Blockchain technology has been on your radar for some time. You’ve done your research, read the case studies and now you’re convinced that transitioning to a distributed ledger data management system is the right decision for your business. And you may be right! The current systems in place for managing business data are fragmented, vulnerable to fraud, and slow to detect falsification, whereas blockchain, a form of distributed ledger technology, can provide increased security, accountability, higher efficiencies and often times lower cost.
Now, when most people hear “blockchain” their mind immediately jumps to ‘bitcoin’, however blockchain technology does not need to leverage a cryptocurrency to provide value; businesses that process transactions, record events, manage and track records, require or trace asset transfers are all well suited to deploy distributed ledger technology. This is because when data is stored on a blockchain it’s replicated across a network of validators and secured using cryptography, thus providing a solution where all participants within the network have the most up-to-date copy of the ledger in a manner that’s transparent, instant and incorruptible.
Where to start?
If you're considering creating a new blockchain-based product or integrating an existing solution with blockchain, a good place to start is to understand and evaluate different technologies within the blockchain ecosystem. This can be a daunting task but fear not, we’re here to help.
What are your requirements?
Now this may seem obvious, but you need to break down your goals for the project and the specific outcomes you want to achieve. There has been a massive influx of companies within the blockchain space over the past few years, many of them are all hype and no substance. Make sure you approach each conversation with a game plan and specific system requirement questions. Also, you need to determine if your desired outcomes can be achieved more efficiently using an existing technology. Blockchain is great for certain business applications and doesn’t makes sense for others.
Scalability
The distributed ledger technology on which you choose to deploy your solution(s) will need to be able to grow and scale with your business. How many users are there in your network? Who will have access to the data? How many transactions will be stored on the blockchain today, tomorrow and 5 years from now? Scalability has emerged as one of the biggest hurdles many blockchain technologies face as they look to go mainstream. For example, the speed at which Bitcoin or Ethereum process transactions would never be suitable for the millions of transactions processed per second by the likes of Visa or Paypal. Solutions are emerging for these problems, and choosing a network that can grow alongside your business is imperative!
Developer Access
Blockchain is a new technology and finding developers comfortable with the ecosystem of programming languages and technologies can be difficult. You’ll want to be sure the platform you choose allows developers to work with a coding language they’re already familiar with, or that there is a healthy ecosystem of tools and libraries supporting developers. This will help you avoid the need to outsource development work which can often be costly and inefficient.
Community Engagement
In the same vein as developer access, does the technology platform you choose to move forward with have a strong developer community? These tech communities can provide invaluable feedback and support when it comes to launching new products or detecting bugs in a new protocol.
Adaptability and “Second Layer Solutions” Like Esprezzo
The blockchain platform you launch today will need to be able to interact with the technologies of tomorrow. As your company grows, the complexity and requirements of your systems may change and you need to ask yourself which data systems will need to interact and what functions are required to keep driving value for your business. At this point I should mention the primary goal of Esprezzo is to build a tier of integration tools and services to keep your business and its data well positioned to connect to, and benefit from this rapidly evolving technological landscape.
Security
Many new technologies take years to be properly vetted from a security standpoint. Has the security and cryptography technology your platform relies on been peer-reviewed multiple times? Is the technology ready for deployment or still being tested in a proof-of-concept? Have they conducted a security and code quality audits?
Understanding Consensus Models
Blockchains are decentralized (distributed peer-to-peer) networks; instead of a central authority that verifies every transaction (potentially being a single point of failure or source of corruption), blockchains rely on participants in their network (validators) to decide which data gets added to the shared immutable ledger and in what order. This requires a “consensus model” so that all nodes are synchronized with each other and reflect the same transactions and outcomes in the same order in near real time. This is the predicament of achieving consensus within a decentralized network. The solution to this problem is a consensus model, which is an agreed upon set of data validation rules that is followed by all participants in the network, and there are several consensus models to choose from. How do you determine the best protocol to achieve consensus within a distributed network? It all depends on the use case.
