A “block chain” is software that allows a network of companies (typically trading partners) to each keep a copy of an electronic ledger (list of transactions) whilst ensuring that each copy is in sync with the others, and that the ledger cannot be accidentally or maliciously updated by one (or more) of the partners without agreement from the majority.
This sounds like a fairly esoteric development, but companies today spend many billions of dollars solving this problem across a wide variety of industries: finance, trading, supply chains, escrow, insurance, automotive etc.
The key innovations here are the use of cryptography, distributed systems and consensus algorithms to ensure that the ledger is append-only (no modifications to existing records), synchronized across trusted participants in the network and that a majority of the participants must validate changes to the ledger before they are accepted (consensus).
Blockchain implementations such as Hyper Ledger or Ethereum allow user defined code to run when a transaction is appended to the ledger. This custom code is sometimes referred to as a “Smart Contract” because it can make arbitrary state updates based on some underlying “contract” between the trading partners. For example, if partner A lends $100 to partner B with the promise that partner B will pay the money back in 30 days with 10% interest, then this promise can be coded as a smart contract that executes automatically, moving money from partner B’s account to partner A’s account (plus interest) 30 days after the loan. The movement of money will occur automatically, and both the ledgers of A and B will be updated and will reflect all the transactions that have occurred. This automation may lead to cost savings for both partner A and B as they no longer have to perform manual settlement of the loan and they both have a “single source of truth” (the synchronized ledger) that encodes the details of their trading relationship.
In subsequent articles I will dig deeper into the business model, use cases, technical and architectural considerations for blockchains, Hyper Ledger and Smart Contracts.
The header image is from the fascinating University of Nottingham business accounting collection.