OECD BLOCKCHAIN POLICY FORUM

OECD Blockchain Primer

OECD
BLOCKCHAIN
OECD BLOCKCHAIN POLICY FORUM
POLICY
FORUM

OECD
BLOCKCHAIN
POLICY
FORUM
The OECD Blockchain Primer
This Primer provides an introduction to blockchain
technology, outlines some of the potential benefits it can
bring, and considers the risks and challenges it poses. While
not comprehensive, it is an overview of the key concepts
and terms intended to help people better understand this
emerging technology and its growing impact.
A technology? A currency?
The new internet?
Blockchain has the potential to transform the functioning of
a wide range of industries. Its features can increase the transparency
and traceability of goods, data and financial assets, facilitate market access
and improve the efficiency of transactions. Fulfilling blockchain’s potential,
however, depends on a policy environment that allows innovation and
experimentation, while balancing the risks of misuse. Governments will
play a significant role in shaping policy and regulatory frameworks that help
address challenges presented by the technology, and foster transparent, fair
and stable markets as blockchain develops.
Fundamentally, blockchain is a combination of already existing technologies
that together can create networks that secure trust between people or
parties who otherwise have no reason to trust one another. Specifically,
it utilises distributed ledger technology (DLT) to store information verified
by cryptography among a group of users, which is agreed through a
pre-defined network protocol, often without the control of a central authority.
The marriage of these technologies gives blockchain networks key
characteristics that can remove the need for trust, and therefore enable
a secure transfer of value and data directly between parties.
Due to this unique ability, blockchain technology can diminish the role of
intermediaries, who can command market power, collect significant fees,
slow economic activity, and are not necessarily trustworthy or altruistic
keepers of personal information. Although mostly known for its digital
financial asset applications (like Bitcoin), blockchain technology is poised
to have an impact on a wide range of sectors. The OECD is exploring the
policy implications in a variety of areas including health, transportation,
agriculture, environment, and supply chain management.
 What is blockchain?

A blockchain is a shared ledger of transactions between parties in a network, not

controlled by a single central authority. You can think of a ledger like a record book: it
records and stores all transactions between users in chronological order. Instead of one authority
controlling this ledger (like a bank), an identical copy of the ledger is held by all users on the
network, called nodes.

The blockchain in practice

NODE
A node is simply a computer on
the blockchain network that stores
the ledger.

DISTRIBUTED
LEDGER All copies of one document are spread
A ledger is a list of all the transactions among users and they are constantly and
made on the blockchain. Technically, it is automatically synchronised, hence identical
made up of a chain of blocks. at all times.

BLOCKCHAIN
UNDER THE HOOD

A block is comprised of a group of transactions from the same time period, like a page from a record book.

Hash: 1Z8F Hash: 6BQ1 Hash: 3H4Q Hash: 1Z8F Hash: 6BQ1 H62Y Hash: 3H4Q
Previous hash: 0000 Previous hash: 1Z8F Previous hash: 6BQ1 Previous hash: 0000 Previous hash: 1Z8F Previous hash: 6BQ1
Source: Savjee, (2017)

Inside each block: Along with its own hash, each block stores the hash of the block before it.
Hash A hash is a unique string of letters and numbers created from text using a mathematical formula.
Previous block’s hash Blocks are therefore “chained” together making the ledger (almost) immutable or unable to be
Transaction data changed. To add a block, it may first need to be mined and then approved by a number of
Timestamp notes through a consensus mechanism.
Different types of blockchain

Before going further, it is important to note that not every blockchain is made the
same. While there are a number of variable features, two of the most important are the
“openness” of the platform (public or private) and the level of permissions required to
add information to the blockchain (permissioned or permissionless). Public blockchains (like
Bitcoin) are open for anyone to read and view, while private blockchains can only be viewed
by a chosen group of people. Similarly, permissioned blockchains permit just a select group
of users to write (i.e. generate transactions for the ledger to record) and commit (i.e. verify new
blocks for addition to the chain). In contrast, permissionless blockchains allow anyone to
contribute and add data to the ledger.

Table 1. The main types of blockchain segmented by permission model

READ WRITE COMMIT EXAMPLE

Public Open Bitcoin,

Anyone Anyone
permissionless to anyone Ethereum

OPEN
Supply chain
All or subset
Public Open Authorised ledger for retail
of authorised
permissioned to anyone participants brand viewable
participants
by public
BLOCKCHAIN
TYPES Restricted to an All or subset Multiple banks
Authorised
Consortium authorised set of authorised operating a
participants
of participants participants shared ledger

CLOSED Fully private External bank

Private or restricted to ledger shared
Network Network
permissioned a limited set between parent
operator only operator only
“enterprise” of authorised company and
nodes subsidiaries
Source: Hileman & Rauchs, 2017

The layers of blockchain Blockchain is comprised of three layers that each add different
components to its development. It is not necessary to get
involved in the most technical layers in order to develop an
application or use a blockchain application.

