General

A Blockchain Primer From Marvin Traub Associates – WWD

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Marvin Traub Associates: A ledger is essentially a record of transactions. If you’ve ever balanced a checkbook, you’ve worked on a ledger. If you’ve ever entered transactions into a spreadsheet, you’ve prepared a ledger of sorts. Ledgers are most commonly associated with accounting functions; they have historically been used primarily by accountants to record financial transactions. While ledgers originally had a physical medium — clay, stone, paper, etc. — they have since evolved into digital mediums and are now kept on computers, spreadsheets and cloud-based applications.

Mortimer SingerMortimer Singer

Mortimer Singer 
Courtesy image.

WWD: So, how is that related to blockchain?

M.T.A.: While it sounds like a technology more suited for Wade Watts in the fiction novel “Ready Player One,” at its core, a blockchain is just a distributed digital ledger. The distributed element of blockchain is critical to understanding its revolutionary nature. The information kept on traditional digital ledgers is centralized somewhere, either locally on a computer or on a cloud-based system. Information on a blockchain, however, is not stored centrally; it is distributed across all participating computers (known as “nodes”) of the blockchain. Since the information is distributed across all of these nodes, and can therefore be audited at any point in time by any network participant, the records are easily verifiable. Additionally, no centralized version of the information exists for a hacker to corrupt. Hosted by all nodes simultaneously, a blockchain’s data is accessible to any participating node with an Internet connection.

One of the core functions that blockchain optimizes is the establishment of trust between counterparties. The current model for completing transactions does this in a fragmented way: requiring that each party keep their own set of records, which they each independently verify prior to executing a transaction, and/or also through the use of a third-party intermediary. One of blockchain’s technological innovations is its ability to establish trust without the need for local information storage or the use of an intermediary.

Michael BoordMichael Boord

Michael Boord 
Courtesy image.

WWD: How does blockchain establish trust?

M.T.A.: Blockchain is designed to store information in a way that makes it virtually impossible to add, remove or change its data without being detected by other users. Once new information is recorded onto a blockchain, it is nearly impossible to change. This is why information on a blockchain is said to be immutable (unchangeable).

In simplest terms, transaction blocks are strung together in a way that new blocks have traces of the previous blocks encrypted in them, forming a chronological “chain” of blocks of information (transactions). If any one block in the chain is altered, the links in the chain are broken and the fraudulent transaction(s) can be easily identified by network participants. Additionally, changing the information on a blockchain requires the approval of a consensus of the blockchain’s users, making it extremely hard to add fraudulent or invalid information.

Today, counterparties often rely on a central authority such as a government, bank or a credit card clearinghouse to establish trust. Blockchain applications instead replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users. As it pertains to the Bitcoin Blockchain, the process of adding new blocks is as follows:

  • New bitcoin transactions are broadcast to the blockchain network of nodes. Some of these nodes, known as miners, actually process these pending transactions on behalf of the bitcoin blockchain network. Providing this mining service is quite costly, and therefore these miners are compensated with transaction fees. When a miner has prepared a new block and submits it to be recorded on the Bitcoin blockchain, approval by at least 51 percent of nodes is required before the new block can be added to the chain.
  • This effectively means that a hacker attacking Bitcoin would have to control a majority of the blockchain’s nodes in order to conduct such an attack. Given the scale of the current Bitcoin network, an attack of this kind is considered almost impossible as it would cost billions of dollars to execute.
  • The distributed nature of blockchain’s transaction processing and verification process therefore creates additional security by requiring multiple network participants to execute new transactions.

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