Blockchain promises to fundamentally solve the issues of time and trust to address inefficiencies and costs in industries such as financial services, supply chains, logistics, and healthcare. Blockchain’s key features include immutability and a shared ledger where transactional updates are performed by a consensus-driven trust system, which can facilitate a truly digital interaction between multiple parties.
This digital interaction is not only bound by systemic trust but ensures that the provenance of the transactional record maintains an immutable track record of interaction between parties. This very characteristic lends itself to culpability and non-repudiation and incentivizes fair play. With the blockchain system design, we are attempting to build a system that has implied trust. This trust system leads to reduced risks, and various applied technology constructs—such as cryptography, encryption, smart contracts, and consensus—essentially create gates to not only reduce risk but also infuse added security into the transaction system.
This article is an excerpt from the book Blockchain with Hyperledger Fabric – A book that helps you learn to develop blockchain-based distributed ledgers and deploy a Hyperledger Fabric network with concrete exercises and examples.
In this article, we’ll look at the core building blocks for blockchain solutions and then examine some additional capabilities that should be considered.
Four core building blocks of blockchain solutions
Blockchain solution proposals typically include the following four building blocks:
– A shared ledger: The shared ledger appends only the distributed transaction record. Bitcoin blockchain was designed with the intent to democratize visibility; however, with blockchain, consumer data regulations also need to be considered. Using a properly configured SQL or NoSQL distributed database can achieve immutability or append only.
– Cryptography: Cryptography in a blockchain ensures authentication and verifiable transactions. Blockchain design includes this imperative because of the computational hardness assumption and a focus on making encryption harder for an adversary to break. This is an interesting challenge with Bitcoin blockchain because of the economic incentive and its system design. When you’re working in a less democratic or permissioned business ledger network, considerations around cryptography change.
– Trust systems or consensus: “Trust systems” refers to using the power of the network to verify transactions.
Trust systems are central to blockchain systems; they are at the heart of blockchain applications. We think trust system is the preferred term over “consensus system” because not all validation is done through consensus. This foundational element of trust dictates the overall design and investment in a blockchain infrastructure. With every new entrant in the blockchain space, the trust system is modified, forming variations that are specialized for specific blockchain use cases.
Trust, trade, and ownership are staples of blockchain technology. For intercompany transactions, the trust system governs transactions for trade between participating companies.
There’s still much work needed to define the best trust system for specific use cases, like P2P and sharing economy models with B2B models.
– Business rules or smart contracts: Smart contracts are the business terms that are embedded in a blockchain transaction database and executed with transactions. This is the rules component of a blockchain solution. It is needed to define the flow of value and state of each transaction.
The following use diagram gives us a good idea of these concepts:
The four building blocks are generally accepted and well understood. They have existed for decades prior to blockchain. Shared ledgers are an evolutionary change, similar to the move to computer-based spreadsheets, but the underlying business rules stay the same.
Additional capabilities to consider
What else should be included in blockchain proposals, especially those within enterprises? The following is a non-exhaustive list of other capabilities to consider:
– Auditing and logging: Including auditing and logging in a blockchain solution can help address regulations for the purposes of non-repudiation, technology root cause analysis, fraud analysis, and other enterprise needs.
– Enterprise integration: It’s also worth considering how the solution will be integrated into the enterprise:
– Integration with the incumbent systems of record (SoR): The goal here is to ensure that the blockchain solution supports your existing systems, such as CRM, business intelligence, reporting and analytics, and so forth.
– Integration as a transaction processing system: If you want to preserve the SoR as an interim approach to adopting blockchain, integrating it as a transaction processing system makes sense.
– Design with the intent to include blockchain: If you intend to share some or part of your data with other enterprises to achieve your business goals, consider designing with your existing system’s architecture in mind, as that will accelerate enterprise adoption of blockchain solutions with appropriate data governance. This is because the current data and application architecture will be able to adapt to blockchain-driven transaction processing.
