Blockchain for Business

A Practical Guide for the Next Frontier

Yannis Kalfoglou

• Verlag: Routledge
• Jahr: 2021
• ISBN:
  9781000404128
• Auflage: 1
• Thema: Negocios y empresa
• Thema: Desarrollo empresarial

This book sets out to explain blockchain for the non-technical expert, to decipher the dense technicalities that dominate the field and to present the opportunities for busy professionals using practical applications and case studies.

Presented in a clear and structured way and with documented real-world cases, the book is a practical reference guide that can be used across different industries. It offers both a constructive and critical review of the pain points blockchain is facing today, illustrates the pitfalls as well as the opportunities for business and describes the steps towards overcoming them. It also aims to provide a unique view of both the intersection and synergy of blockchain with other emerging technologies and the wider digital ecosystem, as we see increasingly that blockchain alone won't be able to deliver business solutions. Most important, the book identifies trends and a path for the future of blockchain and its impact on society as a whole.

The book is written for business audiences across all sectors. It is not a technical guide to blockchain, but it enables businesspeople to be better informed and prepared to plan ahead and develop strategies using blockchain.

1
INTRODUCTION

Blockchain has emerged to dominate the discourse of emerging technologies in the wake of our technology-ridden 21st century. It is an exciting and fascinating topic: in its short 12 years of recent history – and backed up by over 30 years of prior work – it attracted massive attention from the world’s brainiest folks, billions of dollars in funding, spurred thousands of new companies (startups mostly), promises to turn upside down almost every industry as we know it today and provide the foundations for the next internet, the internet of value.

Blockchain, to the unaware, is that mystical new technology breakthrough that carries enough mystic and engineering excellence to make it truly understood by few, yet it is meant to be beneficial to the many. As modern society cruises toward the first quarter of the technology-ridden 21st century, we seem to be accustomed to new, promising technologies coming out at an alarming rate and poised to change the world for the better. Equally, we seem to be disturbed by early failures and weak adoption rates of new technology and, hence, rather quickly dismiss their long-term impact and even the technology all together as a passing fad. Blockchain appears to be at a sweet spot in 2021: backed by strong foundations to become the technology cornerstone to support and enact a next generation of the internet: one that is backed by Web 3.0 applications and enables a seamless exchange of value – as opposed to information-only exchange in the current internet. But at the same time, a lot of critics are quick to dismiss the potential of blockchain, as evidenced by early technical failures, exaggerated claims and undelivered promises. But the reality lies somewhere in the middle: blockchain is not doomed, far from it, and yet it is not that game-changer that will render all things digital into something new that outweighs all current digital experience and provides a better world for everyone – at least not yet!

What is blockchain

But first, let’s define some basic concepts we will use throughout the book. There is no universally agreed-on definition of blockchain; as is often the case with many technologies nowadays (see, for example, the definitions for artificial intelligence [AI]). However, there are many practical working definitions which explain the versatile nature of blockchain. I borrow and adapt some of them throughout the book to explain blockchain technology and its parts. A simplistic breakdown of the term blockchain denotes that we are talking about a chain of blocks. Indeed, that’s a precise definition of what’s happening in the deep layers of blockchain technology. But we need to go a few layers up to understand what these blocks are and why they are chained together.

A practical way of doing that is with the use of a ledger example. A ledger is typically a book that we use to keep records of transactions, as in “a book in which items are regularly recorded, esp. business activities and money received or paid” (Cambridge dictionary). Historically speaking, early ledgers appeared in medieval and industrial Europe, but as expected, in the early 21st century, these ledgers are fully digital, typically in the form of a database, and the transactions recorded therein can be quite complex in nature and content. But the basic concept still applies: record incoming and outgoing transactions and maintain a truthful state of the ledger. A ledger is typically maintained by a central authority that oversees transactions among other parties.

This central authority is deemed to be the trusted party that other transacting parties turn to when they need to verify and confirm ledger transactions. It is also typical to have local ledgers maintained by each transacting party, and often, these need to be aligned, or reconciled, with the central authority’s ledger. This simple model appears to work well. For example, in the securities’ markets, purchasing institutions like asset managers keep a record of their transactions in local ledgers, and selling institutions like banks do the same at their end. Typically, a layer of intermediaries is involved to maintain and align the local ledgers’ records and, in the case of inconsistencies, provide reconciliation.

But what happens when the central authority party exhibits behaviour that questions its very existence: to act as the bed-rock of the transaction ecosystem and act in a trusted and responsible manner – and that unusual and unpredicted behaviour results in ledger entries that are mistakenly falsified? Or if one or many of the transacting parties exhibit similar behaviour and attempt to falsify ledger records at their end, willingly or mistakenly? Regardless of the nature of intent and the presence, or not, of malicious intent, such acts would cause disagreements among transacting parties and unnecessary and costly delays and introduce the need for arbitrage and intermediaries and the breakdown of communication and trust. For example, in the financial services ecosystem, there is a whole raft of middle-layer parties acting as clearinghouses, central depositories, custodians, brokers and dealer agencies, all of which play an important role to rule out foul play by potential malicious actors. But that comes at a cost, political and material, as this overblown intermediaries’ layer is costly to maintain and doesn’t solve completely the issue of malicious behaviour.

One way to overcome this is to use shared ledgers that allow the transacting parties and the central authority to share the same ledger, hence reducing the need for alignment and reconciliation. But the core issue of malicious intent remains, as there is still a need for a ground-truth version of events in a transaction – regardless of the shared nature of the ledger. How can we eradicate the possibility of malicious intent and yet provide a ledger that can be trusted and shared among transacting parties without the need to introduce and operate costly middle layers?