APPLICATION LAYER The protocol layer lays the foundational structure of the
blockchain. It determines the computing language the
blockchain will be coded in and any computational rules
NETWORKING LAYER that will be used on the blockchain.
The networking layer is where the rules set up on the
PROTOCOL LAYER protocol layer are actually implemented.
The application layer is where networks and protocol are
Source: Demirors, 2017 used to build applications that users interact with.
 Blockchain’s key characteristics

Distributed
One of the core aspects of a blockchain is that it is a distributed ledger, meaning that the
database is maintained and held by all nodes in the network. No central authority holds or updates
the ledger, rather each node independently constructs its own record by processing every block
(group of transactions), deciding if it is valid, then voting via the consensus mechanism on their
conclusions. Once a change in the record is agreed, each node updates its own ledger.
In contrast, traditional databases are stored and maintained centrally, which can make them
high-value targets for hackers and criminals.

Immutable
In general, once a transaction is added to a blockchain ledger, it cannot be undone.
This immutability is one of the principal aspects that contribute to the trustworthiness of
blockchain transactions. A blockchain’s immutability is secured through its use of cryptography
(see below for an explanation of hashing). In a traditional, centralised database, an authorised
user can connect to the server to add or modify the data without the approval or detection of
other users. Because all the data is held in one place, if the security of the server or the authority
that runs the server is compromised, data can be modified or permanently deleted. This may
sometimes be irreversible and occur without anyone else realising it.

Agreed by consensus
No block can be added to the ledger without approval from specified nodes in the network.
Rules regarding how this consent is collected are called consensus mechanisms. Consensus
protocols are crucial in ensuring that every block is valid and that all participants agree and
maintain the same version of the ledger. They heavily affect the incentives for nodes to act
honestly and are therefore the most important variables when designing a blockchain.

Misconceptions about blockchain

Pseudonymous
Contrary to popular belief, in general, blockchain technology does not allow its users to be totally anonymous.
Rather, public blockchain platforms tend to be pseudonymous: user identities can be anonymous but their
accounts are not, as all of their transactions are visible to all other users. On these platforms, user accounts
can be created without any identification or authorisation process. This allows users to use a pseudonym.
Permissioned blockchains can require a user’s identity to be verified before they are able to access or
use the blockchain.

…Well “almost” immutable…

While rare, it is possible for the blockchain to be compromised if nodes pool their resources and collude to
approve incorrect ledger entries. However, the larger the network, the more difficult it becomes to carry out this
attack. In most systems, it would cost the attacker many more resources to carry out the attack than they would
gain from the attack itself. Additionally, some private blockchains allow for central authority nodes to change
information on the ledger. Advances in quantum computing (supercomputing) threaten some current cryptographic
security measures, but there is equally the likelihood that blockchain’s security will evolve with quantum computing
capabilities.
Blockchain under the hood:
How does blockchain actually work?

Hashing: a cryptographic fingerprint

A hash is like a digital fingerprint; it is unique to each piece of data on the blockchain.
Users put information regarding their transaction (name of receiver and sender along with the amount
transferred) into a cryptographic hashing algorithm – a complex mathematical formula – and receive
a set of letters and numbers that is distinct to that transaction. The specific input, if unchanged, will
always produce the same exact hash. If, however, any part of the data input is changed (for example
a malicious actor changes the amount transferred), the hash would change to an entirely different set
of characters and make it incompatible with the rest of the chain. Therefore, even without seeing the
details of the transaction, nodes can quickly tell that the data within the block has been tampered
with and reject that version of the ledger. It is this cryptographic security that makes blockchain
ledgers more trustworthy and “almost” immutable.

Examples of hashes
Input Hash output (using SHA 256 algorithm)

OECD 879D5ACDCDA51A6F1B00EBFE77513D9B19F574499C867997EE1FB6B1FA6DDBB0
OeCD 19C91C8433AC66422E8B13A468B3E96D5D7924BEB1164F8412484900C7C1EDC6
Note: Even subtle changes like upper or lower case significantly alter the hash.

Mining
For some blockchains, in order to add blocks to the ledger, transfers must go through a mining
process. Mining is a way of adding transaction records, via blocks, onto a public ledger. Miners are
nodes in the network that ensure the transactions in the block are valid. Specifically, they ensure
that senders have not already used the funds they want to send to receivers. Once miners finish
the verification, they have to ask the network for consent to add the new block to the ledger.
In order to do so, they have to follow the consensus mechanisms chosen for the platform.

