What it is and why it’s significant
06 December 2018
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Blockchain is the technology that underpins the digital currency Bitcoin вЂ“ but it has far broader applications and is being commercialised ter a growing number of areas. It has generated much rente ter technology circles and beyond, because of the fresh possibilities it opens up te financial services, the public sector and other areas.
Blockchain and Bitcoin are not the same thing вЂ“ Bitcoin is implemented using blockchain technology, but blockchain technology can be used te contexts much broader than Bitcoin or cryptocurrencies. The term blockchain refers to the combination of a number of technologies, including:
- The blockchain gegevens structure.
- Public key cryptography.
- Distributed ledgers.
- Overeenstemming mechanisms.
The blockchain gegevens structure
A blockchain is a special type of gegevens structure (ie a database), ter which the gegevens is set out and built up te successive blocks. Each of the blocks of gegevens includes a puny chunk of gegevens that verifies the content of the previous block. Spil a result, if an attempt is made to modify an earlier block te the chain, all of the zometeen blocks cease to match up. Imagine that the database looks like a tower of Lego chunks which go after a particular sequence red-green-green-blue-yellow-red. If a switch is made to the 2nd block, the surplus of the sequence upwards from the 2nd block will switch and become, say, red-black-brown-orange-purple-pink. The system that maintains the blockchain will be able to detect and reject the attempted modification, and this is what makes the blockchain tamper-proof.
Public key cryptography
The use of public key cryptography ensures that each participant ter the system is uniquely identified and can validate any switch to the blockchain using a cryptographically secure private key. While public key cryptography is not unique to blockchain, it is one of the essential underlying technologies which ensure that blockchains are secure and that only authorised participants can make switches to a blockchain. It can also be used to encrypt gegevens stored on the blockchain so that the gegevens can only be accessed by those with the key to decrypt it.
Traditional ledger systems either require each participant to maintain its own decentralised ledger or they require the participants to trust a centralised ledger. The problem with decentralised ledgers is that they can be costly to maintain and to keep secure, and it may not become instantly apparent when they diverge вЂ“ until a transaction down the line exposes that each ledger ter fact records a different version of the facts. A centralised ledger, on the other arm, requires all the parties to trust the holder of the authoritative central ledger and creates a critical vulnerability вЂ“ what happens if the central ledger is hacked or a disgruntled employee deletes it? The key to a distributed ledger is that each authorised participant (a knot) maintains a accomplish version of the ledger and each transaction, ie each proposal to modify the ledger, is sent out to all of the knots and is only approved if a sufficient number of knots agree that it is a valid transaction.
This validation of proposed switches to the blockchain is performed by the knots ter accordance with certain pre-set rules whereby the knots will reach a overeenstemming spil to whether the fresh gegevens entry will be permitted (eg, the knots might conduct a check to confirm that according to the records on the blockchain, the participant purporting to conduct a particular transaction wields the relevant asset which is the subject of that transaction). This is the overeenstemming mechanism and only if there is agreement inbetween the knots spil to the validity of the transaction represented by that gegevens entry will that gegevens entry be permitted to be appended to the blockchain (ie another Lego block will be added to the tower). Once that transaction has bot approved, however, the updated version of the blockchain with the newlyвЂ‘appended entry will rapidly spread via the system, so that that all of the knots end up with an identical version of the ledger.
This overeenstemming mechanism means that there is a rigorous means, applied uniformly by all participants, that ensures that only valid gegevens can be appended to the blockchain. It is the overeenstemming mechanism that enables the gateвЂ‘keeping function to be entrusted to a network of participants, rather than a single central authority.
Why is blockchain technology relevant?
Te the early days blockchain technologies very first captured the imagination of Bitcoin and cryptocurrency enthusiasts вЂ“ often of a techno-utopian and libertarian persuasion вЂ“ the versatility of the technology means that it is now being embraced, at least experimentally, by more established sectors of the economy.
Compared with traditional database technologies and centralised systems, blockchain implementations can be relatively cheap and require considerably less IT investment to maintain. However, spil the technology is still relatively immature, for the time being thesis savings on the ongoing operational costs may be offset by significant upfront development costs.
Because of its application to ledger technologies, blockchain has generated particular rente from the financial sector. Initiatives have included bankвЂ‘specific cryptocurrencies modelled on Bitcoin and self-executing brainy contracts that can automatically implement certain types of elementary financial contracts. One of the most highвЂ‘profile initiatives ter this space has bot R3, a consortium of overheen 70 financial institutions launched te September 2015 and dedicated to developing blockchain technologies for use te the financial sector.
Because of its application ter creating resilient, tamper-proof distributed records, a number of initiatives have bot proposed te the public sector for government-maintained registries to be implemented spil blockchains, eg real estate title registries ter Honduras and Sweden and the aid/public rente sector, eg blockchain-based tracing of donations from donor to recipient to ensure the money goes where it is needed.
Enthusiasm for blockchain has not abated among technologists, who have continued to thrust the boundaries of blockchain technology. The same selfвЂ‘executing clever contracts technology (mentioned above) that financial institutions have bot cautiously exploring, has bot taken much further by blockchain pioneers. May 2016 eyed the launch of the DAO (Decentralized Autonomous Organization) which wasgoed effectively an autonomous crowdвЂ‘sourced venture capital fund implemented by way of clever contracts, without recourse to traditional legal structures. An exploit that enabled one of the participants to samenvatting a large part of the funds resulted te the DAOвЂ™s prompt demise, but the ambitious project demonstrated the potential of blockchain technologies.
What legal issues does blockchain present?
- Real world vs blockchain.
Spil the fresh technology emerges and switches the way parties transact, especially ter the financial sector, regulators will want to monitor the development of blockchain technologies to ensure the assumptions current regulations are based on have not bot superseded.
To read the utter article, including a helpful glossary, please click here.