Defining the Blockchain World
Before delving straight into world of blockchain, its history and its applications; it would be opportune to go over the main concepts and terminology. As most technical topics, jargon quickly takes over and becomes hard for the non-technical person to keep up with all the different terms. Confusion abounds and the lack of understanding may actually become a limiting factor. The scope of this week’s article is to try and present working and accessible definitions to the key concepts surrounding blockchain.
Distributed Ledger Technology
Distributed ledgers use independent computers — referred to as nodes — to record, share and synchronize transactions in their respective electronic ledgers, instead of keeping data centralized as in a traditional ledger. Blockchain is one type of a distributed ledger.
Currently, most people use a trusted middleman such as a bank to make a transaction which is kept in a central ledger. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party. Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded. Five principles underlying this technology can be identified:
- Distributed Database
Each party on a blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transaction partners directly, without an intermediary.
- Peer-to-Peer Transmission
Communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes.
- Transparency with Pseudonymity
Every transaction and its associated value are visible to anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.
- Irreversibility of Records
Once a transaction is entered in the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (hence the term “chain”). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.
- Computational Logic
The digital nature of the ledger means that blockchain transactions can be tied to computational logic and in essence programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.
Smart (legal) contracts
A smart contract is a computer code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other. If and when the pre-defined rules are met, the agreement is automatically enforced. The smart contract code facilitates, verifies, and enforces the negotiation or performance of an agreement or transaction. It is the simplest form of decentralized automation. The term smart contract is a bit unfortunate since a smart contract is neither smart nor are they to be confused with a legal contract. A smart contract can only be as smart as the people coding taking into account all available information at the time of coding. While smart contracts have the potential to become legal contracts if certain conditions are met, they should not be confused with legal contracts accepted by courts and or law enforcement. However, we will probably see a fusion of legal contracts and smart contracts emerge over the next few years as the technology becomes more mature and widespread and legal standards are adopted.
Once we have the main concepts defined, we can start looking at the context and history of blockchain before delving into its applications; including, but limited to, virtual currencies.