact of one or more genetic variants on the phenome providing a snapshot of a participant’s health, lifestyle and environmental exposures.They are studying human diseases and viruses such as diabetes, heart disease and cancers, and autism
Transforming healthcare outcomes through blockchain.
IBM’s blockchain platform can completely transform how you ensure trust, data lineage, and efficiency in your ecosystem and improve patient care and profitability.
Tracking seafood from catch to shelf
IBM Food Trust is helping Raw Seafoods build greater trust throughout the food supply chain by tracking every catch from the water to individual supermarkets and restaurants.
Driving innovation in the oil and gas industry.
Vertrax and Chateau Software launched the first multi-cloud blockchain solution on the IBM Blockchain platform to prevent supply chain disruptions in oil and gas distribution.
More trust in merchant-supplier relationships
The Home Depot is using IBM Blockchain to gain shared, trusted information on goods shipped and received, reducing vendor disputes and speeding complaint management.
Blockchain – frequently asked questions
What is the difference between blockchain and bitcoin?
Bitcoin is an unregulated digital currency. Bitcoin uses blockchain technology as an account ledger for its transactions.
What does IBM’s blockchain platform have to do with Hyperledger?
IBM’s blockchain platform is powered by Hyperledger technology.
This solution can turn any application developer into a Blockchain developer.
Can I deploy the IBM Blockchain on any cloud?
IBM Blockchain Platform software is optimized for deployment on Red Hat® OpenShift®, Red Hat’s engineered Kubernetes platform.
This gives you more flexibility in deciding where to deploy your blockchain network components: on-premises, in public clouds, or in hybrid cloud architectures.