The Big 4 of Blockchain

I believe that most of the readers of this article know by now that blockchain does not equal bitcoin (or any other cryptocurrency for that matter). For those who don’t know about this yet, I will post an article soon, explaining why you need to broaden your blockchain scope substantially.

Let’s start by a quick definition of what a blockchain is. In one sentence, blockchain is a trusted distributed ledger, with a shared set of business processes (smart contracts) across all the members of a particular business group. In other words, it is a transaction platform, where several parties cooperate to ease the transaction process.

Establishing that blockchain is far beyond the ‘crypto-craze’, we can start looking at the actual business uses and talking about the real-life use cases. When trying to establish which industries and which parts of the business process could be improved by implementing blockchain, we need to have a basic notion about the main concepts that blockchain brings to the ‘game’.

In this article I will tell you about the 4 key terms of blockchain for business use and why they are the key ones.

1. Shared Ledger

This is pretty much the blockchain basics. On any blockchain 101 course, you will ever take, a definition of a shared ledger will follow straight after the definition of a blockchain itself. Here it is then, in the simplest terms:

Shared ledger is a record of transactions, that is shared across the participants (distributed/replicated).

Participants all have the view of the transactions made by all the parties. This has an enormous impact on enhancing transparency and the possibility to track all the transactions.

The shared ledger can be permissioned, meaning that each participant is given the permission to see only certain transactions that are relevant to them and the role they are playing in the business network.

Records of all the changes that are kept in the shared ledger are unchangeable. Once the change is made, it is not possible to delete it, move it or change it. No changes or transactions are possible without creating another block of information about that transaction on the chain. This feature is absolutely crucial for the transparency of the system.

2. Permissions

Even though the ledger is shared (replicated), the participant privacy is achieved thanks to cryptographic solutions. Participants are allowed to operate on blockchain with their specific anonymous identification, thanks to this technology. This results in transactions being private.

Permissions then allow only certain members (based on the business network needs) to view certain parts of the chain and add blocks.

3. Consensus

The consensus is the way transactions are verified. It is important to make sure transactions that are conducted are valid and in compliance with the business network’s needs.

If a participant makes a change to the ledger (executes a transaction), it needs to be ensured that the note about this change is distributed to all the parties in a shared ledger. This is currently one of the biggest challenges of the blockchain world. Two factors are of particular importance when it comes to designing consensus solutions: security and speed.

There are several options to tackle this issue at the moment. Probably the most well-known is the way Bitcoin did it in a form of cryptographic mining, where the ‘miners’ were rewarded for verifying transactions. This approach has two main flaws — it is slow and expensive — therefore, inefficient for businesses.

Another approach could be, for example, a multi-signature, in smaller business networks with just a few parties. This would mean including a consensus rule of approval. Every transaction then needs to be signed by 3/5 business network participants. This is obviously just an example and different rules and methodologies can be used.

4. Smart contracts

Last of the ‘Big 4’ of blockchain are the smart contracts. These are contracts agreed to by all the parties in the network. They are the rules of play. The rules are embedded in the blockchain, in the code and therefore execute automatically, once a certain set of prerequisites if fulfilled. They are therefore written out in a programming language.

What are the benefits for businesses? By writing the contract out and embedding it on the blockchain, it decreases the uncertainty and improves trust among the participants. Smart contracts can automate certain processes (for example automatic provision of services/automatic payment for these services based on current needs) and make processes faster (processing payments for goods and services, validating insurance data, etc.).

Smart contracting has potential wide uses not only for larger enterprises. Once the blockchain network will be fully developed, individuals will be able to smart-contract exchanges of goods and services between them, as well as firms will be able to have smart contracts with individuals. This would become particularly interesting for service provider firms (electricity, gas, etc.) that could benefit from easing the complexity of their internal processes. Eventually, any firm providing any assets could have their transactions up and running on the blockchain.

Well, this was the blockchain Big 4. The four important concepts that you will come across and need to understand in order to appreciate the value this new technology brings. Not only to the business world but potentially, to our everyday lives.