Feb 09, 2022
8 mins read
Blockchain is a term used to describe DLT, or Distributed Ledger Technology. Blockchain is used to create a storage system for data in a distributed and immutable manner.
These are the key features from a technological standpoint.
This means that once data is written to a blockchain data store or ledger, it cannot be changed – its there forever. In contrast, in a standard Relational Database, no matter how much security you implement, the data can be accessed and modified on the file system on which the data is persisted. This could be done by corrupt admin or a hacker.
A blockchain system ensures that even if a bit of data is changed at any level on the ledger, the entire system will report an
invalid state. And since the data is
distributed on multiple systems, the actual data with a valid state can be recovered from one of the systems.
As long as you see data on a blockchain and its in a
valid state on a majority
distributed nodes, you can trust that data to be accurate. This trust is key. This trust is achieved in a blockchain system by replicating the datastore on a number of peers(hosts) on the internet. If one of the misbehaving peers goes in an
invalid state, the other peers can filter it out. As long as there is a majority of peers agreeing to a common
valid state, you can completely trust the data that is stored on that system. This replication also guarantees high availability.
This trust is vital! No other system in the past has been able to develop this by design. In this course we will see how blockchain provides this trust by design.
Lack of Trust in Current System of Records - Automobile Industry
We will look at the issue of trustworthiness in the automobile industry and how blockchain can solve this problem.
Trust Issues in the Automobile Industry
I recently imported a used car from another country. If you have bought a used car at some point in your life, you know the trouble and the confusion you must have gone through in order to be able to ‘trust’ the condition of the car (mileage, service history, accident reports, etc.).
There are billions of dollars lost every year due to odometer tampering. In some cases, people have bought a used car and later found there to be a major accident on the car.
On the other hand, as a seller of a used car, if my car is extremely well kept I am not able to fully convince the buyer to get the right value for my well-kept car.
In countries like the US, there are also entities like Carfax, a middleman, which people ‘trust’ to some extent as a keeper of their data. This trust is put into Carfax because there are legal processes in place to hold them accountable if they were to alter the data for any car.
For car service records, we have paper-based car service books, which can, of course, very easily be faked. If one was to take a paper based service record and reconcile it with 10 different service providers to ensure validity of the data, it would be very time-consuming, since all service providers have their own system of records.
Resolving trust issues using Blockchain
Now imagine the following scenario, all the service providers are pushing their service records to a blockchain and the mileage readings of car is being pushed on the blockchain by service providers & IoT devices in car. Moreover, insurance companies are pushing accident details of the car on blockchain. All the timestamped records function to reliably record what happened to the car and by whom. It would be a huge peace of mind for a customer, buying a car with such ‘trustable’ record. Insurance companies would benefit immensely as well, when looking at that data and deciding insurance premiums for a car. And if we were to maintain a mapping of cars to their owners on blockchain, insurance companies benefit further by studying driver behavior.
Cost of Trust in the Financial Industry
Time is money
Let’s take a look at another example.
Let’s say you need to send $100 to a friend in the UAE.
You contact your bank, and they debit that amount from your account. Your bank is regulated by the state bank (the central authority) which is why you trust your bank to send it as promised.
Now, there are multiple ways in which a cross country transfer is processed by banks. Lets look at the most basic one.
Your bank updates its records and sends it to the central bank. The central bank updates its record and sends it to the UAE central bank, which sends it through the central bank of that country. They again update their record and send it to your friends bank. Your bank in the UAE then credits his account. It takes days but eventually your friends can access that money.
And this is just the process for ‘record’ updating, where your account is debited and your friends’ is credited. The central authorities of both countries update their records to keep track of how much money must be moved from one end to the other. The actual movement of money might happen later in a different form, carrying its own long process of record updating and trust development.
In this process, multiple employees from all these banks are involved for safe updating of records. Because the stakes are so high, things are done safely to ensure trust is developed. At the same time, the $100 you paid will incur some processing fee deductions at all stops along the way. The trust you put in the current financial system is paid through your time and money. This is where bitcoin comes is as an alternative to this system! In this new system, both you and your friend have a bitcoin address. All you need to do is transfer the money to your friend’s address. No fee, no delay, no middle parties, no cost buying ‘trust’, as the system is trustworthy be design. . We will see in a later chapter with technical detail how bitcoin achieves this. In the next lesson, we will again discuss how current systems struggle with trustworthiness but this time, we will be using a supply chain example.
Lack of Trust in Current System of Records - Supply Chain
Issue of trustworthiness in the supply chain industry and how blockchain can solve this problem.
Lets take a very simple example without cryptocurrency.
Let’s imagine you are going to buy a pack of frozen vegetables from your grocery store. Lets also imagine you are in a third-world-country where food regulations by a central authority are weak. How well do you trust that the pack of vegetables has been kept in the required temperature range from the time it was cut and preserved to today? You ensure you are buying from a big, well-reputed grocery store. You ensure that the vegetable pack comes from a good trusted brand. But do you fully trust any of this, given there are numerous instances where big companies like Nestle have screwed this up?
Would you trust them if they simply showed you a record of temperature readings in their ‘own database’ to show that the temperature guideline has been met? Would you trust the database admin, the IT team, the maintainers of the data?
Lets imagine another scenario. The vegetables are cut and packaged and a record is added on the blockchain and written on hundreds of peers. Once that package is stored an IoT device repeatedly logs the timestamped temperature entries on the blockchain(on distributed peers). When the item is shipped, the shipping container’s are fitted with IoT logging the timestamped temperature readings on blockchain. At all points of the supply-chain data is read by sensors and put on blockchain - signed and timestamped.
Since you can access the data from blockchain for your vegetable pack and see that it has always remained in the safe zone you can feel safer. You can trust the data coming out of blockchain, without needing a food regulation authority.
In this lesson, we will explain the different terminologies used so far in this chapter
Since there are multiple terms being used here lets clarify some so there is no confusion:
The data store that keeps all blockchain data is called a ledger. Each entry in the ledger is called a transaction. The transactions are timestamped and stored in groups of blocks.
On the ledger you can only add a new transaction or read the old ones. You can not update or delete anything.
The ledger is designed to be immutable using cryptographic algorithms (we will study in next chapter) and its distributed design. The ledger is replicated and maintained by multiple hosts or peers or nodes. This is why its called DLT or Distributed Ledger Technology.
To recap: we saw in this chapter the what and why of blockchain.
Blockchain or Distributed Ledger Technology (DLT) is a ‘trustable data record’ built as a distributed system.
Current system of records either lack trust or pay a cost for trust. There is a huge opportunity to solve these issues in current systems of records.
In the next 2 chapters we will see from a tech perspective, how blockchain achieves this quality of ‘immutability and trust’.
In the next chapter, we will explain the different pre-requisites for understanding blockchain.