Vinod Lall, Minnesota State University Moorhead: Blockchain for beginners
MOORHEAD, Minn. – The concept of blockchain was initially floated in the 1990s to make a digital document tamper-resistant by making it hard to backdate the document. It recently has gained prominence with the emergence of (and the hype surrounding) bitcoin, the famous cryptocurrency.
Here’s a primer on how blockchain works.
A “block” is a digital file that efficiently stores data on transactions related to tangible assets such as a car, cash, land or a house, as well as intangible assets such as a copyright, bill of lading, medical record or patent.
In addition to the asset data, a block also stores a block identifier as well as a previous block identifier. These identifiers are as unique as fingerprints and are referred to as “hash of the block” (Hob) and “hash of the previous block” (Hopb).
The first block in the chain does not have a hash of the previous block and is called a genesis block. These hashes are then used to link one block to the next block to form a chain called a blockchain.
A blockchain system uses a combination of four different technologies – a distributed database, a peer-to-peer network, public key cryptography and a consensus algorithm.
The distributed database is a shared and public ledger that efficiently records all blockchain transactions between involved parties in a verifiable and permanent way.
An exact copy of this ledger is reproduced in a number of identical databases. This database is maintained and hosted by an independent third party, an arrangement that eliminates the need for a central authority to record, send and store information.
This distributed and decentralized system enables all parties involved in a business transaction to have the ledger replica as opposed to multiple and different ledgers in a traditional non-blockchain system.
As a result, the degree of transparency and trust surrounding the transaction increases. Moreover, the reduced duplication effort and elimination of intermediaries make the network transactions more economical and efficient.
The ledger runs on a peer-to-peer network of computers. In this network, every computer is a client/service seeker as well as a server/service provider. This enables identical copies of the transactions to be maintained.
Public key cryptography enables more tightly secured communication between the participants in a blockchain transaction by using a combination of a public key and a private key. The public key is used to scramble and the private key is used to descramble the transaction data.
The consensus algorithm provides rules for triggering transactions. This ensures that no data can be changed without the knowledge and agreement of all transaction participants.
In summary, blockchains provide a system for solving the age-old problem of human trust and the need for a central authority by allowing participants to trust the system output without trusting the system players.
Think of blockchain as a Google Docs file in which each involved party has access to the latest version of the file. However, the file is not stored centrally, and file users have to come to a mutual agreement to make any changes to the file contents.
By offering the key benefits of decentralization, security and trust, the system has enormous economic and social potential in financial services, government, health care, insurance and global supply chain management.
But blockchain is a foundational technology, one in which the development of useful applications is time-consuming. It is not a disruptive technology where groundbreaking applications are developed much faster.
So, before blockchain potentials are realized, many organizational, regulatory and technological barriers will have to be overcome.
Professor and Co-chair, Paseka School of Business
Minnesota State University Moorhead