Elements of blockchain technology originally conceived for Bitcoin and other cryptocurrencies are now recognized to have far-reaching potential in other areas. Blockchains are a way to order transactions in a distributed ledger, a record of consensus with a cryptographic audit trail maintained and validated by multiple nodes.
Blockchain technology allows many distrusting parties to converge on a common protocol that can track assets in a dynamic fashion. Using this technology, many processes and third-party solutions are streamlined or collapsed entirely.
Related concepts include:
- Distributed Ledger (DL) – a decentralized database where transactions are kept in a shared, replicated, synchronized, distributed bookkeeping record, which is secured by cryptographic sealing. The key distinction between ‘distributed ledgers’ and ‘distributed databases’ is that nodes of the distributed ledger cannot/do not trust other nodes – and so must independently verify transactions before applying them.
- Smart Contracts – are simply the rules that participants have collectively signed up to that govern the evolution of the ‘facts’ in the distributed ledger. Possibly computer programs that attempt to codify transactions and contracts with the intent that the records managed by the distributed ledger are authoritative with respect to the existence, status and evolution of the underlying legal agreements they represent.
For many blockchains the key attributes are:
- Resilience – blockchains operate as decentralized networks as opposed to a central server with a single point of failure;
- Integrity – blockchains operate using distributed open-source protocols removing the need to trust a third party for execution;
- Transparency – public blockchains have inherent transparency features, since all changes are visible by all parties; and
- Unchangeable – records in a distributed public blockchain are largely ‘immutable’, allowing applications and users to operate with a good degree of confidence. In general, the key interesting property is the creation of systems that assure that a group of un-trusting parties all have accurate and identical records. Blockchain removes the need to have a trusted third party, for example by acting as custodian or escrow agent for records or assets and thereby creating transparency.