Chapter 2

      Digging into Blockchain Technology

      IN THIS CHAPTER

      Blockchain is one of the most discussed technologies of our time. It's commonly described in many ways, including “a disruptive and game-changing technology,” a “distributed ledger of transactions,” and a “new kind of database.” Although these short descriptions are different, there's some truth in each one, but none captures what blockchain is all about. In short, blockchain technology is a radical new approach to delivering trust and confidence over exchanges of value without relying on a trusted third party.

      Wow, that’s a mouthful! You’ve probably heard that blockchain supports transactions between participants in a trustless environment. Most of the time, when you transfer something of value from one party to another, you use a trusted third party (someone you trust to handle the money or whatever you're transferring). For example, when you pay a vendor, you use a bank (writing a check) or a payment card processor (using plastic). Both the seller and buyer trust the bank or card processor, so you can trust that the transaction will be completed as you expect. Of course, you can also pay with cash, but even cash transactions depend on a government to guarantee the value of the cash you use. Blockchain technology makes it possible for you to buy something from someone you don’t know (or trust) and still trust that the transaction will complete as you expect without having to rely on a third party.

Blockchain does a lot more than just handle payments — it can manage the transfer of any asset from one owner to another. That asset can be cryptocurrency, real estate, cars, premium olive oil, or anything of value in the real or virtual world. And the great thing is that all information on how those ownership transfers take place stays on the blockchain for later review.

      In this chapter, you learn what blockchain technology is all about, some of the different options available, and how to best use blockchain to solve business problems.

Exploring the Blockchain Landscape

      From what you read in books and articles, blockchain technology disrupts everything and fixes every business problem — and both at the same time! This view of blockchain’s omnipotence gives a little too much power to what blockchain can actually do. Blockchain can disrupt the way many business transactions are carried out, but it won’t change everything. Likewise, this new technology can solve some business problems that have been around for a long time, but it doesn’t fit everywhere. The trick is to understand what blockchain can do, and what it can do very well.

      Managing ownership transfer

      When something of value passes from one owner to another, it's referred to as an ownership transfer. One of the things blockchain can do well is manage ownership transfer for items of value without relying on middlemen, or intermediaries, to manage the transfer. You can transfer ownership by giving or selling something to someone. When you sell something, you exchange the thing you sold for some type of payment. Being able to transfer ownership without a middleman can disrupt lots of business models. For example, when you ride with a rideshare service and pay for it with a credit or debit card, the rideshare company normally pays a per transaction fee, but you can be sure it passes that cost along to you! Bypassing the payment card processor means your rides could be cheaper.

      Without getting into the details quite yet, blockchain technology makes it possible for you and the rideshare provider to trust the transfer of payment for the ride without having to trust one another. The ability to pay for a ride without the driver or rider trusting one another can be disruptive to payment card processors.

      Many intermediaries, such as banks, payment processors, brokers, international money transfer companies, and even music distributors, could lose revenue to blockchain. All these middlemen charge a fee by managing transfers that blockchain technology could simplify.

      Doing more with blockchain

      Blockchain started off as an approach to managing cryptocurrency transactions in a trustless environment. Since then it has matured to handle value transfers of many types and has grown into a viable component of an integrated enterprise infrastructure. Enterprises rely on many software and hardware components that work together to provide services to their customers and partners. Blockchain technology is no longer just a cool idea — now it has the power to improve business processes. You’ll likely see more and more businesses relying on blockchain to help run their operations. Before you look into leveraging blockchain and its new way of handling data, it helps to explore the existing blockchain landscape to get a feel of where blockchain may be beneficial.

      Understanding blockchain technology

      At its most basic level, a blockchain is a list of blocks connected to one another, where copies of the entire list are distributed among a set of participants, called network nodes. Each block contains a set of transactions and is connected to the block that immediately precedes it. Each transaction describes the transfer of some amount from one owner to another owner. Each transaction may have more information, but the focus is the transfer of value.

      The way in which new blocks are added to the chain ensures that all copies of the chain of blocks (that’s why it’s called a blockchain) are the same. Distributing copies of data to different locations has always been difficult. Sending copies of data to multiple recipients isn’t hard, but keeping all those copies the same is very hard. Keeping distributed data in sync is another thing that blockchain technology does very well.

      Comparing blockchain to something you know

      One way to think of a blockchain is as a big spreadsheet that is shared among many nodes. Each row in the spreadsheet represents a transaction that records amount, from owner, and to owner columns, and sometimes contains columns with additional data. Periodically, a group of rows, called a block of rows, is added to the bottom of each copy of the spreadsheet. You can’t go back and edit any rows in the spreadsheet, but you can add new rows. That analogy is simple, but it gives you an idea of how blockchain transactions are similar to the familiar spreadsheet.

      One of the first difficulties in maintaining copies of spreadsheets is how to control adding new rows and protecting existing rows from changes. A full discussion of blockchain integrity is beyond the scope of this book, but following is a high-level overview of how blockchains ensure integrity.

      Using cryptography with blockchain

      Blockchain technology is based on the concept of linking blocks together using a cryptographic hash. A cryptographic hash function takes any