Saturday, 1 December 2018

What is Blockchain? Part II


If participants in that process are preselected, the ledger is permissioned. If the process is open to everyone, the ledger is described as unpermissioned.

The purpose, and great strength of unpermissioned ledgers is that they cannot be owned by anyone. A good example of this is the Bitcoin ledger. So, while, anyone to contribute data to the ledger, such as a record of a financial transaction, there us no single owner and everyone in possession of the ledger to has identical copies.

This is a major reason why blockchain represents a challenge to institutional power structures and existing industries, and many governments and financial institutions have reacted strongly against this new method of doing business. For example an unpermissioned blockchain has censorship resistance, which means that no one can prevent a transaction from being added to the ledger. The integrity of the ledger is not maintained by an authority or single device but by all users reaching a consensus about its state. This means that unpermissioned ledgers can be used as a global record that cannot be edited: for recording financial transactions, declaring a last will and testament, for example, or assigning property ownership.

One of the fascinating features of blockchain technology is that an additional feature in implemented which makes it more than just a database. Rules can be set about any transaction, sometimes referred to as business logic can be associated with each transaction. This is not only much more powerful than a conventional databases, where the rules may be set at the entire database level.

In contrast to Unpermissioned ledgers, permissioned ledgers are ones that may have one or many owners. When a new record is added, the ledger’s integrity is checked by a limited consensus process. This is carried out by what are known as trusted actors, for example government departments or banks. The consensus process means that permissioned blockchains provide readily verifiable data sets. The mechanism is that the consensus process creates a digital signature, which can be tested and verified by anyone. This method is also faster and more compact as it does not have to store irrelevant records or be checked by slow or inaccessible machines on the network.

In the example of healthcare, requiring many hospitals or even many doctors and healthcare professional’s medical records systems to validate a record (without necessarily hands on help from a human) gives a high degree of confidence in the record’s security. In contrast to the current situation where paper records can be lost or destroyed or databases an be ‘cleaned’ or deleted changing the official record the permissioned record is not subject to whims or influence of an individual or small number of people.

Other interesting alternatives are Distributed ledgers, which are a type of database that is spread across multiple sites, countries or institutions, and is typically public. In a distributed database, records are stored in order in a continuous ledger, rather than sorted into blocks. New records can only be added when the participants reach a quorum. An example of a distributed ledger is the global financial transactions system Ripple. In Ripple a list of validators known as Unique Node Validators is selected from up to 200 known, unknown or partially known validators who are trusted not to collude in defrauding the actors in a transaction. This requires greater trust in the validators or operators of the ledger. The advantage is that it is significantly faster than a system like Bitcoin, but is considered less censorship resistant.
In contrast, a more general concept is that of the shared ledger, typically refers to any database and application that is shared by an industry or private consortium, or that is open to the public.
Interestingly, a shared ledger may use a distributed ledger or block chain as its underlying database, but will often layer on permissions for different types of users. As such, ‘shared ledger’ represents a spectrum of possible ledger or database designs that are permissioned at some level. An industry’s shared ledger may have a limited number of fixed validators who are trusted to maintain the ledger, which can offer significant benefits of quality while maintaining trustworthiness.

Perhaps most interestingly, and not just the cherry in the top, are smart contracts. Smart contracts are contracts whose terms are written in a formalized language that can be executed by a computer or microchip when the blockchain is accessed. This means that they are effectively business logic coded in a specialized computer language instead of legal language. In effect, smart contracts are automatically executed by a computing system, such as a suitable distributed ledger system. The potential benefits of smart contracts include low contracting, enforcement, and compliance costs; consequently it becomes economically viable to form contracts over numerous low-value transactions. The potential risks include a reliance on the computing system that executes the contract and the correct and error free writing of the smart contract.

So hopefully this has been a useful guide to blockchain as a useful technology with potentially widespread influence and helps better understanding. And in summary I think I can’t do better than to quote the UK Government’s Chief Scientific Adviser in recommending that “Algorithms that enable the creation of distributed ledgers are powerful, disruptive innovations that could transform the delivery of public and private services and enhance productivity through a wide range of applications.”