Blockchains & Distributed Ledger Technologies

The Bitcoin White Paper was published by Satoshi Nakamoto in 2008; the first Bitcoin block got mined in 2009. Since the Bitcoin protocol is open source, anyone could take the protocol, fork it (modify the code), and start their own version of P2P money. Many so-called altcoins emerged and tried to be a better, faster or more anonymous than Bitcoin. Soon the code was not only altered to create better cryptocurrencies, but some projects also tried to alter the idea of blockchain beyond the use case of P2P money.

 

Types of Blockchains

The idea emerged that the Bitcoin blockchain could be in fact used for any kind of value transaction or any kind of agreement such as P2P insurance, P2P energy trading, P2P ride sharing, etc. Colored Coins and Mastercoin tried to solve that problem based on the Bitcoin Blockchain Protocol. The Ethereum project decided to create their own blockchain, with very different properties than Bitcoin, decoupling the smart contract layer from the core blockchain protocol, offering a radical new way to create online markets and programmable transactions known as Smart Contracts.

Private institutions like banks realized that they could use the core idea of blockchain as a distributed ledger technology (DLT), and create a permissioned blockchain (private of federated), where the validator is a member of a consortium or separate legal entities of the same organization. The term blockchain in the context of permissioned private ledger is highly controversial and disputed. This is why the term distributed ledger technologies emerged as a more general term.

Public, private and federated blockchains illustration

blockchainhub.net

Private blockchains are valuable for solving efficiency, security and fraud problems within traditional financial institutions, but only incrementally. It’s not very likely that private blockchains will revolutionize the financial system. Public blockchains, however, hold the potential to replace most functions of traditional financial institutions with software, fundamentally reshaping the way the financial system works.

 

Public Blockchains

State of the art public Blockchain protocols based on Proof of Work (PoW) consensus algorithms are open source and not permissioned. Anyone can participate, without permission. (1) Anyone can download the code and start running a public node on their local device, validating transactions in the network, thus participating in the consensus process – the process for determining what blocks get added to the chain and what the current state is. (2) Anyone in the world can send transactions through the network and expect to see them included in the blockchain if they are valid. (3) Anyone can read transaction on the public block explorer. Transactions are transparent, but anonymous/pseudonumous.

Examples: Bitcoin, Ethereum, Monero, Dash, Litecoin, Dodgecoin, etc.
Effects: (1) Potential to disrupt current business models through disintermediation. (2) No infrastructure costs: No need to maintain servers or system admins radically reduces the costs of creating and running decentralized applications (dApps).

 

Federated Blockchains or Consortium Blockchains

Federated Blockchains operate under the leadership of a group. As opposed to public Blockchains, they don’t allow any person with access to the Internet to participate in the process of verifying transactions. Federated Blockchains are faster (higher scalability) and provide more transaction privacy. Consortium blockchains are mostly used in the banking sector. The consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants.

Example: R3 (Banks), EWF (Energy), B3i (Insurance), Corda
Effects: (1) reduces transaction costs and data redundancies and replaces legacy systems, simplifying document handling and getting rid of semi manual compliance mechanisms. (2) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

Note: Some would argue that such a system cannot be defined as a blockchain. Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies built their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

 

Private Blockchains

Write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent. Example applications include database management, auditing, etc. which are internal to a single company, and so public readability may in many cases not be necessary at all. In other cases public audit ability is desired. Private blockchains are a way of taking advantage of blockchain technology by setting up groups and participants who can verify transactions internally. This puts you at the risk of security breaches just like in a centralized system, as opposed to public blockchain secured by game theoretic incentive mechanisms. However, private blockchains have their use case, especially when it comes to scalability and state compliance of data privacy rules and other regulatory issues. They have certain security advantages, and other security disadvantages (as stated before).

ExamplesMONAX, Multichain
Effects: (1) reduces transaction costs and data redundancies and replaces legacy systems, simplifying document handling and getting rid of semi manual compliance mechanisms. (2) in that sense it can be seen as equivalent to SAP in the 1990’s: reduces costs, but not disruptive!

NoteSome would argue that such a system cannot be defined as a blockchain. Also, Blockchain is still in it’s early stages. It is unclear how the technology will pan out and will be adopted. Many argue that private or federated Blockchains might suffer the fate of Intranets in the 1990’s, when private companies built their own private LANs or WANs instead of using the public Internet and all the services, but has more or less become obsolete especially with the advent of SAAS in the Web2.

Classification Schemes

Many people have tried to classifying blockchains, but there is no consensus on how to accurately distinguish between different types of Blockchains. We have listed a selection of different classification schemes.

 

Pubiic Private/Federated
Access
  • Open read/write
  • Permissioned read and/or write
Speed
  • Slower
  • Faster
Security
  • Proof of Work
  • Proof of Stake
  • Other consensus Mechanisms
  • Pre-approved participants
Identity
  • Anonymous
  • Pseudonymous
  • Know identities
Asset
  • Native Asset
  • Any Asset

Public vs Private Blockchains
Source: Chris Skinner’s Blog

One way to distinguish is between public and private, or permissioned and permissionless. Sometimes these terms are used synonymously, but they refer to different things.