Proof of Work (PoW)
Proof of Work is the most popular consensus mechanism and is currently being leveraged by public blockchains such as Bitcoin and Ethereum. Proof of Work is lauded for its simplicity and extremely high level of security. Proof of Work relies on the computational power of miners to verify legitimacy of transactions and prove (proof) its expenditure of resources (work) within a block by solving complex, cryptographic problems; the first miner to solve the problem is rewarded and a new group of transactions and their data make up the ‘block’ that is then added to the ‘chain’. Proof of Work maintains an extremely high level of security because any successful attack on the network would require at least 50% of the validators on that network to coordinate an attack. This is extremely difficult for a laundry list of reasons, one being that during an attack, it would require electrical consumption on par with that of a country like Denmark or Ireland to reliably have a chance to compromise the network security model.
The largest drawbacks to a Proof of Work consensus mechanism is the processing speed and the amount of energy required to run the computational calculations. On average, Bitcoin processes about 7 transactions per second. Ethereum is twice as fast with 15 transactions per second. To give you some perspective, Visa executes about 24,000 transactions per second. Clearly, there are scalability issues. Bitcoin uses upwards of 58 TWh of electricity on an annual basis, that’s about the same as Switzerland. When the network becomes congested as it did in November 2017, an average Bitcoin transaction can require up to 250kWh to be processed, which is enough energy to power the average home for 10 days.
Proof of Stake (PoS)
Examples: Cardano, Harmony, Ethereum 2.0 (unreleased)
Proof of Stake is a much more energy efficient alternative to Proof of Work but there are trade-offs. While Proof of Work relies on miners expending real resources to demonstrate commitment and accountability to the network, Proof of Stake relies on validators (block producers) chosen by various pseudo-random systems which take into account things like the amount of their ownership ‘stake’ of the network’s currency or how long they’ve been holding the network’s currency. The probability of creating a block and receiving the associated transaction fee and block producer reward is proportional to the amount of tokens or network currency units held. The idea is that the larger your stake, the more incentivized you are to maintain integrity so you don’t lose your stake and the network as a whole retains as much value as possible.
While still a nascent technology, Proof of Stake provides an alternative incentive model which requires far less energy expenditure but a less-proven level of security than Proof of Work. One could argue that a Proof of Stake network could be overrun by someone with deep pockets whereas taking over a Proof of Work network requires not only money but expertise, hardware, electricity and lots of time. The Ethereum network is actively working on transitioning from its current Proof of Work model to a Proof of Stake protocol called, Casper.
Delegated Proof of Stake (DPoS) generally refers to systems in which a stakeholder or token holder has the ability to nominate a masternode or “Delegate” who will assume their voting power and pool it with other constituents to assume a better collective chance of being selected to forge a block and receive the reward. The block reward will then be distributed among the constituents based on the size of their stake, which is usually the percentage of the pool’s voting power their stake represents. This is a bit of a grey area as some systems allow the masternodes to be selected and voted on by the community, and some do not. The lines between PoS and PoA can become blurred and in practice very few applications have a need for the level of decentralization present in networks like Bitcoin and Ethereum. Example: EOS
Proof of Authority (PoA)
Examples: POA Network, Kovan Testnet
Proof of Authority is a reputation and “authority-based” consensus algorithm that’s gaining popularity — especially for private blockchains — due to its high transaction throughput. Proof of Authority blockchains are secured and validated by a pre-approved group of block validators that are believed to be trustworthy. Because Proof of Authority relies on a smaller number of network managers this creates a fast, scalable system perfect for businesses who wish to leverage the benefits of blockchain technology while maintaining privacy. This is suitable for projects that only require distributed consensus as opposed to decentralized consensus.
Microsoft Azure is currently implementing a Proof of Authority solution for clients who wish to launch a private blockchain network that does not require a native currency or “gas” to operate. Given the smaller number of preselected network validators, the argument can be made that Proof of Authority sacrifices decentralization in favor of increased efficiency and scalability. Yes, Proof of Authority provides an extremely high throughput however questions around immutability have risen due to the fact censorship and member blacklisting can be easily achieved.
