Blockchain basics: Introduction to business ledgers

Blockchain basics: Introduction to business ledgers

Bitcoin_istock

 

Everyone is placing bets on how blockchain will revolutionize the way organizations conduct their business transactions. Let’s look at how a blockchain network operates, what makes it unique, and how IBM is helping to advance the technology. First, a little background is in order.

The role of business ledgers

In today’s connected and integrated world, economic activity takes place in business networks that span national, geographic, and jurisdictional boundaries. Business networks typically come together at marketplaces where producers, consumers, suppliers, partners, market makers/enablers, and other stakeholders own, control, and exercise their rights, privileges, and entitlements on objects of value known as assets.

Assets can be tangible and physical, such as cars and homes, or intangible and virtual, such as stock certificates and patents. Asset ownership and transfer create value in a business network, and are known as transactions.

Transactions typically involve various participants like buyers, sellers, and intermediaries (such as banks, auditors, or notaries) whose business agreements and contracts are recorded in business ledgers. A business typically uses multiple ledgers to keep track of asset ownership and asset transfers between participants in its various lines of businesses. Ledgers are the systems of record (SORs) for a business’s economic activities and interests.

A typical business ledger looks something like this:

 

Problems with current business ledgers

Current business ledgers in use today are deficient in many ways. They are inefficient, costly, non-transparent, and subject to fraud and misuse. These problems stem from centralized, trust-based, third-party systems, such as financial institutions, clearing houses, and other mediators of existing institutional arrangements.

Centralized, trust-based ledger systems lead to bottlenecks and slowdowns of transaction settlements. Lack of transparency, as well as susceptibility to corruption and fraud, lead to disputes. Having to resolve disputes and possibly reverse transactions or provide insurance for transactions is costly. These risks and uncertainties contribute to missed business opportunities.

Furthermore, out-of-sync copies of business ledgers on each network participant’s own systems lead to faulty business decisions made on temporary, incorrect data. (Or at best, the ability to make a fully informed decision is delayed while differing copies of the ledgers are resolved.)

3 network topologies for business ledgers

A centralized ledger network controls the flow of information and operational control from a single central point. A distributed ledger network spreads computational workload across multiple nodes in a network. A decentralized ledger network allows nodes to make independent processing and computational decisions irrespective of what other peer nodes may decide.

 

Diagram of network topologies

It is not unusual for distributed systems to also be decentralized (as is the case for a bitcoin network). What is unique about a blockchain network is its decentralized consensus mechanism. All validating nodes in the network run the same (agreed-upon) consensus algorithm against the same transactions, and thus validate (or invalidate) each transaction. Valid transactions are written to the ledger.

What is blockchain, exactly?

Blockchain is a type of business transaction ledger. A blockchain network is a decentralized system for the exchange of assets. It uses a shared ledger (that is either public or private) for recording the history of electronic business transactions that take place in a peer-to-peer (P2P) business network. A blockchain network may use proof of work, or another consensus mechanism, as a basis of trust, accountability, and transparency, instead of relying on a third-party mediator financial institution or actor.

A blockchain network payment system features digital signatures, cryptographic hashes, a timestamp server, and a decentralized consensus protocol that member nodes use to agree on ledger content. In a public ledger, integrity, privacy, and security are engineered in. A blockchain peer-to-peer network is resilient and robust thanks to its decentralized topology architecture. As member nodes join or leave the network dynamically, messages are exchanged between the network participants on a best-effort broadcast basis.

How a blockchain network works

A blockchain network is a highly scalable, decentralized peer-to-peer (P2P) network. Its integrity is based on a consensus mechanism, rather than on a trust-based infrastructure. The following concepts are the heart of blockchain network processing.

The decentralized peer-to-peer network prevents any single participant or group of participants from controlling the underlying infrastructure or undermining the entire system. Participants in the network are all equal, adhering to the same protocols. They can be individuals, state actors, organizations, or a combination of all these types of participants.

At its core, the system records the chronological order of transactions using a peer-to-peer timestamp server and a proof-of-work system model, resulting in transactions being irreversible without actually redoing the proof of work.

IBM’s contribution to advancing the technology

IBM is a premier code-contributing member of the Hyperledger Project, which is the Linux Foundation’s open source collaborative effort to create a blockchain for business-to-business (B2B) and business-to-customer (B2C) transactions. IBM has contributed 44,000 lines of blockchain code to the Hyperledger Project. IBM’s contributed code helps developers explore the use of blockchain in the enterprise as they build secure decentralized ledgers to exchange assets of value between participants.