Permissioned vs Permissionless Blockchains
Source: Gavin Wood (2016)

The Bitcoin Blockchain is a game changer, because it is public and permissionless. Anyone in the world can download the open source code, and can start verifying transaction, being rewarded with bitcoin, through a concept called mining. All stakeholders in the bitcoin network, who do not know and trust each other, are coordinated through an economical incentive framework pre-defined in the protocol and auto enforced by machine consensus of the P2P Network. The smart contract in the blockchain protocol therefore  provides an coordination framework for all network participants, without the use of traditional legal contracts. In private and permissioned blockchain, all network participants validating transactions are known. Bilateral or multilateral legal agreements provide a framework for trust, not the code.


Ok, I need a blockchain, but which one?
Adapted and modified from: Pavel Kravchenko (2016)

 

Public
No centralised management
Consortium
Multiple

Organisations 
Private
Single

Organisation
Participants Permissionless

  • Anonymous
  • Could be malicious
Permissioned

  • Identified
  • Trusted
Permissioned
– Identified
– Trusted
Consensus Mechanisms Proof of Work, Proof of Stake, etc..

  • Large energy consumption
  • No finality
  • 51% attack
Voting or multi-party consensus algorithm

  • Lighter
  • Faster
  • Low energy consumption
  • Enable finality
Voting or multi-party consensus algorithm

  • Lighter
  • Faster
  • Low energy consumption
  • Enable finality
Transaction Approval Freq. Long
Bitcoin: 10 min or more
Short
100x msec
Short
100x msec
USP Disruptive
Disruptive  in the sense of disintermediation. No middle men needed. Unclear what the business models will be
Cost Cutting
Can radically reduce transactions costs. Similar to SAP in the 1990s. Extreme cost cutting opportunities. Less data redundancy, higher transactions times, more transparency
     Cost Cutting
Can radically reduce transactions costs. Similar to SAP in the 1990s. Extreme cost cutting opportunities. Less data redundancy, higher transactions times, more transparency

Adapted and modified from: Slideshare

 

 

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Blockchain Implementation Solutions

There is a wide array of approaches to implementing Blockchain or other Distributed Ledger Technologies. A diverse landscape of players has emerged, including software service providers that offer software capabilities on higher stack levels than the blockchain protocols themselves. Each approach has its own merits and challenges.

APPROACH HOW IT IS DONE EXAMPLES
IT Services Build on request ConsenSys
Blockchain First Develop using the tools provided by the blockchain Ethereum, Bitcoin
Development Platforms Tools for IT Professionals ERIS, Tendermint, Hyperledger
Vertical Solutions Industry specific Axoni, Chain, R3, itBit, Clearmatics
Special APIs & Overlays DIY building blocks Blockstack, Factom, Open Assets, Tierion

Source: Coindesk.com

 

Blockchain as a Service (BaaS)

Setting up an environment to test and research blockchain requires an ecosystem with multiple systems to be able to develop research and test. The big players in the cloud industry like Amazon(AWS), Microsoft(Azure), IBM(BlueMix) have seen the potential benefits of offering blockchain services in the cloud and started providing some level of BaaS to their customers. Users will benefit from not having to face the problem of configuring and setting up a working blockchain. Hardware investments won’t be needed as well. Microsoft has partnered with ConsenSys to offer Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure. IBM(BueMix) has partnered with Hyperledger to offer BaaS to its customers. Amazon announced they would be offering the service in collaboration with the Digital Currency Group. Developers will have a single-click cloud-based blockchain developer environment, that will allow for rapid development of smart contracts.
Examples: Accenture, ConsenSys, Cognizant, Deloitte, IBM, PricewaterhouseCoopers (PWC), Ernst & Young.

 

Blockchain First

In this case, you work directly with the given blockchain tools and stack. Assembly is required, so this isn’t for the faint of heart at this point, as many of the technologies are still developing and evolving. However, working directly with the blockchain provides a good degree of innovation, for example in building decentralized applications. This is where entrepreneurs are creating ambitious end-to-end, peer-to-peer applications, such as OpenBazaar (on Bitcoin), or Ujo Music (on Ethereum).
Examples: Bitcoin, Ethereum, etc.

 

Development Platforms

Here, you don’t start with a preference for a blockchain. Rather, you start with a development approach orientation, and you build an app that backs into a blockchain infrastructure that could be served in the cloud. The goal here is rapid development, and you focus on the blockchain programmability.
Some choices: BlockApps, Blockstream, Eris
Examples: EthCore, Hyperledger, Tendermint.

 

Vertical Solutions

This segment is where we have seen the most rapid metamorphosis in the past year, mostly in financial services. These solutions are industry-specific, and they are based on private blockchain or ledger infrastructures. A caveat here is that some of these are not full blockchains. Rather, they are distributed ledgers, which are a subset of blockchain capabilities. And some don’t even include a consensus element, which takes the implementation another level down from distributed ledger tech.
Examples: Axoni, Chain, Clearmatics, Digital Asset Holdings, itBit, R3.

 

APIs & Overlays

This approach uses the blockchain as an asset, ownership or identity-binding infrastructure, and you build applications with a specific focus on chains of proof, ownership rights, title registries or other specific services with a built-in trust-based component.
Examples: Blockstack, Factom, Open Assets, Tierion.

 

Download our Blockchain Handbook!

 

Sources & Further Reading

On Public and Private Blockchains, Vitalik Buterin (2015)
Vitalik Buterin: On Public and Private Blockchains, Coindesk
Ok, I need a blockchain, but which one?, Pavel Kravchenko
IBM blockchain explained, Diego Alberto Tamayo
Blockchains What & Why, Gavin Wood

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