Introduction to BlockChain

Objective
When you finish this unit, you will be able to:
• Explain the use of blockchain for business.
• Identify different types of blockchain.
• Identify why blockchain is relevant for enterprise.

What is Blockchain
For an introduction to blockchain, watch the video Blockchain Fundamentals:
Blockchain for Business at https://www.youtube.com/watch?v=i9KPXyHc4Bw
• Blockchain is a major shift in both technology and processes for companies.
• Blockchain will serve as the backbone for transformed collaboration models and empower
other technologies, such as the Internet of Things (IoT), mobile, and analytics.
Problem: Inefficient, expensive, and vulnerable

Let us explore a common business network scenario. Several participants are involved
while transferring the ownership of a vehicle: the manufacturer, seller, buyer,
regulators, banks, and many more.
Each participant keeps their own ledgers, which are updated to represent business
transactions as they occur.
This process is expensive because of the duplication of effort and intermediaries that
add a margin for services. It is clearly inefficient because the business conditions (the
contract) are duplicated by every network participant. It is also vulnerable because if a
central system (for example, the bank) is compromised because of an incident, this
compromise affects the whole business network. Incidents can include fraud,
cyberattack, or a simple mistake. Overall, it requires much effort to provide a
transparent trail to auditors.
Solution: A shared, replicated, and permissioned ledger

The solution is a shared, replicated, and permissioned ledger with consensus,

provenance, immutability, and finality.
By using the novel blockchain architecture, participants share a ledger that is updated
every time that a transaction occurs through peer to peer replication. Imagine all the
participants who are in the same room and shouting out loud transactions, and
everyone is noting them down.
Dealing with sensible data, cryptography is used to ensure that network participants
see only the parts of the ledger that are relevant to them, and that transactions are
secure, authenticated, and verifiable.
Blockchain enables the contract for asset transfer to be embedded in the transaction
database, which determines the conditions under which the transaction can occur.
Only transactions that follow the rules are endorsed and eventually written to the
ledger.
Network participants agree how transactions are verified through consensus.
Government oversight, compliance, and audit can be part of the same network and
benefit from a common view.
Consensus means that all participants agree that a transaction is valid. Frequently
within a business network, it is advantageous for a set of organizations to have the
same view of a set of data that can be updated or changed by individual parties. For
example, any use case or industry that relies on shared reference data, such as bank
routing codes, employment records, title insurance, and others, benefits from this
property of blockchain.
Provenance means that participants know where the asset came from and how its
ownership changed over time. All transactions on a blockchain are tied to one another
through an append-only process that is called hash chaining. Each transaction is tied
to the ones that came before it, which results in a tamperproof audit trail. This audit
trail enables participants to know where an asset was first logged on the blockchain
and how its ownership changed throughout its lifecycle.
Some industries such as manufacturing, transportation, and supply chain must track
how often and through how many parties an asset changes hand. Other industries
incur significant costs because of recalls. All these industries can benefit from
blockchain’s provenance capability.
Immutability means that no participant can tamper with a transaction after it is agreed
to. If a transaction is in error, then a new transaction must be used to reverse the error,
and both transactions must be visible. Each block is linked to the previous one, which
means that no participant can credibly claim that an earlier transaction changed or did
not occur.
 Any industry with audits and regulatory compliance derives its principal benefit from
blockchain’s immutability. Immutability creates an indelible record of all transactions,
including seek and find access for auditors and regulators.
Finality means that there is one place to determine the ownership of an asset or
completion of a transaction. Finality is the role of the shared ledger.
Transactions and asset ownership on a blockchain are run immediately upon the
fulfillment of specified contractual conditions. In the global trade industry, for example,
banks and corporations benefit from blockchain’s finality to make transactions nearly
instantaneous compared to the time and the cost that is associated with physically
signing documents, currency fluctuations, and more. Organizations can also use IoT
devices in this scenario to help sellers draw down a buyer’s letter of credit at specified
points during shipment. If an erroneous transaction is sent, reversing it requires an
equal transaction in the opposite direction, and both transactions are visible. To assess
the need for finality, consider whether parties would benefit from the ability to create
instantaneous and tamper-proof transactions.