Understanding Public, Private and Consortium Blockchains
The differences between public, non-permissioned blockchain networks and private, permissioned networks, is pretty straightforward and understanding the differences is crucial for deciding what best suits your needs.
Public Blockchains |
Private Blockchains |
Consortium Blockchains |
|
|---|---|---|---|
Examples |
Bitcoin Ethereum |
MultiChain Hyperledger Sawtooth |
Quorum Corda |
Decentralized |
Yes | No | No |
Access |
Public, open read & write access |
Permissioned read and/or write access Single authority or organization has write access |
Shared permissioned read and/or write access Only members can be nodes (granted permission to join) |
Consensus determination |
All miners (PoW), eligible stakeholders (PoS) | One organization | Selected set of nodes |
Degree of Trust among network participants |
Low | High | High |
Speed |
Slower | Faster | Faster |
Identity |
Anonymous / pseudonymous | Known identities | Known identities |
Public Blockchains
Public blockchains are completely decentralized. Access to public blockchains are available to anyone and everyone anywhere in the world who can operate network nodes, review, audit, and add blocks to the chain. In a public blockchain all transactions are open and transparent (however participating members do maintain a certain degree of anonymity as they are represented by a hash sequence rather than personal information). No permission is required to join a public blockchain and no individual, country, or company is in control of the network. In a public blockchain, data is added to the ledger based on the rules set forth within the protocol and chosen consensus model as discussed above. Bitcoin, Ethereum and Litecoin are popular examples of public, permissionless, blockchain networks.
Private Blockchains
Private blockchain networks are typically owned and operated by specific individuals or organizations who have full control over the network. They have the ability to edit transactions, revert balances and add new blocks without the oversight required in an open network. Within a private blockchain participant access can be restricted and not all network validators have the ability to replicate the ledger. The main advantages of a private blockchain network are fast transaction speeds, the ability to control who can read and write data, and increased security. If you’re not concerned with decentralization and are working within a closed environment limited to known players, this may be a route to consider. It’s important to remember that developing your own private blockchain can be costly and time consuming (see Developer Access & Community Engagement above). Hyperledger Fabric, Hyperledger Sawtooth and MultiChain are examples of popular private blockchain platforms.
Consortium Blockchains
Business leaders were quick to understand the massive potential benefits provided by blockchain technology. However they also understood that when it came to developing blockchain technology, one size does not fit all and it’s difficult to navigate all the options considering the continued development of new technology, governance and regulations. This prompted industry leaders to collaborate on blockchain technology and standards development in the form of consortium blockchains (also known as federated blockchains) where like-minded companies share development costs and time, and work together to make decisions regarding the rules that govern the network.
Essentially, consortium members operate the blockchain together; the consensus process is controlled by a pre-selected set of nodes. Consortium blockchains can be considered semi-private, sitting between fully open, decentralized public blockchains and centrally-controlled private blockchains. Some consortium blockchains are cross-industry (e.g. Hyperledger), while others are focused on specific industries (e.g. medical, healthcare, insurance, IoT). Consortium blockchains limit their access to members of the organization who also have the ability to operate as network validators and maintain consensus. Consortium blockchains also allow participating members to share selected data amongst the network in a secure manner. As participating members often conduct business with one-another, this saves time and cuts costs. Quorum, Corda and R3 are all examples of popular consortium blockchain networks.
Conclusion
The blockchain revolution is coming. The operational enhancements provided to traditional industries and the enablement of new business models can’t be ignored. Companies who understand this and develop an adoption roadmap will create a competitive advantage against their peers… if done the right way. Early adoption of a new technology does not guarantee success, many who make the jump will stumble and fall. The best way to ensure the successful implementation of a blockchain solution will be in the planning, strategy and operation meetings you have with your team before a line of code is touched.
If you're interested in experimenting with blockchain-based automation, check out Esprezzo Dispatch. It's a tool we're working on that makes it fast and easy to set up automations ranging from alerts on blockchain and crypto stats you care about, to more complicated workflows.
