Distributed Ledgers and Blockchains demystified

Introduction

Figure 1 - Dilbert and the blockchain (source: Dilbert)

Blockchain, Ledger, Bitcoin, Ethereum, Cryptocurrency…. All these terms, beyond the hype it generates, also makes many people confused, particularly when it comes to understand what they are, how they work and how they interrelate with each other.

While perceived as very new by the medias and masses, experts and other insiders consider blockchain technologies differently. Stuart Haber and W. Scott Stornetta started this journey, about 30 years ago, with their work related to a cryptographically secured chain of blocks that no one could tamper with timestamps of documents. However, it is in 2008 that Blockchain really started to gain relevance, thanks to the work of one person/group known by the name Satoshi Nakamoto.

This makes blockchain almost as old as the World Wide Web itself (1989).

Figure 2 - History of Blockchain (source: 101Blockchains)

Since then, the blockchain ecosystem considerably evolved and the main purpose of this article is to provide clarity to the reader unfamiliar with this environment by explaining with simple terms what it is all about, how does it work, as well as where such technologies are currently deployed and what could be some of their uses in the future.

What is a distributed ledger? 

For a very long time, ledgers have been used to record various transactions, whether contracts, payments, buy-sell deals or movement of assets or property.

What has started with simple clay tablets or papyrus made a big leap with the further invention of paper.

More recently, computers have provided the process of record-keeping and ledger maintenance great convenience and speed.

They also enabled higher forms, i.e. cryptographically secured, distributed and decentralized.

Figure 3 – Evolution of ledgers (source: CoinDesk)

In its simplest form, a distributed ledger is a database which is held and updated independently by each participant (called node) in a large network.

Also, the distribution is unique: records are not communicated to various nodes by a central authority but are instead independently constructed and held by every node (fig. 4).

Which means that every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to be certain the majority agrees with the conclusions.

Once this process of agreement (called consensus) is complete, the distributed ledger is updated accordingly with all nodes maintaining their own identical copy of the ledger.

Various type of consensus mechanisms exists as illustrated in the Fig. 5 (Security).

Because of its distributed architecture, it is also more difficult, but not impossible, for attackers to be successful as all the distributed nodes need, theoretically, to be compromised simultaneously.

Figure 4 - Centralized vs Distributed Ledger (source: Tradeix)

Private vs public ledger

Although the central authority is now replaced by a consensus, it does not mean that anybody can interact with the network and access information of the ledger, which is the case when using a Public Permissionless ledger.

To mitigate the risks of malicious behaviors, it is possible to use a private Permitted type of ledger in which actors can only join and participate upon invitation (Fig. 5).

Figure 5 - Public vs Private Ledger (source: Blockchainhub)

Blockchain

A blockchain is a chain of blocks, that contain transaction data. Every block but the first one, is linked with the previous block and every block but the last one, is linked with the next block, together forming a chain, as illustrated in the below figure.

Figure 6 - Representation of a blockchain (source: Kauri)

Thanks to this chain of blocks, recorded information is immutable/unalterable.

Having explained what distributed Ledgers and blockchains are, it is time to indicate two major differences between them.

The first one is that blockchain is just one type of distributed ledger (Fig. 7).

The second, and possibly the most important of all, is that distributed ledgers do not require such a chain; they do not need a data structure in blocks.

Their main purpose is to remove the intermediary element (Fig. 4 – Clearing House) from the equation and that is what makes these distributed ledger technologies so appealing.

There are other differences (architecture, security considerations…etc) that this article will not cover to keep the latter understandable for the non-expert reader.

Figure 7 - blockchain vs DLT (source: Consensys)

How does blockchain work?

It starts with a node performing a transaction (asset)by creating and then digitally signing it with its private key (asymmetric cryptography).

The transaction is then propagated to the network-peers that validate the transaction based on preset criteria. Usually, more than one node is required to verify the transaction.

Once the transaction is validated, it is included in a block, which is then propagated onto the network. At this point, the transaction is considered confirmed.

The newly created block now becomes part of the ledger, and the next block links itself cryptographically back to this block (as illustrated in Fig. 6).

Figure 8 - How does Blockchain work? (source: Coinmama)

Many blockchains uses cryptocurrencies (Bitcoin, Ethereum…etc), initially, to reward nodes for their contribution to the network (typically by verifying transactions).

However, what was used as an internal currency has been starting competing with traditional ones (called fiat currency, for example dollar or euro), which has triggered a wave of opposition from central banks across the world, with some of them simply and purely banning the use of such technologies, due mainly to the lack of central authority to control and modify transactions.

It exists many cryptocurrencies with Bitcoin and Ethereum the most valuable for the moment. 