Consensus
One of blockchain’s key characteristics is the consensus mechanisms it uses to gather consent.
Agreement among nodes regarding the “state” of the ledger is essential for the function of the
blockchain ledger. The bitcoin blockchain utilises a consensus model called Proof of Work, which
requires the miner to compete against other miners to create and broadcast blocks for approval.
If successful, they are rewarded in Bitcoin. There are other consensus mechanisms like Proof of
Stake, Proof of Authority, Proof of Elapsed Time, and Proof of Burn – all of these are variations on
the means for the network to agree on changes to the ledger.
 What are digital financial assets?

A digital asset that works as a medium of exchange

The term tokenisation describes the process of transferring rights to a real world asset into a
digital representation – or token – on the blockchain. Being in possession of that digital token then
gives you the right to that asset and the ability to trade and track it digitally.
There are three main types:
Payment tokens C
 ommonly known as a cryptocurrency, a payment token can be a store of
value and a unit of measurement, e.g. Bitcoin.
Utility tokens  token that represents a right to a good or service, similar to a gift card,
A
e.g. StorjCoin.
Security tokens A
 token that provides equity or equity like investment in a company. The holder
of the token has rights to the company’s future profits, e.g. tZERO.

Why is this important? What can it be used for? One example: Bitcoin
In today’s financial system, banks are an essential intermediary for financial transactions and
transfers. They verify the identity of the sender, the ability of the sender to make a transfer
(i.e. a sufficient account balance) and accuracy of the recipient’s address. In this context, the
bank acts as the only trusted third party.
However given the bank stores all data on a single centralised ledger, it therefore creates a single
point of failure, whereby hackers or malicious actors can direct all their efforts for cyberattacks
or manipulation to this specific entity. These financial intermediaries also charge fees to process
transactions. In the case of international remittances, these fees are significant compared to the
overall value of the transaction.
It was in this environment that the first blockchain application, a digital currency (cryptocurrency)
called Bitcoin, was born. It created a peer-to-peer currency that enables users to transfer value to
one another without having to go through a bank. Due to Bitcoin’s use of cryptographic hashing,
mining, and consensus mechanisms, users are able to verify transactions without needing a
central authority controlling a single ledger.

Comparing bank transfers and Bitcoin

■ An international
bank transfer
5-7 days

YOUR BANK INTERMEDIARY BANKS THEIR BANK

On average $20-$60 in fees
YOU SELLER
FEES FEES FEES FEES

■ A Bitcoin-based
transfer
< 1 hour

On average $0.50 in fees to miners

YOU SELLER
 Blockchain beyond finance

Blockchain technology goes far beyond cryptocurrencies and tokens, and its usefulness as a
wider economic and administrative tool is well worth exploring. The table below describes just a small sample of
blockchain’s potential to transform supply chains, healthcare and the energy sector.

Table 2. Examples of blockchain’s potential in supply chains, healthcare and the energy sector

Policy area Description Potential benefits Potential risks/Obstacles

Due diligence Blockchains allow Enhanced transparency Difficulty controlling data quality
in supply multiple parties to A more transparent supply chain will help Widely known as the “garbage
chains access the same companies and consumers identify risks of in garbage out” issue where the
database to track adverse impacts (i.e. human rights abuse and information entered on the blockchain
and record and audit financial crime), and on that basis, prioritise is only as good as its source.
products as they move further efforts to prevent or mitigate such risks. Upfront costs and lack of access
along the supply chain Sharing value of due diligence In order to link the physical world to
Using blockchain technology to tokenise due the digital, supply chain stakeholders
diligence data (attaching a monetary value to have to invest in technology as well
access to the data), could potentially help fund as facilitate access to and encourage
due diligence efforts. uptake of the technology.
Financial inclusion Fragmentation
Blockchain technology can lead to greater Despite being created for very
integration of informal actors and SMEs in the similar purposes, multiple blockchain
formal supply chain by helping overcome cash initiatives have developed, operating
flow barriers through self-executing smart on different platforms, identifying and
contracts. collecting information differently, and
with different governance structures.
Healthcare Blockchain could Continuity of care Privacy rules
be used to provide Information can be shared between different While some healthcare blockchain
more robust patient healthcare stakeholders and end users could solutions will make only high level
healthcare information find it easier to share information to new demographic information publicly
data management providers. viewable, it is conceivable that the
systems. Instead of Cost effectiveness combination of demographic data
information siloed in Providing better data sharing between and geographic location could reveal
different data systems, stakeholders can increase the ability of sensitive information.
patients and healthcare healthcare organisations to provide cost Data security
providers could choose effective care and reduce clerical errors Given the information stored
what they share and that are at best inefficient and at worst life (or linked onto the blockchain)
with whom. threatening. is highly sensitive, data security
is a potential risk.

