Blockchain can be termed as another hype or buzzword making its way to mainstream IT. It is a technology that will dramatically transform the way businesses are conducted. Today, organizations big or small operate in a network. It may have a customer, supplier, distributor, financial intermediaries, global and local partners and so on. They all collaborate and conduct economic activities to achieve certain common set of goals. It’s a complex web of business entities that make money by offering services to each other. In business terms, exchange of goods and services (also known as assets) is called a transaction. It is a formal transfer of value and ownership of an asset from one entity to another, i.e., parties to the business. Transactions between these entities must be recorded and maintained in a book of account also called a ledger. Each business entity or organization maintains its own ledger, which consists of day-to-day transactions. Third party intermediary often does the bookkeeping or maintaining of the ledger. This obviously leads to increase in cost and in some way duplication of efforts as each entity in the business network maintains its own ledger of transactions. There is no clarity or transparency as to how the transactions are recorded and settled and the process of reconciliation is often time-consuming. In a nutshell, the current handling of accounts among the business network is less transparent and inefficient. So, what is the technology solution for this problem?
The solution lies in creating a technology infrastructure that can distribute or share the copy of ledger to all the entities in the business network. This is where the blockchain comes into the picture. Blockchain is a distributed ledger protocol that offers a more unique and innovative approach towards maintaining transactions among business entities. Transactions are validated by all the entities and created as unit of blocks. Blockchain architecture can be applied to public or private business network. With public applications, every business entity can view and validate the transactions, though no one can alter it. In a private setup, ledger is permissioned, which means only authorized entities can act (like validate or view) on transactions. Transactions, in general, cannot be tampered with, i.e., its state cannot be altered. It means blockchain ledgers are immutable. Transaction payloads are secured using cryptographic hash and digitally signed using public/private key thereby certifying provenance. The digital signature proves the identity or the ownership of the transaction or the digital token (asset) that is being transacted. The blockchain transactions are generated with network-wide consensus without the need of central server or authority. The consensus here means all the entities in a business network agree on the validity, state of data and originality of the transaction.
Note – Understanding blockchain 1.0 and 2.0.
Bitcoin-based blockchain is popularly termed as blockchain 1.0. It is modeled around simple database concepts with data insertion (transaction recording) happening sequentially in the distributed ledger. There was no special logic involved. Then came the modern blockchain applications that introduced the concept of smart contracts. The smart contracts came under the blockchain 2.0 umbrella. Smart contract represents a software code that performs some logic, then just recording transactions. Blockchain platforms like IBM HyperLedger, Microsoft Bletchley, Ethereum, etc. are all part of blockchain 2.0 world.
Here are the benefits of a blockchain network in a nutshell:
- The blockchain network manages the transactions without the need of any intermediary or central authority. It is self-regulated and automated using smart contracts and consensus protocol.
- All the business entities are equipped with their copy of ledgers, and therefore, the information is shared and transparent across the network
- With blockchain, the data or the transaction record is up to date, verified and consistent as all the business entities are involved in performing the validation.
- Reliable and highly available as there is no central point of failure.
- There is a significant reduction in cost as a business need not maintain its own ledger and managed by any third-party intermediaries.
- Transaction settlement and the process of reconciliation are automatic and almost immediate. Unlike the manual process, it does not require any mandatory number of business working days to make the settlement.
- It mandates the use of single ledger where all the transactions of a defined business network are recorded. It, therefore, removes the data redundancy and the need to maintain separate ledger by each business entity.
A blockchain network is setup based on the following principles:
Consensus: The network must be in the state of consensus, i.e., the validity of the blocks of transactions must be validated and agreed or accepted by all the nodes (or designated nodes) in the blockchain network.
Provenance: Provenance generally means place of origin. In the context of blockchain, it refers to the origin of the digital tokens or assets. The nodes in the network must know who is the owner of the digital asset and also track the change of ownership.
Immutability: In a blockchain network, the ledger cannot be tampered with once the transactions are recorded. A ledger may have valid or invalid transactions. An invalid transaction is addressed by adding a new valid transaction of the same value. Data in the blockchain network is append-only and not subject to modification.