BLOCKCHAIN PRINCIPLES

1) Shared ledger
Why is a shared ledger so interesting? Because there is no need for reconciliation. All companies operate with their own accounting ledgers and they then reconcile transactions with other external companies by comparing ledgers. This is an extremely inefficient process. A shared ledger takes away the inefficiency of reconciliation. That is why banks are interested with this technology because the financial system is just stacks and stacks of ledgers. It is important to attribute the significance of ‘shared ledgers’ to the work of Richard Brown.

Why is this relevant?
If you have one ledger, then you don’t just have to share the ledger with say your supplier who may say record their invoice on the ledger, you can also share the ledger with other stakeholders. The multi-stakeholder ledger is seen mainly in financial services. A regulator wants to see what is happening, and most of regulation relies upon the regulated entity reporting to the regulator rather than the regulator finding out for itself. With a blockchain between the regulated entity, its customers and the regulator, the regulator can monitor transactions seamlessly.

2) Not owned by anyone
People ask the question why not just use a database. The point is that a database is owned generally by a single entity, whereas a blockchain is distributed and owned by everyone in the network. For example, the bitcoin protocol. No-one owns the protocol, the protocol is essentially a community of persons that have downloaded a full copy of the bitcoin ledger and the miners who decide on what new content can be added to the ledger. This is significant as it creates a platform to enhance coordination between stakeholders.

3) Adding any content to ledger
You can add device or human identities to the ledger, you can add money to the ledger, you can add assets to the ledger, you can add invoices, you can add most things. This means that the application of blockchain technology is extremely broad and not only limited to financial services.

4) Validation and permanence
When new content is proposed to be added to the ledger, then the other validators in the network – in bitcoin these are miners – decide whether the content can be added or not. Once they have decided then the content can never be removed.

5) Applications and the ledger
Bitcoin is a static asset on a ledger. You add it to the ledger and you may move it from A to B. However, a shared ledger can be used to store programs of any sort. These programs are called distributed applications or smart contracts. Once they are added to the ledger, they act autonomously in most cases. The advantage of these distributed applications is that anyone can read their code so they know how the application will work before they interact with it. Think of a see-through clock: you can see inside at the inner mechanisms from the outside. Distributed applications add transparency to systems that have huge efficiencies. Distributed applications are being explored in areas such as bond administration which requires regular payments to beneficiaries.

6) Variation
There are many protocols and iterations of blockchain tech. For instance, R3’s blockchain prototype Corda allows granular sharing of information amongst network participants. In some blockchains, anyone can access the network such as bitcoin, while, in others, you may have to be approved to join a network. Further, the role of ‘validator’ can be assigned to everyone on the network or only for certain appointed persons, and the way that validators reach consensus is equally varied with notions such as Proof of Stake to Proof of Work.