The Hyperledger Project defined a protocol specification known as Open Blockchain Protocol Specification to create a blockchain fabric for use in a variety of industry use-cases involving B2B and B2C transactions. The primary goals of this effort are:

  • Support a wide variety of industrial use cases with different requirements
  • Comply with regulatory regimes that exist today
  • Support verified identities, private and confidential transactions
  • Support permissioned, shared ledger
  • Support performance, scaling, auditability, identity, security, and privacy
  • Support reduction of costly computations involved in proof of work

To provide functionality and required capabilities, Hyperledger’s Blockchain fabric implementations use the following concepts as its underpinnings:

  • Smart contracts
  • Digital assets
  • System of record repositories/stores
  • Decentralized consensus-based network
  • Pluggable consensus algorithms/models
  • Cryptographic security

The Hyperledger protocol specification architecture shown below supports modularity, plug-and-play interoperability, and container technology for supporting smart contracts written in any popular language.

 

Digram of the reference architecture of a Hyperledger

Goals of IBM’s contribution to the Hyperledger Project

IBM’s proposed contribution is a “low-level blockchain fabric that has been designed to meet the requirements of a variety of industry-focused use cases. It extends the learning of the pioneers in this field by addressing additional requirements needed to satisfy those broader industry use cases. The central elements of this implementation are smart contracts (what IBM calls chain code), digital assets, record repositories, a decentralized network providing consensus, and cryptographic security. To these blockchain staples, the implementation supports key industry requirements such as performance, verified identities, private and confidential transactions. Finally, the fabric is architected to provide for a pluggable consensus model, allowing a variety of specialized or optimized consensus algorithms to be applied.”

From IBM’s perspective, industrial-grade blockchain technologies have the following characteristics:

  • A shared, permissioned ledger is the append-only system of record (SOR) and single source of truth. It is visible to all participating members of the business network.
  • A consensus protocol agreed to by all participating members of the business network ensures that the ledger is updated only with network-verified transactions.
  • Crytography ensures tamper-proof security, authentication, and integrity of transactions.
  • Smart contracts encapsulate participant terms of agreements for the business that takes place on the network; they are stored on the validating nodes in the blockchain and triggered by transactions.

The Blockchain service on Bluemix

With the Blockchain service on IBM Bluemix, you can create your own blockchain network with validating nodes and a security service. From there, you can deploy smart contracts (also called chain code), see results, and build applications. Learn more about getting started with the Blockchain service.
If you haven’t already done so, take a moment to check out Bluemix, IBM’s public cloud, based on Cloud Foundry, for application development and deployment. It’s easy to try out the Blockchain service when you start a free 30-day Bluemix trial. Or, better yet, did you know that developerWorks Premium gives you a full 12-month subscription to Bluemix and $240 USD in cloud credits on Bluemix? Learn more about how developerWorks Premium can give you a jump-start in developing for or migrating to the cloud.

The business benefits of blockchain

Current transactions flowing through business networks for asset ownership and transfer are inefficient, slow, costly, and vulnerable to manipulation. All participants in the business network maintain their own ledgers with duplication and discrepancies between ledger transactions that result in disputes, disagreements, increased settlement times, and the need for intermediaries with their associated overhead costs.

Blockchain-based shared ledgers can help businesses save time and costs while reducing risks. Additionally, blockchain technologies promise improved transparency among willing participants, automation, ledger customization, and improved trust in record keeping since transactions cannot be altered once validated (by consensus) and written to the ledger.

Blockchain consensus mechanisms provide the benefits of a consolidated, consistent dataset with reduced errors, near-real-time reference data, and the flexibility for participants to change the descriptions of the assets they own.

Because no one participating member owns the source of origin for information contained in the shared ledger, blockchain technologies lead to increased trust and integrity in the flow of transaction information among the participating members.

Immutability mechanisms of blockchain technologies lead to lowered cost of audit and regulatory compliance with improved transparency. And because contracts being executed on business networks using blockchain technologies are smart, automated, and final, businesses benefit from increased speed of execution, reduced costs, and less risk with timely settlements of contracts.

Conclusion

Blockchain technologies represent a fundamentally new way to transact business. They usher in a hugely scalable, robust, and smart next generation of applications for the registry and exchange of physical, virtual, tangible, and intangible assets. Thanks to the key concepts of cryptographic security, decentralized consensus, and a shared public ledger (with its properly controlled and permissioned visibility), blockchain technologies can profoundly change the way we organize our economic, social, political, and scientific activities.

Acknowledgments

The authors are grateful for contributions from Nitin Gaur and Joshua Horton, who reviewed the content and provided constructive suggestions. Additionally, they thank Scott Sloan, Sujatha Perepa, and the rest of the IBM Technical Sales Leadership Council (TSLC) team for connecting as one unified IBM Blockchain team.

PDF – version:

 

cl-blockchain-basics-intro-bluemix-trs-pdf

 

[IBM]

August 9, 2016 / by / in , , , , , , , ,

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