Blockchain 101
Blockchain 101
Authors:
Gary Zimmerman Gary Rowe
CMO / Principal Consulting Analyst CEO / Principal Consulting Analyst
[email protected] [email protected]
Blockchain 101
Zimmerman & Rowe
Table of Contents
Introduction
Most IT and business executives have or will shortly be exposed to blockchain. This
executive level-set report is designed to provide a basic understanding of the technology;
what it is, how it works and how it can impact your business. We start with this high-level
blockchain explanation.
Blockchain is simply a secure, shared database. In its purest form, everyone connected to a
blockchain network has access to the same set of information. Think of blockchain as a
permanent, replicated, distributed, yet secure ledger where all parties have access to the
same information. Much like an accounting ledger, blockchain is a platform for recording
transactions, but it intrinsically makes this shared data available.
So why the fuss around blockchain since replicated databases have been here for a long
time? It is because of specific elements associated with the security of the shared database;
permanence, transparency and the network effect are major enhancements as blockchain
gains momentum. So if you are a CIO, Business Architect, or Business Unit Head and are
This report is a great starting point in understanding and assessing the value of blockchain
and other related distributed ledger technologies.
It’s easy to get swept up in the hype of blockchain, the protocol that will change the world.
As Don and Alex Tapscott expressed so eloquently, “Today thoughtful people everywhere
are trying to understand the implications of a protocol that enables mere mortals to
manufacture trust through clever code. This has never happened before—trusted
transactions directly between two or more parties, authenticated by mass collaboration
and powered by collective self-interests, rather than by large corporations motivated by
profit.” It has been said that blockchain will do for assets what the Internet did for
information. But to reach this future state, we all have to take practical, pragmatic steps
along the journey. Consider this report a first step in a blockchain journey of a thousand
miles.
Throughout this report we’ll address many aspects of blockchain (distributed ledger)
technology. We’ll share some background on the technology itself in the basics section of
this report. We’ll give you five good reasons to evaluate blockchain to improve your
competitive position, and we’ll share five areas of concern you’ll need to consider as you
explore the technology. We’ll share the different ways you can identify opportunities in
terms of what you can do with blockchain and the best ways to learn more about it.
We’ll give you key concepts of the technology so that you are grounded as you explore the
subject further. Finally, we’ll recommend a blockchain action plan to help you get started.
None of these sections will be at the level of detail you’ll need to complete the journey, but
they can get you started down the path.
The Basics
Over the last few years, a major IT innovation known as blockchain has emerged as a
potentially disruptive technology. The core of this innovation is built around the concept of
a distributed consensus ledger, where the ledger or record is kept and maintained on a
distributed network of computers. This ledger makes it possible for the entire network to
jointly create, evolve and keep track of one immutable history of transactions or other
successive events. While this paper describes a broader distributed ledger technology, the
ledger is today most commonly known as the blockchain. Up until recently, the most
prominent blockchain technology application has been a cryptocurrency known as Bitcoin.
It used a ledger called the Block chain, from where blockchain technology got its name. The
Bitcoin blockchain, however, is just the first of many potential applications of distributed
ledger technology.
The blockchain is being heralded as the fifth disruptive computing paradigm, which would
bring with it an ubiquitous experience of value exchange across the Internet.
While the potential is there for the next wave of digital value, it remains a potential and not
a reality. As we describe later in this report, a few roadblocks need to be removed before
blockchain becomes ubiquitous.
backbone for the enterprise’s financial and operational activity. Blockchain, or distributed
ledger technologies don't change our need for transactions, but they do radically change
the way we execute and confirm those transactions.
Let’s start by looking at what most enterprises are typically doing today. Whether it is
between internal applications or across enterprise boundaries, the general architecture
template is to capture and process transactions in internally controlled data stores. That
creates a workflow similar to this.
Of course, applications add value beyond these simple steps, but this is a good portion (as
much as 40%) of the processing typical enterprise operational systems and organizations
do every day.
In figure 1, the transaction is shared between six different entities, each must execute some
form of the above transaction processing steps and if there is anything amiss in the
processing of any of these entities, the entire work flow needs to be examined for integrity.
This is inefficient, expensive, and vulnerable to weakness in any of the exchanges.
FIGURE 1
What if you could share a single data store among all participants that is secure, immutable,
auditable, trusted?
FIGURE 2
Blockchains
We’ll now add to the blockchain explanation we started with. A blockchain by itself is just a
data structure that is broken up in to pieces called blocks. That is, it’s how data is logically
put together and stored. Other data structures are databases (rows, columns, tables), text
files, comma separated values (csv), images, lists, and so on. In the end, a blockchain is just
another file.
As shown in figure 3, Blocks in a chain refer to precedent and subsequent blocks. They help
you know where you are, just like page numbers in a book. Within the blockchain, each
block references the previous block, not by ‘block number’, but by the block’s hash value, a
fingerprint which is more robust than a page number because the fingerprint itself is
determined by the contents of the block.
