One of the main topics key executives have to deal with in our current business environment, notably in the financial industry, is the revolution created by the blockchain/distributed ledger technology. They notably have to understand: “how is blockchain/distributed ledger technology going to disrupt their industry and how can their company take advantage of it?” While there are few doubts about the revolution occurring, the technology behind it is often misunderstood and surrounded by much hype.
This blog post will be the first one of a series published by Adjoint to provide executives and curious professionals with a deeper understanding of the revolution occurring.
What is the blockchain?
You might have heard about Bitcoin, this cryptocurrency created in 2008, that uses a peer-to-peer network avoiding the need for a central authority. The so-called blockchain was born with this cryptocurrency, since it is the underlying technology.
So what is it? A blockchain is an immmutable distributed ledger of verified transactions. In basic terms, it is a distributed database of verified transactions that is replicated along a network of participants, called nodes, making it secure, efficient and transparent.
How does blockchain work?
As explained above, a blockchain is a distributed database of transactions.
Transactions, in order to be added to a blockchain, will be filled into a block. The block will contain all the transactions’ details along with the unique signatures of the parties involved and a link to the transactions already in the blockchain (linking all the previous and current blocks together - making the database immutable).
Before being added to the chain, the block needs to be validated through a cryptographic signing of transactions and a consensus protocol often built on hashing of these blocks. Once validated, this block will be added to the other blocks and replicated along the nodes of the distributed database.
But is there only one type of blockchain?
Blockchain: only one type of distributed ledger technology
A blockchain is only one among different types of distributed ledgers. Indeed, distributed ledgers can have different structures depending on the needs they address. The main difference in distributed ledgers concerns the associated level of privacy and security:
- Public distributed ledgers: everyone can join the ledger, including potentially anonymous or pseudonymous parties
- Private distributed ledgers: only validated parties can join the network
Other differences in the structure of distributed ledgers can be summarized in the graphic below
What are the key advantages of distributed ledger technologies?
Distributed ledger technologies provide parties with different incentives a secure, transparent and efficient way to transact without the need of intermediaries. The key features are:
- decentralized systems (versus centrally managed systems that lead to a unique point of failure)
- reconcilable systems (versus manual multiple synchronization systems that lead to time consuming procedures and potential errors)
- disintermediated systems (versus the need for central intermediaries due to the lack of trust between parties that leads to delays, costs, and potential errors)
A technology surrounded by hype
As with many innovations, distributed ledger technologies are surrounded by hype. But just like every new technology, they have their limits.
One of the most widespread misconceptions is the idea that distributed ledger technologies will disrupt the entire economy. Perhaps one day this might be true. But at Adjoint, we believe that as of today, in some cases the technology is not appropriate.
In the next post, we will provide you with our views about the question: “Do I need a distributed ledger?”