The challenge when doing any transaction is trust. To help generate this trust, we have laws and institutions which govern how business is done, how data is exchanged: financial regulations, contracts, consumer rights and so on. Most transactions require to go through a trusted 3rd party: e-business relies on financial institutions, land titles are defined and stored in land registries, etc. The role of trust institutions is to run and maintain the information, to make sure it’s available and secured.
However, storing information in a centralized place raise new questions: who owns the system? Who runs it? Who is responsible/accountable for security? What happens when the system is offline?
Not a day goes by without hearing about blockchain, and people are often using the terms ‘Blockchain’ and ‘Distributed Ledger’ interchangeably.
Blockchain technology emerged with Bitcoin in 2008, in a paper written by a mysterious (and still unidentified) Satoshi Nakamoto.
The purpose of Bitcoin was to create “…an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”.
Bitcoin and other cryptocurrencies are getting most of the attention, but the technology beyond is far more interesting.
Blockchain or Distributed Ledgers?
Many definitions are describing what blockchain is. A common one is that blockchain is a distributed and immutable ledger where transactions are irreversibly recorded and immediately shared to a distributed network of nodes. In different words, it’s a data structure that stores a history of all the transactions that took place in a network. By storing blocks of information that are identical across its network, the blockchain cannot be controlled by any single one and has no single point of failure.
But then, what is the difference between Distributed Ledger Technology (DLT) and Blockchain? If I had to summarize, every blockchain is a distributed ledger, but not every distributed ledger is a blockchain.
Distributed ledger is a broader term to designate technologies that distribute records of data among nodes, privately or publicly. A central authority does not maintain the ledger: when a transaction is requested, instead of a single and centralized party verifying and executing the transaction, it gets distributed across many nodes where it is validated and confirmed. The nodes are updating the ledger and voting on the updates to ensure the majority agrees with the conclusion. This voting and agreement is called consensus and is conducted by a consensus algorithm (such as proof of work, proof of stake or Byzantine). By allowing digital information to be distributed, this technology is solving the problem of malicious manipulation and helps with auditing and stability.
Some distributed ledgers can be public while others can be closed and private (where all participants are known and trusted). We talk about:
- permissioned ledgers when the nodes (being individuals, companies, institutions, and so on) require permission to read or update the information. Permissioned ledgers may have one or multiple owners. When a record is added or updated, the integrity is checked by a limited consensus process.
- permissionless ledgers when anyone can participate in the consensus process. They can be used to allow anyone to contribute data to the ledger and for everyone in possession of the ledger to have identical copies.
The distributed ledger concept creates a new way to collaborate without relying on 3rd parties or by having multiple agreements signed between different members of the same consortium or organization. Now, a pre-selected number of peers can control the consensus process; for example, financial institutions collaborating to fight money laundering by sharing their information on a distributed ledger or government departments agreeing on the validation of records.
One form of distributed ledger design is blockchain, but not all distributed ledgers have to necessarily employ a chain of blocks to provide secure and valid achievement of distributed consensus successfully.
Blockchain’s structure makes it distinct from other types of distributed ledgers. It’s using a data structure where transactions are grouped into blocks, and blocks are chained together using cryptography.
The foundation of blockchain is cryptography and hashing is a fundamental building block in cryptography. A hash is basically a way of reducing a large amount of data into a more manageable chunk for reference, sorting, and comparison. Unique hashes have 3 characteristics:
- No matter what size of data you put in, the length of the hash will always be the same.
- The hash is always the same for the same data.
- This uniqueness of the hash applies to even the smallest of changes.
A block hold details of a number of transactions and the blockchain grows when new blocks are added to it. The way a blockchain maintains its integrity is that a unique hash is generated for each block, before being embedded in the next block: this means that a block is linked to another, thus forming the chain. When a transaction is verified, a new block of data is recorded, and hash and timestamps are added to the existing chain of transactions, making your transaction immutable and permanent. A break in the chain is easy to detect, and any attempts to manipulate are impossible as it would require the complete chain to be rebuilt from zero: the trust is directly built into the data.
While blockchain’s original purpose was limited to Bitcoin, blockchain and distributed ledgers potential use cases are almost endless. Technically speaking, every industry where a record of transactions is needed can benefit from them, such as:
- Supply Chain Management and Auditing
- Land Title Registration
- Quality Assurance
- Smart Contracts
- Voting Systems
- Electronic Medical Record
- Identity Management
- Intellectual property
Remember, every blockchain is a distributed ledger, but not every distributed ledger is a blockchain. Both concepts require decentralization and consensus among nodes, but a blockchain organizes data in blocks which are chained together using cryptography. Their secure and distributed nature means that traditional barriers are removed; this type of trusted peer-to-peer interaction with our data can revolutionize the way we access, verify and transact with one another and offer a range of benefits such as:
- transaction efficiency
- traceability and transparency
- better security
Those technologies provide a true alternative to the largely paper based centralized transaction verification systems.
In a not-so-distant future, you will use distributed ledgers and blockchain technologies without even knowing it, just like you are using cloud today. Their usage is expanding, and all major actors are working towards those technologies. VMware is actively participating in advancing the infrastructure underlying the Blockchain technology to provide the most secure, reliable, and scalable Blockchain platforms.
More info here: Blockchain, Disrupting the Fintech.
Romain Decker is a passionate virtualization IT specialist with 14+ years of IT experience. He currently works as a Senior Solutions Architect within VMware’s Professional Services Engineering (PSE) team, focusing on NSX. He is also a member of the CTO Ambassador Program at VMware and holds several industry certifications including VMware VCDX #120 (DCV and NV).