What actually is blockchain?

I’m sure most of you have heard of bitcoin and blockchain, but how many of you could explain the difference between the two or why we should even care? To be perfectly honest until I started listening to ZigZag podcast I don’t think I could have either. The first series of this brilliant podcast breaks down blockchain in to its component parts, clearly explaining it for the layperson and details how it is being used to disrupt the world of journalism.  All the while chronicling Manoush and Jen’s own career disruption, or zig zag (see what they did there?!), and entry in to the world of the entrepreneur. I listened to it religiously as I walked to work and it got me thinking.  If blockchain showed so much promise for journalism then how could it disrupt the mining industry? When it came to choosing the subject for my final MBA research paper I wanted to take a deeper dive in to sustainable development within the mining industry and determine if disruptive tech such as blockchain was really worth the investment of time and money for companies.  8000 odd words and 3 months later I had a paper titled “Are the benefits of applying blockchain in the gold mining sector sufficient to outweigh the challenges of implementing an emerging technology?” ready for submission to complete my MBA.  I thought others may be interested in this topic and as we all seem to be devouring online content at a rate of knots given the current situation I have edited the paper and produced a limited series of posts.  I hope you enjoy reading them and learn something valuable.

Blockchain is a distributed database hosted across multiple participants and is known for its transparency, persistency and immutable append-only ledger which can assist in cost reduction by removing administrative time and costs and the necessity of intermediaries such as clearing houses or banks.  Typically, the mining industry has been slow to adopt technological change but in the last decade mining companies have begun to embrace analytics and machine learning algorithms for mine and production planning and introduced augmented reality to combine geological modelling, mine planning and operations.  Diamond miners have begun to embrace this technology to trace diamond provenance through the supply chain.  In this series of posts we will be investigating what blockchain can  do for the gold mining industry and if the barriers to its implementation are too great to overcome?

Touted as the next ‘big thing’ in technology (The Economist, 2015) after the introduction of cryptocurrency to the world in 2008, the technology behind bitcoin is gaining exposure as its use within industry intensifies.   An internet search of ‘blockchain’ will produce more than 220 million results in less than a second, from ‘Understanding Blockchain in Two Minutes’, discussions about the so-called truth of blockchain and whether the bitcoin bubble has truly, or even finally, burst.   Blockchain separated from bitcoin in the popular consciousness around 2014 when people started realising this open, decentralised ledger-based technology that records the transactions between two parties permanently possessed the ability to dramatically reduce the cost of transactions.  This led to a surge in investment and discovery in an attempt to realise the full potential of blockchain.  Since then platforms based upon blockchain such as Ethereum and as well as other new cryptocurrencies have developed, smart contracts have seen wider use in industries such as real estate, shipping and oil and gas, and private and public enterprise have started to explore the full possibilities of this technology.  Forbes (Vilner, 2018) featured the top 5 product use cases to watch from 2018, including smarter predictions using business intelligence and analytic tools capable of scouring through massive amounts of data, building decentralised applications that operate on a fully trust-less protocol and allow data to be securely stored on a distributed ledger, fortifying identity management and streamlining supply chain management through real-time tracking of stock from production to customer.

So what actually is blockchain if it isn’t bitcoin?

Blockchain is a form of distributed database that is hosted across a network of multiple participants; a persistent, transparent, immutable, append-only ledger, essentially removing trust from the equation.  Its qualities promoting data tamper protection, traceability, security and creditability present an opportunity to transform industry through provision of cost savings, tracing information flows and reducing transaction times, and so businesses have started investigating the application of blockchain within their operating remit.

A block on the blockchain comprises two parts – the header of the block links back to the preceding block in the chain with every block containing the ‘hash’ of the prior block so transactions cannot be altered thereby creating a chain; while the body of the block contains a validated list of transactions, their amounts, time stamp, digital signatures and other relevant details, that have been agreed upon by a consensus within the decentralised network.

The blockchain data structure

A decentralised network, cryptographic hashes and consensus mechanisms – should I know what these are?

The technology behind blockchain was designed to enable true decentralisation.  A centralised system possesses a master node responsible for dividing tasks or data and distributing them across the network, with such systems simple to design, maintain and govern, however they possess a central point of failure and are therefore less stable and secure and more susceptible to attack.

Centralised Network Structure

Within a decentralised system no one has central control of the data and every individual node has equivalent authority, and within a blockchain system individual nodes on the network have a matching duplicate of the blockchain.  Decentralised systems possess no central point of failure and therefore are more stable, fault tolerant and attack resistant, and as all nodes have equal authority there is less opportunity for unprincipled operations and these systems are usually democratic in nature.

Decentralised Network Structure

This inherent network structure creates the two major challenges of blockchain – how the security of the contents of the block itself is guaranteed, and how consensus is reached so transactions are agreed upon.  Blockchain addresses the inherent lack of a central “trusted” authority within the system with cryptography and consensus mechanisms.  The aforementioned ‘hash’ is a cryptographic function that points to a preceding data block’s identifier and encrypts these numbers and letters to an output of a fixed length thereby providing a mechanism for verifying data hasn’t been interfered with, helping build a tamper resistant blockchain.  The cryptographic functions used are one-way, irreversible and deterministic, producing the same output for a given input so any alterations to the input would produce entirely different outputs when hashed again (Singhal, et al., 2018).

Before a transaction can be added to a block, consensus must be reached.  A transaction proposed to the blockchain network must be agreed upon by greater than 50% of the nodes on the network before being added to a block.  Several consensus mechanisms are available and most fall under the umbrella of either a Proof-of-Work (PoW) or Proof-of-Stake (PoS) consensus.  The PoW mechanisms require certain work be completed for a block of transactions before it is proposed to the entire blockchain and this piece of work is hard to produce computationally but simple to verify as miners produce the same answers.  The most common example of this is mining bitcoin.  The PoS mechanism doesn’t require mining but rather the validation of blocks of transactions with validators having to commit their stake to be able to partake in validating a transaction with the likelihood of a participant validating a block proportional to their stake or the amount of coins they hold (Singhal, et al., 2018).

By design, every node on the blockchain maintains its own identical copy of the entire blockchain, authenticates all transactions and blocks, and serves requests from other nodes on the network to achieve true decentralisation.

So to recap, the three main component parts of blockchain are the cryptographic, private keys, the distributed network and the consensus mechanism.  The inherent nature of blockchain presents a huge bottleneck for the scalability of blockchain.  All parties agree though on the potential of blockchain due to its inherent characteristics of decentralisation, openness, automatic execution contracts and anonymity.

Makes much more sense now. Now what?

In our next post we will look at the benefits of blockchain and possible applications focusing on mining industry.

References

Singhal, B., Dhameja, G. & Panda, P. S., 2018. Beginning Blockchain: A Begginer’s Guide to Building Blockchain Solutions. s.l.:Apress.

The Economist, 2015. The next big thing. [Online]
Available at: https://www.economist.com/special-report/2015/05/09/the-next-big-thing
[Accessed 12 November 2018].

Vilner, Y., 2018. 5 Blockchain Product Use Cases To Follow This Year. [Online]
Available at: https://www.forbes.com/sites/yoavvilner/2018/06/27/5-blockchain-product-use-cases-to-follow-this-year/#74d656c91b60
[Accessed 12 November 2018].