By Pete Harris, Co-Founder and Research Principal
Speaking at a financial conference organized by Bloomberg, Blythe Masters once famously described a blockchain at its simplest level as “nothing much more than a fancy kind of database.” A former executive of investment bank JPMorgan Chase, Masters was tapped to be CEO of Digital Asset Holdings, one of the early startups looking to reinvent financial markets using the technology.
So what is a blockchain, what makes it fancy, and how does it compare to a “standard” database?
For starters, people frequently refer to “the blockchain”, but that terminology is inaccurate. Blockchain is a class of software technology that is composed of other technologies including data storage and distribution via the internet, data synchronization, cryptography and identity.
As the name implies, blockchains are typically a time-ordered collection of data blocks that are linked together using cryptographic techniques. Changing the content of any single block breaks the cryptographic linkage, making the modification very transparent. Moreover, recreating the linkages to hide a modification is extremely onerous and impractical.
Many types and implementations of blockchains already exist today, and more are emerging. While blockchains share a common design philosophy, the various flavors of blockchain have particular capabilities and properties that make them suitable for specific use cases.
The first blockchain implementation – and the one that is most well established and well known – is the foundation of the bitcoin cryptocurrency. Although earlier research had been conducted into cryptographically-secured chains of data blocks, the bitcoin blockchain was created by Satoshi Nakamato in 2008. This allows bitcoin currency to be sent from one user to another without an intermediary bank or payment service controlling the transactions or keeping a record of balances.
Crucially, Satoshi’s blockchain prevents double spending. As an example, suppose Alice has 10 bitcoins. She sends those 10 bitcoins to Bob. If she tries to send those same 10 bitcoins to Jim, the blockchain will prevent her from so doing.
Since its creation to support the bitcoin currency, the underlying blockchain has been adapted to transfer and record other items of value, such as business documents. Meanwhile, many other blockchain variants have been created, some as public open source projects and others as proprietary software offerings.
While there are differences in the way the various blockchains work, they tend to follow the same basic design criteria:
· Data is stored and replicated across several computer systems, connected via internet protocols, and is synchronized in near real time.
· Data is generally exchanged peer to peer, without any central router or controller.
· Multiple participants (sometimes all) can write data to the same store.
· Multiple participants (sometimes all) can read data from the same store.
· Mechanisms exist to make it hard to change data that has been stored, and to easily detect when data is changed.
A couple of these design criteria exemplify why blockchain-based data stores can be considered to have unique and useful attributes compared to traditional databases. Firstly, the same data store is shared between multiple participants reading and writing data to it. This architecture eliminates the need for synchronization of data between participants, since all access the same data store. Secondly, once data is written to a blockchain data store, that data cannot be readily changed. This attribute – achieved through cryptographic technology – is sometimes referred to as immutability, and a key benefit is that data in the data store can be considered tamper proof.
Because data on blockchains is shared among all participants and is tamper proof, blockchains are sometimes referred to as distributed ledgers, or distributed shared ledgers. Technically speaking, the terms are not 100% synonymous, but for the most part, the blockchain and distributed ledger terms are used interchangeably.
While the above properties are found across blockchain implementations, there are often significant differences in the details of how various blockchains work – usually driven by whether a blockchain implementation is considered public or private.
Public or “permissionless” blockchains are ones where any participant can read or write data, without the need for any special permission. These are best suited to applications where the lack of any controlling function is acceptable, practical or even desirable.
The blockchain that underpins the bitcoin currency is an example of a public blockchain. Proponents of it point to its ability to transfer bitcoin currency between participants without the need for any central oversight function and knowledge, relationship or level of trust between participants. Since there is no function that manages or oversees data integrity, so-called consensus mechanisms are built into public blockchain designs to synchronize all the data stores that are replicated across many computer systems.
By comparison, private or permissioned blockchains generally require some kind of authorization to access them, and perhaps include different access levels, such as read-only, read/write, etc. Such authorizations are granted by an oversight function that is either controlled by one participant or several participants working in concert. Hence some level of relationship and trust is assumed between participants.
To date, private blockchains have been the preferred choice for proof of concept tests conducted by major financial institutions. Many of these have focused on processes such as the clearing and settlement of financial transactions, issuance of securities and interbank payments. The controlled access nature of private blockchains is an attribute that banks, with their need for privacy and support of regulatory compliance, find essential to the adoption of the technology.
 The true identity of Satoshi Nakamoto is unknown, and it may even be a group of people. The development of blockchain technology was taken over by a group of so-called Core Developers in mid-2010.