6 Essential Blockchain Technology Concepts You Need To Know
Blockchain technology creates a viable, decentralised record of transactions – the distributed ledger – which allows the substitution of a single master database. It keeps an immutable record of all transactions, back to the originating point of a transaction. This is also known as the provenance, which is essential in trade finance, allowing financial institutions to review all transaction steps and reduce the risk of fraud.
1. Blockchain and Bitcoin are not the same
Many people assume that blockchain and bitcoin are the same. Blockchain is the underlying technology of Bitcoin. They are closely related, but they are not the same thing.
In 2008, Bitcoin was introduced as a type of unregulated digital currency created by the pseudonymous Satoshi Nakamoto. Blockchain was the ledger solution used to securely record facilitating the use of this new currency since there was no bank or government involved to monitor or police the transactions. As such Bitcoin can actually be considered as the first use case leveraging blockchain technology. The confusion between blockchain and bitcoin often arises because these two concepts were introduced at the same time.
Blockchain and Bitcoin transactions
Since the introduction of blockchain technology it has been extrapolated for use as a ledger solution in many other industries related to assets other than a currency. These fields include healthcare with patient records, trade finance and owner of an invoice or purchase order, as well as insurance and who has the title to a house or car.
Bitcoin is known as a cryptocurrency and the first decentralised digital currency of its kind. It was launched as an open-source solution to work without a central repository or single administrator. Bitcoin transactions are transferred and saved using a distributed ledger on a shared network that is open, public and anonymous. Blockchain is the underlying technology that maintains the transaction ledger for Bitcoin transactions.
The blockchain technology as for example the one used for Bitcoin allows for the recording of transactions on a distributed ledger across a network of users. The open-source technology allows for the storage of data from the transactions into blocks. Each block includes a time-stamped record of the transactions with each block linked to the previous one, thus creating a chain. The information stored on the blockchain is fully transparent and permanent without the ability to change or remove previous transaction data from the distributed ledger. This characteristic and solution can be used to solve many inefficiencies in different applications and industries.
Whilst blockchain is an excellent choice for a digital currency, it can be used to keep a trusted audit train of ownership of a vast range of asset types. These can be both intangible (e.g. trade finance assets) and tangible (e.g. diamonds) assets. This makes for a highly diverse choice of blockchain applications for multiple sectors and institutions – including TradeIX focusing on the trade finance industry with dedicated solutions leveraging blockchain technology.
2. Data stored on blockchain is public
This statement is partially correct. Some public blockchain are open, though others are private accessible only to specified users. The use case will determine which type of blockchain is needed. There are basically three types of blockchains.
In a public blockchain, a user can become a member of the blockchain network. This means they can store, send and receive data after downloading the required software on their device. Allowing anyone to read and write the data stored on the blockchain as it is accessible to everyone in the world.
A public blockchain is completely decentralised. The permissions to read and write data onto the blockchain are shared equally by all connected users, who come to a consensus before any data is stored on the database.
The most popular example of a public blockchain is Bitcoin. The digital currency allows users to use a platform for making transactions directly between them.
In a private blockchain, permission to write, send and receive data is controlled by one organisation. Private blockchains are typically used within an organisation with only a few specific users allowed to access it and carry out transactions.
The organisation in control has the power to change the rules of a private blockchain and may also decline transactions based on their established rules and regulations.
An example of this is a blockchain deployed by a corporation to collaborate with other divisions or a few permissioned participants.
A consortium blockchain, also called permissioned blockchain can be considered as a hybrid model between the low-trust offered by public blockchains and the single highly-trusted entity model of private blockchains. Instead of allowing any user to participate in the verification of the transaction process or on the other side just allowing one single company to have full control, in a consortium blockchain a few selected parties are predetermined. It only allows a limited number of users the permission to participate in the consensus process.
For example, imagine a group or network of ten banks, each of which is connected to the blockchain network. In this example, we could imagine that for a block to be valid, seven of the ten banks have to agree.
Although there is some degree of centralisation in this structure, users can grant permissions to read or write to other users. This leads to the partially decentralised design of consortium blockchains. Similar to private blockchains, the consortium blockchains keep the privacy of the data, without consolidating power within a single organisation.
An example of this is Marco Polo which is a banking initiative for trade finance powered by R3’s blockchain technology.
3. On the blockchain, private information is visible to everybody
People often think that all their information and transaction details posted on to the blockchain are public, based on the fact that the distributed ledger is public. This is not correct.
Though visibility depends on different use cases and the technology deployed. Narrowing the scope to this question – for business to business purposes, all transactions are private and only visible with the appropriate permissions. A company leveraging a blockchain to distribute data to their suppliers does not mean his competitors can see his suppliers or what they are buying. Nor can the suppliers see other suppliers’ data. It is all private and secure and the suppliers only see the data the buyer has permissioned them to see.
