Demystifying Blockchain

I had an interesting conversation few weeks ago with a number of IBM Distinguished Engineers on emerging technologies. The consensus was that over the holiday season last year, it seems the technorati had an epiphany about blockchain - post Thanksgiving season, every CIO had a surge of interest in understanding the implications of blockchain.

Of course, no article about blockchain can start without mentioning bitcoin - the technology that revolutionized transactions, for once obviating the ever growing list of middlemen who introduce new processes and checks and balances. The following graphic from Paul Baran's book illustrates this:

• On the left, one can think is the Central Reserve lending money to all other entities. This centralized network is obviously vulnerable as destruction of a single central node destroys communications between stations (or entities, in my simplified example).
• In practice, a mixture of star and mesh is used. So that's like the various banks we currently deal with today, who in turn borrow money from the Central Reserve. 
• Finally, keeping in mind that the destruction of a small number of nodes in a decentralized network can destroy all communications (which is why the banks invest heavily in ensuring IT resilience), a "distributed" network is of paramount interest. This would be the blockchain enabled world.

So..where's my block? Where's the chain?

A blockchain is a chain of blocks obviously :-) A block is a space where you store data in a linear container space, and a blockchain is that series of blocks. Each block contains a reference to previous block in the chain (that’s the Prev_Hash in the picture) and some additional information which makes up the content of the block. The link to the previous block is what makes it a chain: given a block you can find all the information in all the previous blocks that led to this one, right back to what’s called the genesis block, the very first one in the chain.

Remember linked lists? Similar idea to facilitate navigation. 

Now here's the key idea: Anyone can read and verify the "header" - fields like 'TimeStamp', 'Tx_Root', etc in the picture above, but only you (or a program) can unlock what’s inside the container because only you hold the private keys to that data, securely.

So what's stored in the block?

The data stored can be a token of value, or a crypto money balance. The publicly visible header ensures auditability (yes, I did make a transaction) and the encrypted data ensures privacy (only those with the private key can see what I trasacted).

Where is the blockchain stored?

Remember the first picture in the article about distributed network? Each node has a copy of the entire blockchain. In blockchain for business, each node is a member company that is part of the network. 

How do new blocks get added to the chain?

Every node in the network can add blocks to the chain. Every node is sent the data that needs to go into the blocks (for example, the bitcoin transactions). Every node can package up that data into a block that links back to the last block in the chain that they are aware of. And every node can then transmit that block to the rest of the network to assert “this is the new chain”.

In cryptocurrency implementations, there is protection built into the block headers as 'proof of work' required to generate the next valid block. In the emergence of blockchain for business, blockchain technology plays the role of decentralized public ledger, collectively maintained by a network of participants. It is then a database that incrementally gets built up by a network of participating parties who run the same software, and that is subject to the constraints and rules set by the underlying software they run. It is a distributed database, where blocks like cells in an Excel spreadsheet keep getting added, and all parties maintain it. New transactions result in new blocks being added to the chain.

Smart Contracts (and Smart Property)

Beyond the cryptocurrency based implementations, blockchain as a distributed ledger opening the possibility of creating blockchain databases storing all manner of diverse data, including, for example, property titles, contracts, shares, voting decisions, or even reputation scores. 

At the cutting edge of the scene are experiments with smart contracts, which are small
bundles of code—or scripts—that can be recorded on a blockchain, and that participants
can interact with in order to undertake simple tasks. For example, imagine a travel insurance which is endcoded in a blockchain-based script that is activated automatically when exception conditions are met (such as flight delayed by more than 6 hours, for example). This smart-contract is programmed to read data from the airlines, and after a set amount of time releases the monetary value from the escrow, sending it
to a traveller who requires protection against flight delays. This is a blockchain-based
travel insurance contract.

Conclusion

There's great potential for blockchain to disrupt industries and the our way of doing things. From smart insurance contracts, to the use of blockchain within the Internet of Things technologies, to clarity in all multi-party transactions (like car lease/titles, property insurance, credit history, etc). Blockchain promises to be an extraordinary phenomenon but the technology needs to advance quite significantly to fulfil its promise. Open standards needs to emerge and widely adopted, as well as industry / geographical networks will emerge for blockchain based transactions to be broadly adopted.