Anyone who pays attention to emerging technologies knows there is a lot confusion around the concept of blockchain. While people have been talking about blockchain for years, and a wide range of industries are now using blockchain, many people aren’t quite sure of what blockchain is and how it works. In this blog, I hope to clear up some of the confusion about this rapidly emerging technology.
So, what is blockchain? The short answer is that blockchain is a secure, poorly written database that nobody has to own. I say “poorly written” because there are some arguments that blockchain is not necessarily the best database structure out there — but it’s not meant to be that. Basically, blockchain is a self-sustaining and self-governing database.
At a more detailed level, a blockchain is a de-centralized data structure of transactional records that ensures security, transparency and immutability — meaning that records can’t be changed. You can also think of a chain of records stored in the form of blocks, which are typically controlled by no single authority. Or you can think of blockchains as fairly simple databases wrapped in varying degrees of cryptography.
Blockchain is not trying to solve a database issue. It is trying to solve a trust issue. Blockchains are a type of distributed ledger system that grew out of a need for trust.
Individual-multi corporation structures use imposed trust systems. You have a central clearinghouse or a single database and exchanges. This can be stock exchanges and the clearinghouses that support them.
The Depository Trust and Clearing Corporation (DTCC), a clearinghouse that settles securities transactions for NASDAQ, is a trust system. Bitcoin is a trust system. The same for many other security groups — from central banks to toll roads and your local library. A trust system can be anything that is keeping track of records and the individuals or corporations that use them.
A distributed trust system, distributed ledger or blockchain decentralizes the trust system. Everything goes to a peer-to-peer database with some form of trust built into it. Blockchains are one form of distributed trust, in that blockchains embed a cryptography in each block and they use a consensus algorithm.
Blockchain vs. distributed ledger
You’ll often see the terms “blockchain” and “distributed ledger” used interchangeably. While it’s true, that blockchains are mostly distributed ledgers, not all distributed legends are blockchains. You’ll see people talking about a distributed ledger system, but it’s not really using a blockchain. It’s using some other form of distributed trust.
One of the key drivers for blockchain and distributed ledger solutions is some level of mistrust between different entities, whether that is companies, governance organizations, groups or individuals. This group of technologies could be one solution to allow different entities to cooperate, do business together and generate profits, even if they have reasons to be leery of one and other.
Trust — and mistrust — play into your blockchain architecture choices around consensus and cryptography. The harder you make consensus, the more likely it is that consensus will be contested, and the more vigorous your cryptography has to be. The more the groups trust each other, the less vigorous your cryptography has to be. It all comes back to trust in a lot of ways.
A blockchain is a database shared among different entities who have varying levels of trust, including no trust at all. This reality has a lot of architecture problems built into it. And that, at the end of the day, is what blockchain is all about. It is about overcoming those problems.
Blockchain takes people and transactions that you have no reason to trust and builds trust into the system, locking it in place by rules of the database in a permission-less system.