– Monitoring: Monitoring is an important capability for addressing regulations and ensuring high availability, capacity planning, pattern recognition, and fault identification.
– Reporting and regulatory requirements: Being prepared to address regulatory issues is also very important, even for interim adoption of a blockchain as a transaction processing system. It’s recommended that you make connectors to your existing SoR to offload reporting and regulatory requirements until blockchain is enterprise aware, or the enterprise software is blockchain aware.
– Enterprise authentication, authorization, and accounting requirements: In a permissioned enterprise world (unlike permissionless Bitcoin blockchain), all blockchain network participants should be identified and tracked. Their roles need to be defined if they are to play a part in the ecosystem.
Where blockchain technology has been and where it’s going
Blockchain has already been a business disruptor, and we expect it to significantly transform industries, government, and our lives in the near future.
The great divide
A significant divide exists between the cryptocurrency and Initial Coin Offering (ICO) world, and the world of regulated business. The latter consists of banks and financial institutions working collectively to assess market potential and operational efficiencies.
An economic model for blockchain delivery
Blockchain networks, underpinned by blockchain technology, may bring transformation or disruption to industries, but in any case, to thrive, blockchain needs an economic model. If disruption is the aim, investments in technology, talent, and market synergy can be combined with the lure of economic incentives. ICOs, for example, typically rely on tokenomics, a term that describes the economic system of value generation in those networks. The token is the unit of value created by the system or network—either through making a platform for providers or consumers, or through co-creating a self-governing value network in its business model that various entities can use to their advantage for creating, distributing, and sharing rewards that benefit all stakeholders.
Learning as we go
With any new technology, there is always a learning curve. As blockchain evolved and we began to work with regulated industries, we quickly recognized that, in such industries, there are important design considerations to address—things like identity, confidentiality, privacy, scalability, and performance. These elements can have significant cost implications when it comes to designing blockchain networks, as well as the business models that govern these networks. These challenges have not only been interesting to solve; they’ve also had a positive effect on conventional, regulated industries and businesses by re-energizing innovation in these organizations and inviting the best talent to join in tackling these challenges. Businesses are recognizing that ecosystems and networks driven by blockchain technology will contribute to progress and success.
The promise of trust and accountability
Blockchain technology promises to be the foundation for a secure transaction network that can induce trust and security in many industries that are plagued with the systemic issues around trust and accountability. From a technological point of view, blockchain facilitates a system of processing and recording transactions that are secure, transparent, auditable, efficient, and immutable. These technological characteristics lend themselves to addressing the time and trust issues that plague current-day distributed transaction systems.
Adopting blockchain in the enterprise requires a balancing act. Organizations not only have to run, manage, and maintain their existing infrastructure, they also need to help pave the way for this new computational model that promises to bring transformation.
Nitin Gaur currently leads IBM Financial Sciences research practice, as a part of IBM Research. In this role Nitin leads a team that aspires to play a pivotal role in reshaping the future of the financial services industry with faculty, advanced technology, and superior design in the field of financial sciences and financial technology.
Anthony O’Dowd is a Distinguished Engineer at IBM, focusing on Blockchain. He led IBM’s contribution to the design and development of the new smart contract and application SDKs found in Hyperledger Fabric v2. Anthony has also made significant contributions to Hyperledger Fabric documentation and samples.
Petr Novotny is a Research Staff Member and Master Inventor at IBM Research with more than 15 years of experience in research and engineering of software systems.
Luc Desrosiers is an IBM Senior Certified IT Architect and the technical leader of the IBM Cloud Pak Acceleration Team. He has worked for many years helping clients and consortiums build blockchain solutions using IBM technologies.
Venkatraman Ramakrishna is an IBM Researcher with 10 years of experience. Following a B. Tech. from IIT Kharagpur and a PhD from UCLA, he worked in Microsoft’s Bing Infrastructure team before joining IBM Research-India.
Salman A. Baset currently works at MongoDB, where he is responsible for the strategy and execution of security and compliance for MongoDB’s server and cloud.