Blockchain Basics

Q1. What is blockchain?

A1. Blockchain is a decentralized software mechanism that enables a public distributed ledger system. The technology allows the tracking and recording of assets and transac-tions without the presence of a central trust authority such as a bank. Blockchain uses the shared ledger — which can be used to record any transaction and track the movement of any asset whether tangible, intangible, or digital. Blockchain owes its name to the way it stores transaction data —in blocks that are linked together to form a chain. Blocks record and confirm the time and sequence of transactions, which are then logged into the blockchain, within a discrete network governed by rules agreed on by the network participants. Each block contains a hash (a digital fingerprint or unique identifier), timestamped batches of recent valid transactions, and the hash of the previous block. The previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks.

Q2. What are Key concepts of Blockchain for Business?

1.      Shared ledger :- a shared, distributed ledger — an immutable record of all transactions on the network, a record that all network participants can access. With a shared ledger, transactions are recorded only once, eliminating the duplication of effort that’s typical of traditional business networks. The shared ledger has the following characteristics:

a.      Records all transactions across the business network; the shared ledger is the system of record, the single source of truth.

b.     Is shared among all participants in the network; through replication, each participant has a duplicate copy of the ledger.

c.      Is permissioned, so participants see only those transactions they’re authorized to view. Participants have identities that link them to transactions, but they can choose the transaction information that other participants are authorized to view.

2.      Permissions:- Blockchains can be permissioned or permissionless. With a permissioned blockchain, each participant has a unique identity, which enables the use of policies to constrain network participation and access to transaction details. With the ability to constrain network participation, organizations can more easily comply with data protection regulations. With the ability to restrict access to transaction details, more transaction detail can be stored in the blockchain, and participants can specify the transaction information they’re willing to allow others to view. In addition, some participants may be authorized to view only certain transactions, while others, such as auditors, may be given access to a broader range of transactions.

3.      Consensus: In a business network where participants are known and trusted, transactions can be verified and committed to the ledger through various means of consensus (agreement), including the following:

a.      Proof of stake: To validate transactions, validators must hold a certain percentage of the network’s total value. Proof-of-stake might provide increased protection from a malicious attack on the network by reducing incentives for attack and making it very expensive to execute attacks.

b.     Multi-signature: A majority of validators (for example, three out of five) must agree that a transaction is valid.

c.      Practical Byzantine Fault Tolerance (PBFT): An algorithm designed to settle disputes among computing nodes (network participants) when one node in a set of nodes generates different output from the others in the set

4.      Smart contracts :- A smart contract is an agreement or set of rules that govern a business transaction; it’s stored on the blockchain and is executed automatically as part of a transaction. Smart contracts may have many contractual clauses that could be made partially or fully self-executing, self-enforcing, or both. Their purpose is to provide security superior to traditional contract law while reducing the costs and delays associated with traditional contracts.

Q3. What are essential characteristics of Blockchain network?

Consensus: For a transaction to be valid, all participants must agree on its validity.

Provenance: Participants know where the asset came from and how its ownership has changed over time.

Immutability: No participant can tamper with a transaction after it’s been recorded to the ledger. If a transaction is in error, a new transaction must be used to reverse the error, and both transactions are then visible.

Finality: A single, shared ledger provides one place to go to determine the ownership of an asset or the completion of a transaction.

Q4. What are different participants and their roles to provide Blockchain?

A4. Various participants on a blockchain network play a role in its operation. Following are descriptions of each of the participants:

a.      ??Blockchain user: A participant (typically a business user) with permissions to join the blockchain network and conduct transactions with other network participants. Blockchain technology operates in the background, so the blockchain user has no awareness of it. There are typically multiple users on any one business network.

b.     ??Regulator: A blockchain user with special permissions to oversee the transactions happening within the network. Regulators may be prohibited from conducting transactions.

c.      ??Blockchain developer: Programmers who create the applications and smart contracts that enable blockchain users to conduct transactions on the blockchain network. Applications serve as a conduit between users and the blockchain.

d.     ??Blockchain network operator: Individuals who have special permissions and authority to define, create, manage, and monitor the blockchain network. Each business on a blockchain network has a blockchain network operator.

e.     ??Traditional processing platforms: Existing computer systems that may be used by the blockchain to augment processing. This system may also need to initiate requests into the blockchain.

f.       ??Traditional data sources: Existing data systems that may provide data to influence the behavior of smart contracts and help to define how communications and data transfer will occur between traditional applications/data and the blockchain — via API calls, thru MQ style cloud messaging, or both.

g.      ??Certificate authority: An individual who issues and manages the different types of certificates required to run a permissioned blockchain. For example, certificates may need to be issued to blockchain users or to individual transactions.