What is a ledger
You are probably used to looking at your bank account. What is most important to you
is the available balance because it is what you may spend at the current moment. If
you want to see how your balance was derived, then you can look through the
transaction credits and debits that determined it. This is a real-life example of a ledger,
which is a state(your bank balance) and a set of ordered transactions (credits and
debits) that determine it. Hyperledger Fabric is motivated by these same two concerns:
to present the current value of a set of ledger states, and to capture the history of the
transactions that determined these states.
A ledger does not literally store business objects, but it stores facts about those
objects. When we say “we store a business object in a ledger”, what we really mean is
that we are recording the facts about the current state of an object and the facts about
the history of transactions that led to the current state. In an increasingly digital world,
it can feel like that you are looking at an object rather than facts about an object. In the
case of a digital object, it is likely that it is in an external data store, and the facts you
store in the ledger can identify its location and other key information about it.

Although the facts about the current state of a business object might change, the
history of facts about it is immutable; it can be added to, but it cannot be retroactively
changed. We are going to see how thinking of a blockchain as an immutable history of
facts about business objects is a simple yet a powerful way to understand it.
For more information about the ledger, see Ledger at https://hyperledger-
fabric.readthedocs.io/en/release-1.4/ledger/ledger.html

Different types of blockchain

All blockchains aim to provide irrefutable proof that a set of transactions occurred
between participants.
Different types of blockchain exist (non-exhaustive list):
• Bitcoin is a public blockchain that is most famous for its digital currency. It is the first blockchain
application.
• Ethereum is a public, blockchain-based distributed computing platform that introduced the
concept of smart contracts.
• Hashgraph is a distributed ledger technology (DLT) that uses a novel concept of graphs instead
of blocks for sequencing transactions.
Bitcoin and its cryptocurrency are the first applications that use blockchain technology.
Many other projects followed over the years and applied blockchain technology to other
use cases beyond digital money. However, the shared ledger technology is separate,
separable, and applicable to a whole range of business challenges across all
industries.
Many business use cases do not require a token to work. IBM is not primarily focusing
on cryptocurrencies but is committed to helping clients make the most of blockchain
technologies. IBM sees this technology as a major transformation opportunity for many
of its clients.
Digital currencies (the representation of FIAT currency as an asset on a blockchain)
are auditable and permissioned, so they are an excellent blockchain use case.
Although certain applications justify the use of an unpermissioned and public
blockchain, business use cases in general focus on permissioned networks. As an
analogy, in today’s network landscape, basically every company, even every
household, runs their own private network (for example, an intranet) by using the public
internet for exchanging data.
Blockchain technology can be the infrastructure for secure transactions, like the
internet for general communication. There are countless applications that run on both
infrastructures. The internet would be a boring place if it was used only for sending
emails. Similar, blockchain would be uninteresting if it was used for only
cryptocurrencies.

Requirements of blockchain for business

The requirements of blockchains for business are generally different from open, public
blockchains:
• Blockchains for business are used to track any assets of value, tangible or intangible, and are
not restricted to cryptocurrencies.
• Regulated businesses have requirements such as Know Your Customer (KYC) and Anti-
Money Laundering (AML), which require them to know with whom they are dealing.
Participants on business blockchains have known identities by using digital certificates, which
also allows transactions to be signed and encrypted. Transactions on business blockchains
can be viewed by only those participants with a need to know, for example, a regulator. In
public blockchains, the data on the ledger is in general visible to all.
• To keep transactions confidential, businesses need fine-grained control over who agrees to,
or endorses, transactions.
In business blockchains, transactions are endorsed by a small subset of participants,
such as those affected by the transaction and optionally a third party, such as a
payments provider.
Blockchain for business is much more efficient than state-of-the-art public blockchains,
such as Bitcoin or Ethereum, which require most of the network to endorse a
transaction.
The following figure shows three main requirements of blockchain for business.
 Assets
• Assets are anything of value. On the blockchain, they are represented digitally by using a pre-
agreed format.
• Transactions change the state of an asset and are provably recorded on the blockchain.
Examples are creating a vehicle, transferring ownership, or changing color.
• Transactions are underpinned by smart contracts, which are verifiable business rules that
cause the asset to change state

Identity
• Various regulations (such as KYC) that are applied to businesses require them to know
with whom they are dealing.
• Identity is used to ensure that business networks are kept private and individual
transactions confidential, with transparency for the regulator.
• In general, every business, no matter which country, is regulated. Commonly known examples
include KYC, AML, and Combatting the Financing of Terrorism (CFT). These regulations
require that companies know who their business partners are.
A standards-based Private or Public Key Infrastructure (PKI) creates identities that can
be trusted by other members of the business network. In addition, on- and offboarding
procedures are typically established.

