You may have heard of blockchain because of the hype around bitcoin. But blockchain and bitcoin are not the same thing. In this post, I’ll try to explain what blockchain is and why we at Full Profile are so excited about agri-blockchains for our AgriDigital solutions.
Blockchain, also known as distributed ledger or shared ledger technology, is a new technology that records all transactions for an asset in what can be regarded as an asset database, or ledger. This ledger is shared across multiple locations, and each transaction is verified by the parties that share the ledger. A transaction could be as simple as an exchange of a good or service for money. Each record, or transaction, is a ‘block’. As more transactions occur, each block is chained on to the previous and subsequent blocks for that asset. This chain of blocks therefore becomes an immutable historical record, a single source of truth, documenting all the transactions. (Technical side note: in the case of a true distributed ledger the record is a line in the ledger rather than a block, but both blockchains and distributed ledgers essentially work the same way).
When there are changes to the ledger, the changes are verified against pre-determined business logic, or rules, and are authenticated. In a normal system, you have a third party that authenticates transactions. But in this system, all parties within the system must achieve consensus that a record is valid. Once they do, a block is created. The ledger can be updated in seconds and all changes are replicated across the blockchain. This means that all participants have an accurate record of an asset’s position, the transactions relating to that asset, and the chain of title.
“In distributed ledger technology, we may be witnessing one of those potential explo- sions of creative po- tential that catalyse exceptional levels of innovation. The tech- nology could prove to have the capacity to deliver a new kind of trust to a wide range of services”
— UK Government Chief Scientific Adviser
Blockchains can be permissioned or open (which is called “unpermissioned”). The original blockchain developed as part of Bitcoin is an open blockchain. In permission blockchains, the ledger is maintained by trusted participants who are sometimes called validating peers (or nodes). These nodes provide the consensus, according to agreed rules, needed to create a new block. This process gives both open and permissioned blockchains a high degree of trust and security even where the participants do not know each other or do not usually operate in a trusted environment.
The key to this trust is cryptographic security. Crytopgraphic security means that participants operate through the use of digital keys (think of a digital ID card) which maintain privacy of information and verify the identity of different participants in the system. These keys can be set with security levels that define what a participant can and cannot do or see on the blockchain.
A real game-changer with shared ledgers is the embedding of business logic within the operation of the blockchain. In fact, logic can be embedded right at the level of the transaction. In many normal databases, information is stored and can be sorted or filtered in different ways. But these rules act on the whole database, rather than at the level of an individual transaction.
Automatically applying business logic at the transaction level is revolutionary.
Enter the “smart contract”. A smart contract is one where the terms of the contract are recorded in computer code and they are able to auto-execute on the shared ledger. This means that once the smart contract conditions have been satisfied, the next part of the transaction can occur automatically. For example, you could write into the code that once a payment occurs and is validated, then the title for that asset should be transferred. With this logic, real-time settlement is possible.