Blockchain basics

Nov. 4, 2018, 6:04 p.m.

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      Blockchain technology is a powerful game-changer for many industries because it organizes activities with less friction and more efficiency.


Blocks and blockchain networks

    A blockchain is a type of distributed ledger that is shared across a business network. Business transactions are permanently recorded in sequential, append-only, tamper-evident blocks to the ledger. All the confirmed and validated transaction blocks are hash-linked from the genesis block to the most current block, hence the name blockchain.

    A blockchain is thus a historical record of all the transactions that have taken place since the beginning of the blockchain in the network. The blockchain serves as a single source of truth for the network.


Distributed ledgers


     A distributed ledger is a type of database, or system of record, that is shared, replicated, and synchronized among the members of a network. The distributed ledger records the transactions, such as the exchange of assets or data, among the participants in the network. This shared ledger eliminates the time and expense of reconciling disparate ledgers.

    Participants in the network govern and agree by consensus on the updates to the records in the ledger. No central, third-party mediator, such as a bank or government, is involved. Every record in the distributed ledger has a timestamp and unique cryptographic signature, thus making the ledger an auditable history of all transactions in the network.


Participants


    A blockchain network for business is a collectively owned peer-to-peer network that is operated by a group of identifiable and verifiable participants. Participants may be individuals or institutions, such as a business, university, or hospital, for example.


Assets and transactions


    Anything that can be owned or controlled to produce value is an asset. Assets can be tangible (such as a car or farm-fresh peaches) or intangible (such as a mortgage or patent). A transaction is an asset transfer onto or off of the ledger.


Consensus


    Consensus is the collaborative process that the members of a blockchain business network use to agree that a transaction is valid and to keep the ledger consistently synchronized. Consensus mechanisms lower the risk of fraudulent transactions, because tampering with transactions added to the ledger would have to occur across many places at the same time.

    To reach consensus, participants agree to the transaction and validate it before it is permanently recorded in the ledger. Participants can also establish rules to verify transactions. No one, not even a system administrator, can delete a transaction that has been added to the ledger. A trusted network of participants reduces the costs of establishing consensus, relative to the higher costs present in permissionless blockchains.


Smart contracts


    Smart contracts govern interactions with the ledger, and they can allow network participants to execute certain aspects of transactions automatically. For example, a smart contract could stipulate the cost of shipping an item that changes depending on when it arrives. With the terms agreed to by both parties and written to the ledger, the appropriate funds change hands automatically when the item is received.

Blockchain applications


    A blockchain application requires three interdependent components: the user-facing application, the smart contract, and the ledger.

    The top layer is the user-facing application that meets the needs of the network participants. The application lets users invoke smart contracts that trigger transactions in the business network. The smart contract encapsulates the business logic of the network: assets, ownership, and transfers. Each invocation of a smart contract creates a transaction in the network and updates the ledger. The ledger holds the current value of smart contract data , and is distributed across the network.