Introduction to Blockchain

June 7, 2017

Blockchain a a combination of software and technology architecture capable of controling the flow or transfer of assets to produce value. These assets can be tangible assets such as a car or house and intangible assets such as a loan, mortgage or insurance coverage. Blockchain makes use of shared ledgers to record transactions and to register and activate contracts.

 

When a business network (a collection of business participants) join a Blockchain, the members of that network share a replicated ledger. For instance the buyer of goods, the seller, the bank used to finance the transaction, insurer, regulator, auditor: all these participants receive a replicated copy of the ledger which manages the transaction. Blockchain architecture handles the permissions (who can see and who can add to the chain), manages the peers, addresses consensus and security.

 

I want to touch on something you are likely familiar with: Bitcoin is ostensibly recognized and frequently confused with Blockchain. I am referring to that secretive currency associated with black market transactions and put into use by people who seek anonymity in their transactions (for the most part). That said, there are legitimate applications for Bitcoin and even a few Bitcoin ATMs have posed up - search for a Bitcoin ATM near you.

 

It's important to understand that bitcoin is a specific application for blockchain but there are other blockchain implementations which prioritize identity of parties(vs. the anonymous nature of bitcoin) or deal with the transacting of assets versus currency. Just like all roses are flowers, not all flowers are roses.

 

Here's an example how this all works: A manufacturer sells widgets to a buyer. The buyer's bank can participate in the transaction and issue a Letter of Credit by adding it to the blockchain. That LOC becomes a permanent part of the ledger. Meanwhile a shipping company in this business network can attach RFID sensor data indicating a container of goods from the manufacturer just arrive in the destination country to automatically update the LOC credit facility. With trust in the blockchain all the participants can rest assured that they have full information about the transaction. From this example you can see the basic components of blockchain: the notion of "appending" information to the block chain; the immediacy, near-real-time nature of the transactions stored in the block chain and the notion of a business network of peers and participants in the blockchain.

 

The key concepts of the shared ledger are: consensus (all participants agree the transaction is valid), provenance (the entire history of the asset and ownership changes are part of the record), immutability (no participant can tamper with a transaction) and finality (the ledger is the only record of the asset/transaction).

 

I hope you found this helpful sorting the confusing terminology around blockchain. Drop me a note in the comment section below if you think I should clarify any of these concepts. In the next article I will be introducing a novel application for blockchain. By the way: it is NOT for financial services!

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