Pros and Cons of Distributed Ledger Technologies

The below table highlights a few pros and cons that come with distributed ledgers.

Pros

• Improved accuracy by removing human involvement in verification
• Cost reductions by eliminating third-party verification
• Decentralization makes it harder to tamper with
• Transactions are secure, private and efficient
• Transparent technology

Cons

• Low transactions per second (TPS) (few dozens of TPS), compared with 24 000 TPS for VISA
• Significant technology cost associated with mining
• History of use in illicit activities
• Secure but not invulnerable (e.g. hack of Ethereum in 2016)

Where are blockchains used today?

There is an increasing number of industries that are now using or seriously consider using blockchain technologies for their business.

Banking & Finance:

• International Payments, with Banco Santander who launched in April 2018 the world’s first blockchain-based money transfer service. Known as "Santander One Pay FX," the service uses Ripple's xCurrent, a cryptocurrency, to enable customers to make same-day or next-day international money transfers.
• Capital Markets, with Axoni, a startup founded in 2013 that builds blockchain-based solutions specifically for capital market improvement. Recently, Axoni announced the launch of a distributed ledger network to manage equity swap transactions to enable both sides of an equity swap to be synchronized throughout their lifecycle, communicating changes to each other in real time.
• Trade Finance, because blockchain can streamline trade finance deals and simplify the process across borders. Besides, it enables enterprises to more easily transact with each other beyond regional or geographic boundaries.
• Regulatory Compliance and Audit, as blockchain is extremely secure by nature, which makes useful for accounting and auditing. It significantly decreases the possibility of human error and ensures the integrity of the records as no one can alter the account records once they are locked in using blockchain tech, not even the record owners.
• Money Laundering Protection, thanks to the encryption that is so integral to blockchain and that makes it incredibly helpful to combat money laundering. Its underlying technology also enables record keeping, which supports "Know Your Customer (KYC)," strategy, an approach through which a business identifies and verifies the identities of its clients.
• Insurance, using “smart contracts” which allow customers and insurers to manage claims in a transparent and secure manner. All contracts and claims can be recorded on the blockchain and validated by the network, which would eliminate invalid claims, since the blockchain would reject multiple claims on the same accident. As an example, OpenIDL, a network built on the IBM Blockchain Platform with the American Association of Insurance Services, is automating insurance regulatory reporting and streamlining compliance requirements.

Supply Chain Management:

• CMA CGM and MSC who announced in 2019 they will join TradeLens blockchain-enabled digital shipping platform.

Media Companies:

• They have already started to adopt blockchain technology to eliminate fraud, reduce costs, and even protect Intellectual Property (IP) rights of content – like music records. For example, Eluvio Inc, who launched in 2019 Eluvio Content Fabric that uses blockchain technology to enable content producers to manage and distribute premium video to consumers and business partners without content delivery networks. Besides, the platform has been tapped by media giant, MGM Studios for "global streaming to web, mobile, and TV everywhere audiences of 'certain properties.'

In Real Estate:

• Georgia, where it is already possible to register land titles using blockchain, has therefore become one of the first countries to use the Blockchain platform to complete property-related government transactions.

What about tomorrow?

Below are some of potential uses/opportunities for blockchains and distributed ledger technologies.

• Peer-to-Peer Transactions, P2P payment services such as Venmo are convenient, but they have limits. Some services restrict transactions based on geography while others charge a fee for their use. And many are vulnerable to hackers, which is, of course, a big concern for customers who are putting their personal financial information out there. Blockchain technology, with all its benefits, could fix these roadblocks.
• Healthcare, as specialized connected medical devices become more common and increasingly linked to a person's health record, blockchain can connect those devices with that record. Devices will be able to store the data generated on a healthcare blockchain and append it to personal medical records. A key issue currently facing connected medical devices is the siloing of the data they generate, that blockchain could solve by providing a link that bridges those silos.
• Energy, blockchain technology could be used to execute energy supply transactions, as well as further provide the basis for metering, billing, and clearing processes with other potential applications including documenting ownership, asset management, origin guarantees, emission allowances, and renewable energy certificates.

We can also think about future usages in government applications such as Record Management, Identity Management, Voting, Taxes, Non-Profit Agencies, Compliance and Regulatory oversight, as well as opportunities in other domains such as Cybersecurity, Big Data, Data Storage and IoT (for tracking the location of goods and monitoring assets and machinery). 

Conclusion

Distributed ledger and blockchains technologies have positively impacted many industries.

As it is often the case with technologies, these are not silver bullet solutions and they come with some tradeoffs.

But with time and experimentations, these technologies will mature and provide more value to users.

The future is decentralized.