This is where blockchain comes in. It brings to the fore a completely different technology viewpoint to this problem. Rather than relying on a central authority acting as the ground truth, as the undisputed trusted party which oversees transactions and certifies the fidelity of the ledger, blockchain introduces a computerized, algorithmic approach to build and maintain consensus among transacting parties over a wide-reaching global network of participants where there is no central authority. Designing, developing and deploying such a network on a global scale is not easy. There is a lot of engineering trickery to achieve that, so we will break down the steps for ease of consumption:

A blockchain is a continuously growing list of transactions that is organized into a series of blocks, each containing a batch of transactions. Blocks can also contain data records or any arbitrary data type. Each block also has a time-stamp and a reference to the previous block, allowing all blocks to be linked together to form a chain that includes a history of all transactions executed in a network, thereby increasing the transparency and auditability of transactions (Figure 1.1).

Figure 1.1 Blockchain blocks chained together

Blockchains are typically immutable, meaning that you can’t delete or remove previously inserted blocks from the chain. If we look at it from a database perspective, it’s an append-only function; no deletion, removal or editing. There are some exceptions to this rule, however.

So how do transactions get inserted into the chain and added to blocks? Blockchain is a network with a common data structure so that any node with access to the internet can participate. As blockchain technology sits on top of the existing internet infrastructure, there are no special technical requirements for a proprietary network, and most software used to run the nodes of the network is open-sourced and free to use. Nodes have a unique address on the network so that other nodes can find them and send or receive digital assets. This is the public key that nodes share with other nodes. They also have a private key, acting as a digital signature, which is used to sign off transactions. Each network participant can submit transactions, send or receive digital assets and, depending on the network consensus protocol, validate and endorse transactions for authenticity. Previously, this would have been the job of the trusted authority party. But with blockchain, any node can validate transactions for authenticity. And the network protocol ensures, in a mathematically provable manner, that no one can cheat.

It is common to come across different terminology to describe block-chain technology: distributed ledger technology (DLT), shared ledger, distributed databases and the like. To understand the interplay between distributed databases, DLT and blockchain, Hileman and Rauchs (2017) offer “a simple framework that can be used to easily distinguish between traditional distributed databases, distributed ledgers, and blockchains. Distributed ledgers are a subset of distributed databases, and blockchains are a subset of distributed ledgers.” We adopt and depict that framework in Figure 1.2. The outer circle denotes distributed databases where there is no central database that unilaterally decides on updates to the database. Instead, they are replicated across multiple nodes that collaborate to maintain a consistent view of the database state. Distributed databases are good for providing fault tolerance and continue to operate even in cases in which some nodes might fall off the network, due to technical failure, or be unresponsive. But as Hileman and Rauchs (2017) point out,

it is assumed that all nodes are honest as they are all cooperating and freely sharing data with each other based on mutual trust. This means that distributed databases are generally operated by a single entity that maintains strict access control to the network, which operates in a trusted environment.

However, as we depict in the rectangular box 1 in Figure 1.2, there is a possibility of malicious nodes present in the network, in which case the premise of mutual trust would be compromised. To remedy this, we move to the inner circle, denoted DLTs. In DLTs, we have a different operating principle. It is assumed that some nodes might be malicious, so the database is designed to be Byzantine fault-tolerant. That means that the database should be able to run even if some nodes act maliciously. So the individual nodes in a DLT do not trust their peers by default and thus need to be able to (a) independently verify and validate transactions that update the database state and (b) independently re-create the transaction data log (Hileman and Rauchs, 2017). To make that model operable at a global scale, we go one layer deeper in our diagram, to that of blockchains. In addition to the properties inherited from DLT, in blockchains, we have the introduction of a unique data structure that is “append-only data structure that is composed of transactions batched into blocks, which are cryptographically linked to each other to form a sequential, tamper-evident chain that determines the ordering of transactions in the system” (Hileman and Rauchs, 2017). Finally, there is one more layer within blockchains that distinguishes between permissioned and permission-less, the former being a blockchain network where only admitted members are allowed to participate and the latter being a block-chain network where anyone is free to participate.

Figure 1.2 Framework to distinguish between distributed databases, distributed ledgers and blockchain

The benefit of using a blockchain versus traditional distributed databases is that we can reach consensus about changes to the state of the blockchain network without needing to trust the integrity of any of the network participants or administrators. It is said (Hileman and Rauchs, 2017) that the combination of the consensus mechanism with a specific data structure allows blockchains to solve the double-spending problem, for example the same digital asset being copy/pasted and transferred multiple times. This ability of blockchain network participants to independently verify the integrity of the shared database without having to rely on a trusted third party is one of the main value propositions of using a blockchain.

How it emerged

Blockchain technology enjoyed a unique situational opportunity: emerging in the aftermath of the 2008 global financial crisis (GFC) helped a lot, as it presented itself with huge transformational potential. Unique triggers that aligned powerful forces in the global financial and geopolitical ecosystem influenced and enhanced blockchain’s rapid trajectory: the 2008 GFC brought about a nearly catastrophic erosion of trust for banking institutions from large portions of the public, financial services institutions willingly or were forced to embark on digital transformation journeys, the sharpest-minded folks of the despondent public sought ways to take full control of their financial affairs away from the banks and great technological innovation enablers brought seemingly unlimited computational power and planetary-scale distributed systems; all that combined led to the birth of Bitcoin in the first days of 2009. And then bloc...

Inhaltsverzeichnis

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of Figures
• Preface
• Acknowledgements
• 1 Introduction
• 2 Blockchain Smart Contracts and The Future Promise
• 3 Industry Verticals
• 4 Visionary Use Cases
• 5 Vulnerabilities and Considerations
• 6 A Utopian Digital Future
• 7 Pathfinders
• 8 Concluding Remarks
• Index