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WHAT IS BLOCKCHAIN TECHNOLOGY?

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You will see the phrase ‘blockchain technology,’ or commonly just
‘blockchain,’ in many different contexts, and it can be confusing because
different people use the words to mean different things. Purists will have
a different understanding of the word from generalists. Angela Walch,
Research Fellow at University College London—Centre for Blockchain
Technologies, provides some excellent commentary on the lexicon in her
2017 paper ‘The Path of the Blockchain Lexicon (and the Law)’.199 In
general, technologists and computer scientists are more precise with their
terminology than journalists, who write for the layman. In this chapter, I
will provide a broad overview of blockchain technology and then explain
some of the nuances.
By now, you should understand that there is no such thing as ‘the
blockchain,’ just as there is no such thing as ‘the database’ or ‘the
network’. ETH is the Ethereum blockchain, a reference to the public
Ethereum transaction database—but you can also create private
Ethereum blockchains by simply running some node software on some
machines and having them connect to each other. Your private Ethereum
network will create its own blockchain, and the miners will mine ETH
just like in the public network. Your private ETH will not be compatible
with the public ETH because your private Ethereum network has a
different history from the public version.
In print, if you read ‘the blockchain,’ you may need to make a guess as to
what the writer means. In conversation, and at the risk of coming across
as pedantic, it should help your understanding to ask early on, ‘Which
blockchain platform?’ then, ‘The public chain or a private one?’ As you
now know, there are many blockchains, and many variations on how they
work.
work.
If you like hierarchies, blockchains fall under the broader category of
‘distributed ledgers’. All blockchains are distributed ledgers, but you can
have distributed ledgers that don’t have blocks of data chained together
and broadcast to all participants. Sometimes journalists and consultants
inaccurately use the term ‘blockchain’ when they are describing nonblockchain
distributed ledgers. I guess ‘distributed ledgers’ is too much of
a mouthful whereas ‘blockchain’ is a nice memorable buzzword.
We need to differentiate between blockchain technologies and specific
blockchain ledgers.
Blockchain technologies are the rules or standards for how a ledger is
created and maintained. Different technologies have different rules for
participation, different network rules, different specifications for how to
create transactions, different methods of storing data, and different
consensus mechanisms. When a network is created, the blockchain or
ledger of record is initially empty of transactions, just as a new physical
leather-bound ledger is empty. Some example blockchain technologies
are: Bitcoin, Ethereum, NXT, Corda, Fabric, and Quorum.
Blockchain ledgers themselves are specific instances of ledgers that
contain their respective transactions or records.
Think of normal databases. You may have heard of a few types or flavours
of databases—Oracle databases, MySQL databases, perhaps others. Each
flavour works slightly differently though they are all have similar goals:
efficient storage, sorting, and retrieval of data. You can have multiple
instances of the same type of database: a company might use more than
one Oracle database. And so it is with blockchains. Some blockchain
technologies operate one way, others operate a slightly different way and
you can have multiple instances of any blockchain technology, in separate
ledgers.
Public, Permissionless Blockchains
We’ve explored that cryptocurrencies and some other tokens use public
blockchains as their medium of record—that is, their respective
transactions are recorded in blocks on a replicated ledger. Public
blockchains are also described as permissionless primarily because
anyone may create blocks or be a bookkeeper without needing permission
from an authority. In these public networks, there is also
permissionlessness in another sense—anyone may create an address for
receiving funds and create transactions for sending funds.
Private Instances of Public Blockchains
As described earlier, you can run blockchain software on a private
network to create a fresh ledger. For example, you could take the
Ethereum code and run it, but instead of pointing your node to some
computers already running the public Ethereum blockchain, you could
point it instead to a few other computers that are not on the public
Ethereum network. As far as all of these computers are concerned, they
are starting with a fresh ledger with no entries.
Could you set up a small private network running Ethereum, then mine
some ETH and transfer them to the public network? No. Although this
private network would use the same set of rules as the public blockchain,
they have different records of account balances. Nodes on each network
can only validate what they see in their own blockchain, and they are not
able to see coins on the other blockchain.
Permissioned (or permissionable) blockchains
Some platforms are designed to allow groups of participants to create
Some platforms are designed to allow groups of participants to create
their own blockchains in a private context. They do not have a global
public network. These are called ‘private blockchains’ and they are
designed to only allow pre-approved participants to participate. Hence
the term ‘permissioned’.
Popular permissioned blockchains include:
• Corda, a platform built from scratch by R3 and a consortium of
banks for use by regulated financial institutions but with broad
applicability.
• Hyperledger Fabric, a platform built by IBM and donated to the
Linux Foundation’s Hyperledger Project. It was originally based
heavily on Ethereum but between versions 0.6 and 1.0 was heavily
re-architected. Fabric uses a concept of ‘channels’ to restrict parties
from seeing all transactions.
• Quorum, a private blockchain system based on Ethereum originally
built by JP Morgan. Quorum uses advanced cryptographic
constructs called zero knowledge proofs to obfuscate data and
address privacy issues.
• Various private instances of Ethereum under development by
individual businesses.
Unlike permissionless networks such as Bitcoin and Ethereum,
permissioned blockchains don’t need their own native token. They don’t
need to incentivise block-creators, and they don’t need proof-of-work as
the gating factor to allow participants to write to the shared ledger.
Instead, when businesses transact, they are looking for data that can be
trusted to be up to date, agreed and signed off by the appropriate parties.
In a traditional business ecosystem, participants are all identified, and if
some try to misbehave they can be sued. When parties are identified and
have legal agreements between them, the technical environment is not as
have legal agreements between them, the technical environment is not as
hostile as that of the pseudonymous world of public cryptocurrency
blockchains, where code is law and there are no terms of service or legal
agreements.
Some cryptocurrency proponents argue that permissioned private
blockchains are somehow inferior to public cryptocurrency blockchains.
An analogy commonly used is that public cryptocurrency blockchains are
like ‘the internet,’ in that they are open, free, and permissionless, whereas
private industry blockchains are like intranets, which are closed. The
implication here, of course, is that public blockchains will be very
successful and disruptive whereas private blockchains are boring,
unsuccessful and not very disruptive or game changing200.
Nothing could be further from the truth. Intranets and private company
networks are highly successful. I can’t think of any significant company
that doesn’t use its own network. And it is equally far from the truth to
regard the internet as being open and permissionless. As Tim Swanson
notes on his blog in ‘Intranets and the internet’201:
The internet is actually a bunch of private networks of internet service providers (ISPs) that
have legal agreements with the end users, cooperate through ‘peering’ agreements with
other ISPs, and communicate via a common, standardized routing protocols such as BGP
which publishes autonomous system numbers.
The fact is that cryptocurrencies and private blockchains are different
tools deployed to address different problems. They are both fine and may
happily coexist. In news articles written between 2015 and 2018,
blockchain technology was commonly defined as ‘the technology
underpinning the cryptocurrency Bitcoin’. This conflates the two ideas
and is as enlightening as defining databases as ‘the technology that
powers Twitter’.
Public and private blockchains run within different context and
ecosystems and, as discussed, are designed to address different problems.
ecosystems and, as discussed, are designed to address different problems.
So they will naturally operate in different ways. After all, technology is a
tool, and tools exist to serve a need. If the needs are different, then it is
likely that the tools will be different.

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