Q5. Kindly quote some examples of blockchain in Fintech industry?

1.      LC issuance and settlement

2.      Providing delivery assurance to buyers through trade asset tokenization.

3.      Mitigating risks and increasing financing revenues for banks through payment instrument (such as promissory notes, checks, drafts or bills of exchange) digitization.

4.      Escrow transactions, Nodal accounts, Peer to Peer lending

5. Insurance industry

Q6. How is Trust achieved in Blockchain technology?

A6. Blockchain builds trust through the following five attributes:

·        Distributed and sustainable: The ledger is shared, updated with every transaction, and selectively replicated among participants in near real time. Because it’s not owned or controlled by any single organization, the blockchain platform’s continued existence isn’t dependent on any individual entity.

·        Secure, private, and indelible: Permissions and cryptography prevent unauthorized access to the network and ensure that participants are who they claim to be. Privacy is maintained through cryptographic techniques and/or data partitioning techniques to give participants selective visibility into the ledger; both transactions and the identity of transacting parties can be masked. After conditions are agreed to, participants can’t tamper with a record of the transaction; errors can be reversed only with new transactions.

·        Transparent and auditable: Because participants in a transaction have access to the same records, they can validate transactions and verify identities or ownership without the need for third-party intermediaries. Transactions are time-stamped and can be verified in near real time.

·        Consensus-based and transactional: All relevant network participants must agree that a transaction is valid. This is achieved through the use of consensus algorithms. Each blockchain network can establish the conditions under which a transaction or asset exchange can occur.

·        Orchestrated and flexible: Because business rules and smart contracts (that execute based on one or more conditions) can be built into the platform, blockchain business networks can evolve as they mature to support end-to-end business processes and a wide range of activities.

Q7. What are advantages of Blockchain technology over traditional intermediary based setups?

A7. With traditional methods for recording transactions and tracking assets, participants on a network keep their own ledgers and other records. This traditional method can be expensive, partially because it involves intermediaries that charge fees for their services. It’s clearly inefficient due to delays in executing agreements and the duplication of effort required to maintain numerous ledgers. It’s also vulnerable because if a central system (for example, a bank) is compromised, due to fraud, cyberattack, or a simple mistake, the entire business network is affected. The blockchain architecture gives participants the ability to share a ledger that is updated, through peer-to-peer replication, every time a transaction occurs. Peerto-peer replication means that each participant (node) in the network acts as both a publisher and a subscriber. Each node can receive or send transactions to other nodes, and the data is synchronized across the network as it is transferred. The blockchain network is economical and efficient, because it eliminates duplication of effort and reduces the need for intermediaries. It’s also less vulnerable because it uses consensus models to validate information. Transactions are secure, authenticated, and verifiable.

Q8. What are limitations of Blockchain Technology?

A8. While the blockchain contains transaction data, it’s not a replacement for databases, messaging technology, transaction processing, or business processes. The blockchain contains verified proof of transactions. However, while blockchain essentially serves as a database for recording transactions, its benefits extend far beyond those of a traditional database.

Blockchain promises to upend traditional banking models of trusted intermediaries but introduces scalability and performance issues, and requires greater collaboration with heretofore rivals to create economies of scale. Moreover, the introduction of a decentralized network threatens to undermine stable revenue models and will require a large investment in system integration services to connect legacy systems with shared infrastructure and distributed ledger ecosystems.

Q9. What are Top internal barriers in an organization to Blockchain?

A9. Top Internal Barriers to blockchain are :-

·        Understanding blockchain and use cases

·        Communicating blockchain to key decision makers

·        Evaluating cost-benefits of use cases

·        Uncertainty around time needed to start reaping benefits

·        Other technology investments taking priority

·        Reengineering business process

·        Understanding legal and compliance issues

·        Procuring talent and expertise Ensuring data security

·        Gaining buy-in from organizational leaders and internal divisions such as compliance, IT, etc.

·        Securing budgets Integrating legacy systems with existing enterprise architecture

·        Culture and change management 

The above information have been compiled from various openly available resources like IBM, McKensie, Cognizant publications.