The consultancy meeting was held last Monday in the Poland’s Parliament in a subject of “Digital money and distributed ledger technology – current status and challenges”. Looking at the presentations, the content of the meeting was dominated by topics around bitcoin, not distributed ledgers technologies (DLT). There was no discussion about digital money and digital currencies. I would like to argue that the focus should be shifted on a Distributed Ledger Technologies and this is why.
Bitcoin was created as a peer-to-peer (P2P) payment platform, allowing the participating users to pay directly to each other without an involvement or intermediation of any financial institution. Hence, bitcoin is a censorship-resistant digital cash.
Bitcoin is not the only distributed ledger available on the market. Bitcoin uses public blockchain technology as a distributed ledger. It is one of the most popular applications which is based on a public blockchain. There are many other examples of Distributed Ledger Technology (DLT) such as Ripple, Etherum, Hyperledger Fabric, Multichain. Each use different methodologies to achieve a similar goal: record transactions securely in a distributed chain of blocks using the decentralized consensus algorithms.
World Economic Forum pointed to a blockchain as a revolutionary decentralized trust system which would reshape a global economy. The UK government has been researching the topic for some time now validating the ideas on how it can be used by the government bringing the benefits to the country, and the citizens. The bank-backed
R3 blockchain consortium gathered key players from the financial markets to work together on the blockchain adoption in the financial industry.
The central banks in many countries lead the discussions about blockchain as a platform for a digital currency and / or digital cash.
Non of them focuses purely on a bitcoin but rather analyze the DLT, the benefits of its use, and the efforts required to implement. Users of the DLT benefit from the efficient environment for a digital and secure data& assets sharing.
Blockchain does not equal bitcoin
A distributed ledger technology is a consensus of replicated, shared, and synchronised digital data spread across multiple sites, and/or institutions.
A blockchain is a type of distributed ledger, comprised of unchangeable, digitally recorded and signed data in packages called blocks. Blocks are stored in an append only chain. Each block is linked to a previous block and cryptographically hashed. Data in a blockchain remains unchanged. Not all distributed ledger technologies use the chain of blocks. There is a standard network protocol that allows every participant to receive transactions using the same validation rules within a network.
Blockchain is called sometimes as a crypto-technology because it uses advanced cryptography. It provides secure achievement of distributed, decentralized consensus. There are many algorithms which can be used as distributed consensus, such as: PBFT (Practical Byzantine Fault Tolerance), Proof of Work, Proof of Stake. All entries in the ledger are synchronized across the blockchain network. A consensus ensures that these shared distributed ledgers are the exact copies, hence lowers the risk of any fraud transactions.
Business based on blockchain
While many crypto-technologies, such as bitcoin, are permissionless, business in its nature uses permissioned infrastructure.
Blockchain has an ability to protect records with a personal digital signature: a private and a public key to assure security of its data (transactions). The transactions need to be authenticated, and cryptography is central to these processes.
Public Blockchains (permissionless) are suitable for the censorship resistant applications (e.g. Bitcoin). They allow anyone to contribute data to the network. All participants possess an identical copy of the ledger.
Private blockchains (permissioned) allow for distributed identical copies of a ledger, but to the trusted participants only. This type of blockchain network may have an owner. Permissioned blockchain is suited for applications requiring simplicity, speed, and greater transparency. Although the ledger is shared across all participants, sometimes the business participants require a privacy, hence the transaction details need to be private only known to the transaction participants.
It doesn’t need to be a public blockchain, it does need to be the Open Source Standards
A blockchain has two main concepts: a network of participants and a ledger. Participants of the network exchange items of value through a ledger, and ledger’s content is always in sync with the others members of a network.
Even if a blockchain and DLT have potential to redefine a future digital economy, it does not mean that there would be one only DLT based on blockchain standard or rule. There will be many implementations of DLT. To support wide adoption of this emerging technology a blockchain standardization is essential and should be based on the open source neutral protocols, the pluggable consensus and the choice of the privacy rules.
One of the way to create and established open standards is through consortium (R3) or open sources communities (Hyperledger Project).
The benefits of a blockchain are based on an open and secure collaboration between the participants, so interoperability and openness are key to meet the needs of different industries, countries or legal regulations. More awareness is needed about DLT, blockchain, its potential use cases and benefits as well as solutions already available on the market.