Whilst some transactional information can be made public, what is stored on the distributed ledger is nothing more than the amount of the transaction and a hash. The hash is a code generated by running the actual transaction details through a cryptographic method. Therefore, it is impossible to have access to more information on the transaction.
4. There is only one blockchain
The term blockchain is most often used to describe a ledger technology, not a specific product or solution. A blockchain solution will have the same common denominators such as being distributed and underpinned by cryptography and having some form of consensus mechanism.
However, there are various blockchains that come in public, permissioned or private versions. Today, there are dozens of different protocols, considered as blockchains and can be classified as distributed ledger technologies. For example Ethereum, Corda from R3, Fabric from IBM and Ripple.
Some are similar while others differ greatly from one another. Each blockchain solution will have specific advantages and disadvantages for the specific use, different use cases and applications.
5. Smart Contracts are legal documents
The term Smart Contract is misleading. They are neither “smart” nor a “contract” typically construed as legal document. Smart Contracts, which was first introduced as a term by cryptography researcher Nick Szabo in 1994 are basically scripts or software codes written by developers and deployed onto a blockchain. They are written as transaction instructions usually triggered by events. As an example, if goods arrive at this customer’s warehouse by this date, release payment to the supplier. Thus, automatically by companies updating shipments and receipts Smart Contracts can automatically perform tasks. This eliminates the need to manage time consuming and costly manual business processes.
A smart-contract is a digital program that automates the execution of business logic, obligations, and agreements.
A smart-contract can be used to represent almost anything- an electronic warehouse receipt, a bond, an invoice, a unit of electricity, a unit of currency, a futures contract, a share of risk, and much more.
These cryptographically unique assets can be created, traded, and settled in real time by users on the network. Each smart-contract can be written to include almost any type of business logic. This business logic can be enforced automatically in accordance with the terms and conditions of the agreement.
As inputs occur, the contract responds by executing any type of obligations or conditions mandated by the logic of the contract.
- a GPS coordinate indicating the arrival of a ship at the correct port could automatically trigger payment to the seller of goods carried by that ship.
- The input of the current price of a certain commodity could trigger the smart-contract to sell an option on that commodity.
- A buyer’s signature on an invoice can create a payment obligation that is automatically executed on the date specified if and when other conditions are met.
- A vending machine can pay the drone who restocks it upon completion of the restocking and based on the inventory it has been stocked with,
- Collateral is transferred to creditor upon default event as received in court filing system.
As mentioned, Smart Contracts are typically not legal agreements. However, they can execute terms based on prior or separate agreements between parties. In addition, since legal agreements tend to follow a logical format such as if-this- then-that, similar to code, paper-based agreements could be replaced with computer-based programs which automatically execute the terms of a contract. Therefore, Smart Contracts play an important role in operating blockchain models. Specifically where processes between different parties can be automated by using automated rules, embedded smart contracts, thereby fulfilling the contractual intentions of parties with speed, clarity and efficiency.
6. Blockchain – a buzzword, nothing more
First blockchain is a real technology available today. Currently, blockchain is being tested with proof on concepts (POCs) in many different industries and regions around the world. Also keep in mind this is still early days for this technology. Several blockchain providers, like IBM and R3, released version 1 of their solutions in 2017. So, this is all very new and emerging right in front of us.
Indeed, blockchain has become arguably an overused term and covered daily in multiple media and press outlets. This does not mean that it is just a buzzword as the investment numbers speak for themselves.
In 2016, over $280 million was spent on blockchain technology by capital markets firms1 with 90% of North American and European banks exploring blockchain solutions2 During the same year, over $1.4 billion was invested globally in blockchain start-up companies.3
Already today, approximately 50% of leading banks are working with a technology company to augment their blockchain capabilities.4
The investments in the technology and emerging companies are aligned with the potential efficiency gains for financial institutions. Accenture expects that more than $8 billion can be achieved in annual savings for the largest eight banks. By implementing blockchain technology there’s potential for 70% in cost savings on business operations and 30-50% potential cost savings on compliance.
Oliver has over 15 years of experience in supply chain finance and account receivable finance solutions. He has worked for numerous leading organizations in trade finance and had key roles with PrimeRevenue, GSCF and Sumitomo Bank. In 2008, he founded Swiss Commercial Capital, a company specialized in trade finance solutions, which was successfully sold to Macquarie Bank in 2011. Oliver is the co-author of the book Supply Chain Finance Solutions and a frequent speaker on this topic.
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