Blockchain is the first radical technology innovation of the 21st century. It provides a secure ledger system which is distributed across various network participants. This provides a highly secure accountancy system which is hardened against unauthorised use. A detailed explanation of the technology can be found further in this document.
WHAT IS BLOCKCHAIN?
Blockchain is frequently discussed at the moment across the global media and online and the concept can often appear complex and confusing, however at a conceptual level it is actually quite simple.
A blockchain is simply a method of structuring data which allows a digital ledger of transactions to be created and shared amongst the participants of the network via a distributed network of computers. By using public/private key cryptography (a method of secure communication), similar to the technology that website ssl certificates use, network participants are able to add data to the online ledger without the requirement of a central authority to authenticate or manage users and data.
Users can append (add) additional data to the end of the blockchain ledger in what is known as a block. It is extremely difficult to change or remove data from the ledger once encoded into a block. When data gets added in this manner all the network participants (all of whom have copies of the blockchain) validate the new data via a series of automated computer processes. If the majority of network participants successfully validate the new data against the blockchain history, then the newly added data will be approved and the new block will be appended to the chain. This process forms the what is known as a “consensus mechanism”.
Although in most use cases the term “blockchain” is used to refer to a publically distributed ledger with a distributed consensus mechanism, this is not the case with all blockchain technologies. There are a range of distribution options and consensus mechanisms, these will depend on the particular use case. The example that most people know is called bitcoin. Bitcoin is public and permissionless, in that anyone can view the blockchain ledger information and anyone can interact with the network and add valid transactions to the ledger. There are also permissioned blockchains in existence, in these systems the network is comprised only of known or “permissioned” participants. This may be desireable in some use cases where users must be authenticated and/or verified.
A permissioned or private blockchain is one that can only be accessed by pre-approved parties. Permissioned blockchains facilitate many of the the advantages of digital assets powered by public blockchains – fast and cheap transactions permanently recorded in a shared ledger – without the troublesome openness of the public network where anyone can be a node on the network anonymously.
Instead of anonymous processors, only banks and vetted financial operators would be allowed to validate transactions in permissioned blockchains.
The prominent computer scientist Nick Szabo summarised the main disadvantage of this in an interview he gave to the IB Times:
“[Bank] bureaucracies are so heavily invested in the expertise and importance of local regulations and standards that it’s extremely difficult for them to cut the Gordian knot and implement seamless global systems,” said Szabo. “So they keep trying to re-inject points of control, and thus points of vulnerability, into blockchains, e.g. through ‘permissioning’; but this nullifies their main benefits, which come from removing points of vulnerability.”
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