Energy Blockchain can enable Lower transaction costs Scalability and technical
decentralised peer- Without intermediaries, costs can be performance
to-peer electricity significantly reduced along the electricity value As is, several types of blockchain
markets, allowing chain. This could potentially lead to more have difficulties scaling (for example,
individuals and entities competition and a broader range of options for due to data volumes and transaction
to balance supply and consumers. speeds).
demand and trade Facilitating distributed Energy consumption
electricity without going and low carbon electricity To reach scale in energy applications,
through a central entity. Blockchain could reduce the complexity of blockchain technologies will have
managing systems with large numbers of to develop less energy-intensive
small-scale renewable and distributed energy frameworks for processing
resources, accelerating their deployment. transactions.
 Blockchain beyond borders

The areas where major blockchain progress is taking place are as diverse as the
applications they are creating. The global nature of blockchain’s development can help
distribute opportunities for wealth creation and economic development more widely than before. It
is important for governments to develop the right policies to harness the potential benefits of this
technology while mitigating its risks and potential for misuse. To do so, it is essential for countries
to cooperate in order to share best practices and ensure interoperability. Regulatory fragmentation
will hinder the progress towards useful applications of blockchain technology.

The global development

of blockchain

lE
 conomies engaged in different
stages of using blockchain

Note: The economies engaged in different stages of using blockchain include: Argentina, Australia, Austria, Barbados, Belgium, Bermuda,
Brazil, Cambodia, Canada, Chile, China, Denmark, Estonia, Finland, France, Georgia, Germany, Ghana, Hong Kong (China), India, Israel,
Japan, Kazakhstan, Kenya, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Norway, Palestinian Authority, Papua New Guinea, Russia,
Senegal, Singapore, South Africa, South Korea, Sweden, Switzerland, Thailand, Tunisia, Ukraine, United Arab Emirates, United Kingdom,
United States, Venezuela.
Source: OECD calculations based on data collected by the Illinois Blockchain Initiative.
https://illinoisblockchain.tech and https://bit.ly/blockchain-govt-tracker

The role of the OECD

The OECD provides a forum for discussion, sets international standards, and helps build capacity in governments
– and is bringing these core competencies to the opportunities and challenges presented by blockchain. It is
already helping governments find the right experts and practitioners to engage with, consider the need for
cooperation in the international policy environment, and identify and share best practice for governments
managing and using blockchain.
An integrated and holistic approach is key to maximising the benefits of this technology, both between sectors and
between markets. The OECD’s multidisciplinary expertise and deep links with industry, academia, governments
and other international organisations mean it is able to join the dots for domestic priorities and global actions.
If blockchain is going to be one of the transformative technologies of our time, the OECD is here to make sure
governments are ready.
References
Berryhill, J., T. Bourgery and A. Hanson (2018), “Blockchains
Unchained: Blockchain Technology and its Use in the Public
Sector”, OECD Working Papers on Public Governance, No. 28,
OECD Publishing, Paris, https://doi.org/10.1787/3c32c429-en

Demirors, Meltem (2017), Oxford Blockchain Strategy

Programme, Saïd Business School, University of Oxford, UK,
https://www.getsmarter.com/presentations/uk/oxford-said/what-
stakeholders-are-involved-in-the-blockchain-strategy-system

Hileman, G., Rauchs M. (2017), Global Blockchain Benchmarking

Study, https://www.jbs.cam.ac.uk/fileadmin/user_upload/
research/centres/alternative-finance/downloads/2017-09-27-
ccaf-globalbchain.pdf

Pike, Chris (2018), “Blockchain Technology and Competition

Policy”, OECD Issues Paper on Competition, https://one.oecd.
org/document/DAF/COMP/WD(2018)47/en/pdf

Ray, Shaan (2017), “Blockchain versus Traditional Databases”,

Online, https://hackernoon.com/blockchains-versus-traditional-
databases-cla728159f79

Savjee, Xavier (2017), “How Does a Blockchain Work – Simply

Explained”, YouTube video, https://www.youtube.com/
watch?v=SSo_EIwHSd4

This work is published under the responsibility of the Secretary-General of

the OECD. The opinions expressed and arguments employed herein do not
necessarily reflect the official views of OECD member countries. This document
and any map included herein are without prejudice to the status of or sovereignty
over any territory, to the delimitation of international frontiers and boundaries and
to the name of any territory, city or area.
www.oecd.org/finance/blockchain