What is block-chain?
Block-chain is a technology to store information with 3 key characteristics:
- Distributed (so called “distributed ledger”)
- Secure: only the owner & authorized parties can read the relevant records and not from others. No administrator rights.
- Non-reversible: data/information is stored in the system in the form of blocks that linked to each others in the chronological order. It is not possible to modify previous blocks once it is committed.
Why block-chain?
Borrow words from “Global Insight: Blockchain in Banking:Disruptive Threat or Tool?“. I prefer the approach of viewing Blockchain as a new database technology rather than other interpretations like peer-to-peer secured information sharing which has been applied for sending money (bitcoins).
“…Because, in fact, blockchain technology – although when you get into the technology itself, there is some complexity there and some ingeniousness – is nothing more than a new form of database … approach to database architecture, that is. Fundamentally, an improvement over the way that, traditionally, databases have been designed and used in the past.
So, what’s a database? You know, it’s a place where we store important information that we want to refer back to for various purposes, at some point in the future. Visually, you can imagine it as a cylindrical thing. It’s owned by someone, it’s administered by someone, it typically exists in a physical location. The administrator of the database is very interested in investing and ensuring that the perimeter security to that cylinder that protects the contents is strong, impenetrable. The lucky ones are the ones that know that it turned out that penetration happened, and then there’s the rest of us who just don’t know yet. And, typically, the information that’s kept in databases is raw information, not encrypted, not further protected other than the perimeter security which, increasingly proves to be penetrable. So when someone gets in there, that isn’t authorised to do that, the consequences can be dire, whether it’s the theft of someone’s identity for theft of funds or what have you, you read about this every day. So that’s traditional database architecture, and pretty much everybody keeps databases because they have important information about their activity, their client’s activity, that they need to keep a record of, and as a matter of fulfilling their fiduciary responsibilities, they need to keep that record.
Interaction between entities who keep their own separate databases requires a process of taking information from that database, sending it off to another party, for whatever the relevant purpose is, independently validating, verifying and then, of course, when the two sets of information aren’t consistent, reconciling the reasons for the differences. And, simply put, that reconciliation process between different renditions of the same data that needs to be communicated between parties accounts for tens of billions of dollars of cost every year, in the financial manufacturing process.
So that’s the way things have traditionally worked in financial database architecture for years, and along comes a new technology, this is blockchain technology or distributed ledger technology, which makes a few fundamental changes to what I just described. The first thing is that instead of this cylinder in one place, you have a network with multiple nodes, and you have a technology which enables the multiple nodes in that network to be accessed by those with a need and right to know it, and for ensuring that the data, the important information that we’re all referring back to, can be kept in sync and replicated continuously, on a real-time, or as near as need to real-time basis, between parties.
And protecting all of this is the fact that the data itself is encrypted, and the identity of the users or those who have the right, need and right, to access that information, is subject to a sophisticated identity management regime involving, again, cryptographic tools, so that it is very possible to independently verify whether or not an actor is who they say they are and has the right to access that information. And, simply put, what that allows you to do, for the first time, is responsibly share, mutualise, common infrastructure and use this database environment as a place to keep a record of important transactional information that is one record, a golden or prime record, that can be shared by multiple, independent entities, that is protected through cryptography, so that only those with a need and right to know, only the piece of information in that environment that they have the need and right to know, can do that.”
How Blockchain works?
There is so much “noises” around the topic of “explaining” how Blockchain works and I’m still in the process of distilling the information. I will start with the view of distributed database and then discuss on the applications around bitcoins, payments in existing currency, trade confirmations, reconciliation in general to some fancier concepts like clearing, “smart contract“(*/**). A bit ambitious I guess…
What I often forget?
- What we mean exactly by distributed? “Everyone keep the DB on their personal computer?”- really?
- Database run with administrative cost / maintenance cost. Who paid and who gets rewards?
- Delay in validating transactions
- Cost (electricity / computation power) to validate transactions
- Intrinsic value of distributed ledger – what are the benefits?
In a cryptocurrency system, miners are incentivized to create blocks to collect two types of rewards: a pre-defined per-block award, and fees offered within the transactions themselves, payable to any miner who successfully confirms the transaction. (Wikipedia)
Video references:
Bitcoin: Transaction block chains: The mechanics of a bitcoin transaction block chain, which is a construct that is generated by bitcoin miners and functions as a global ledger for recording and validating bitcoins.
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