Endorsement process
• Endorsement is the process in which a transaction is verified as “good”. It ensures that
participants are willing to accept the transaction and prevents the double spending problem.
• Endorsement is the process by which the network verifies a transaction. Depending on the
underpinning blockchain technology, different mechanisms are used to decide whether a
transaction is valid. You might have heard about Proof of Work (PoW) or Proof of Stake (PoS).
These strategies are necessary to create incentive for correct behavior in an anonymous
network.
• Blockchain for business has known identities and a different level of trust. Transactions must
be checked against the agreed business rules to avoid incorrect data being stored on the
ledger.
• Endorsement can be expensive in public blockchains:
o Without identity, transactions are distributed among the whole network for endorsement.
o PoW is CPU-intensive.
• In the real world, transactions are endorsed by a smaller number of participants: Sender bank,
receiver bank, and payments provider.
• Must be completed in an appropriate timeframe.
 Why blockchain is relevant for enterprise

There are use case examples everywhere, and we are still in the early days of
understanding the potential of blockchain. Also, be aware that many use cases (for
example, supply chain) are cross-industry.
Finally, it all comes down to building infrastructures to benefit from blockchain use
cases.
Problem: Lack of trust in the food ecosystem

The problem with the food ecosystem was:

• Data is siloed within each company, and accessing it requires a request and time.
• Exchange of information takes place between a pair of partners, and to get information from a
distant partner might require intermediaries, time, and resources.
• Most transactions are still paper-based, which creates inefficiencies and opportunities for
fraud.
• Because everyone maintains their own record of transactions, differences take time and
resources to reconcile.
Today in complex ecosystems, when one actor transacts with another, they do so
through individual interactions, and many of these transactions often include
intermediaries. As a result, transactions take on extra costs, create inefficiency, and
can also be more vulnerable because of the dependency on specific actors.
Blockchain transforms the food ecosystem:
• Blockchain provides an independent data-sharing platform that participants trust.
• Data is shared on a single platform. Members have instant transparency into the transactions
without needing intermediation.
• Data immutability creates an auditable record of all transactions, which disincentives
fraudulent behavior.
Dispute resolution from the shared ledger can be automated, which saves time and
resources.
 With blockchain, actors in complex ecosystems can easily share transaction
information on a single data-sharing platform, which eliminates the need for individual
interactions or to work with intermediaries. Everything is trusted, transparent, and
automatic, which results in large efficiency gains.
Providing safe, authentic, and sustainable food is an important responsibility. How can
we trust that the right information is shared accurately and instantly across our complex
food supply chain? Discover the answer to this question by watching the following
videos:
• Circling back to your community of food at https://www.youtube.com/watch?v=rfabcj-rNh8
• Join the power of IBM Food Trust at https://youtu.be/QWijlTDHLMQ
Problem: Online Identity systems are broken
Today, individuals and organizations are not in control of their identity. Personal
information is often shared without our awareness and is a honeypot of personal data
for hackers to exploit.
Enterprises and traditional data aggregators realize the shift to decentralization
because of the following reasons:
• Cost
• Liability
• Difficult to establish trust
Blockchain enables decentralized identity for trust and privacy at scale:
• Blockchain enables trust.
Users can verify the identity of a person, organization, or thing on the public ledger,
and they can create and manage cryptographic identities. There are no central
certificate authorities (CAs).
• Blockchain provides privacy.
Zero-knowledge proofs disclose only the information that needs to be shared.
• Blockchain provides scale.
Removal of centralized issuers allows identity to scale at the edges.

For more information, see The Sovrin Network- Making Self-Sovereign Identity a
Reality