FIGURE 3
A cryptographic hash function is software which takes an input, like a block, and returns a
unique fixed-size alphanumeric string, a hash value. The hash value is generated based on
the content of the input. Because of the way hashing works, changing just one character in
the input generates a completely different hash value. By using a hash value instead of a
timestamp or a numerical sequence, you get a way to order the blocks and a way to validate
them. For any block within the chain, you can generate the block hash value yourself by
using certain algorithms and compare it to the original hash value. If the hashes match, they
are consistent with the data, and if the hash values are consistent along the chain, then you
can be sure that the blockchain has integrity. If anyone wants to meddle with any of the
data, they have to regenerate all the hash values from that point forwards and this
particular copy of the blockchain will look different. That creates the property of
immutability; no one can alter the past without everyone knowing about it.
Provenance – transactions related to assets managed on the blockchain can be traced back
to the recorded beginning of the asset’s existence. If you hear the term genesis block, it
refers to the first block recorded on the chain. And since each block is chained to the
previous block, it is possible to walk back from any point in time to the genesis block to
prove the provenance of any asset and any transaction that affected it. But what happens if
someone tries to change history? Immutability kicks in.
Immutability – As mentioned earlier, the ability to verify the fingerprints (hashes) of each
block as well as the order of appearance allows each node the ability to verify the work of
any other node. Once the block is committed, it cannot be changed without creating noise
in the system. Great, but in this network, can’t everyone see everyone else’s business?
That’s where pseudonymity steps in.
Finality – Digital signatures at the transaction level provide the means of demonstrating
authenticity and non-repudiation. When a signed transaction is validated and written to the
ledger, it is final; it cannot be disputed.
So, it’s not just the file system, it’s also how it’s managed that makes it revolutionary. We’ll
next look at a few of the early foundational blockchain offerings and provide some context.
The Bitcoin protocol was first described in a nine-page 2008 paper by Satoshi Nakamoto.
“Satoshi Nakamoto” is assumed to be a pseudonym, so it’s not clear whether the protocol
was developed by an individual or a group, and attempts to identify the developer or
development team have been unsuccessful.
In January 2009, the Bitcoin network came into existence with the release of the first open
source Bitcoin client and the issuance of the first Bitcoins, with Satoshi Nakamoto mining
the first block of Bitcoins ever (known as the genesis block).
Bitcoin is the original version of the “blockchain client and network server software set”
and it implements decentralized trading of the Bitcoin cryptocurrency among peers. If you
try to use the Bitcoin blockchain architecture to implement something besides
cryptocurrency exchange, you need to implement a discrete blockchain because the
protocol is the scripting code and accordingly is the blockchain. In other words, a
blockchain is purpose-built to support the particular problem it is trying to solve.
sources. This approach eliminates the need for separate purpose-built chains required by
the Bitcoin architecture and allows for more sophisticated processing through
decentralized applications. With Ethereum, the network becomes a computing engine.
Now that you have the basics as to what blockchain is, we’ll turn our attention to why
enterprises are evaluating and, over time, moving towards blockchain-based services.
About TVR
World-class research requires world-class consulting analysts and our team is just that.
Gaining value from research also means having access to research. All TechVision
Research licenses are enterprise licenses; this means everyone that needs access to
content can have it. We know major technology initiatives involve many different skill-sets
across an organization and limiting content to a few can compromise the effectiveness of
the team and the success of the initiative. Our research leverages our team’s in-depth
knowledge as well as their real-world consulting experience. We combine great analyst
skills with real world client experiences to provide a deep and balanced perspective.
TechVision Consulting builds off our research with specific projects to help organizations
better understand, architect, select, build, and deploy infrastructure technologies. Our well-
rounded experience and strong analytical skills help us separate the hype from the reality.
This provides organizations with a deeper understanding of the full scope of vendor
capabilities, product life cycles, and a basis for making more informed decisions. We also
support vendors when they carry out a product and strategy review and assessment, a
requirement analysis, a target market assessment, a technology trend analysis, a go-to-
market plan assessment, or a gap analysis.
Mr. Rowe has personally led over 100 consulting engagements, 50+ educational seminars,
published over 50 research reports/articles and led three significant technology industry
initiatives. His combination of business skills and his deep understanding of technology
provide a balanced perspective for clients. Core areas of focus include identity and access
management, directory integration, cloud computing, security/risk management, digital
transformation, IT business model changes, privacy and blockchain/distributed ledger."
His experience at Neustar, Respect Network, and Sovrin allows him to provide a broad
perspective on a variety of subjects including self-sovereign identity, blockchain, enterprise
data management, and the data brokerage industry.
Contributing
Authors: Bill Bonney – Principal Consulting Analyst
John Myracle – Principal Consulting Analyst
Gary Rowe – CEO / Principal Consulting Analyst