the best experience.
A new technology is redefining the way we transact. If that sounds incredibly far-reaching, that's because it is.
Blockchain has the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables.
It combines the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key information and establish trust.
Chapter 01
What is Blockchain?
01
Blockchain technology was originally developed as part of the digital currency Bitcoin. But the two are not the same. Blockchain can support a wide range of applications, and it's already being used for peer-to-peer payment services, supply chain tracking and more.
A Digital Record
At its heart, a blockchain is a record of transactions, like a traditional ledger. These transactions can be any movement of money, goods or secure data—a purchase at a supermarket, for example, or the assignment of a government ID number.
Secure
Blockchain is designed to store information in a way that makes it virtually impossible to add, remove or change data without being detected by other users.
Decentralized
Today, transactions are verified by a central authority—like a government or a credit card clearinghouse. Blockchain applications could replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users.
Chapter 02
How Does it Work?
02
A blockchain needs to do two things: gather and order data into blocks, and then chain them together securely using cryptography.
Section A
Recording a Transaction
Let's start with a simple transaction: Alice sells her car to Bill.
The transaction information is recorded and shared with the other computers in the blockchain network.
Section B
Building Transactions into Blocks
On the network, the record is combined with other transactions into a block—like a traditional computer database. Each transaction is time-stamped.
When a block is complete, it also gets its own time stamp. So all information is sequential, which helps avoid duplicate entries.
Section C
Connecting Blocks into a Chain
Into the Network
The completed block is sent out across the network, where it's appended to the chain.
Forming a Line
Other participants on the network may be sending out their own blocks at the same time.
But the time stamps ensure that data is added in the right order, and all participants have the latest version.
Securing the Chain
The key to a blockchain's security is something called a hash. It's a bit of cryptographic math that makes the links between blocks virtually unbreakable.
A hash function takes the information in each block and uses it to create the hash—a unique string of characters.
Locking it Down
The hash from one block is added to the data in the next block.
So when the next block goes through the hash function, a trace of it is woven into the new hash.
And so on, throughout the chain.
Raising the Alarm
So if there's any attempt to alter a previously created block, the hash that's encoded in the next block won't match up anymore.
This mismatch will continue through all subsequent blocks denoting an alteration in the chain.
Establishing Trust
Since all participants have a copy of the entire blockchain, they can detect any tampering.
So when the hashes match up across the chain, all parties know that they can trust their records.
Chapter 03
Blockchain in Action
03
The technology is still new, but its potential is enormous. Here are some examples of how blockchain could hypothetically transform everyday transactions. Because blockchains establish trust, they provide a simple, paperless way to establish ownership of money, information and objects—like concert tickets.
Section A
Trusted Concert Tickets
Can You Trust Your Seller?
It's hard to tell real tickets from counterfeits, especially if you bought them from a third-party website or a private individual.
Going Straight to the Source
A blockchain can help buyers quickly establish that a ticket (and its seller) can be trusted.
TICKET_58
The event venue registers the event, date and serial number of each ticket to a blockchain, which is accessible online.
When the ticket is first sold, it's assigned an address—a string of data which is publicly viewable on the blockchain.
The owner is given a private key, which is a hash of the address data.
Address
18PX1VPNCMSM7LU3CS796CQLAXXNMMW
TICKET_58
That key can be used to "unlock" the address.
So by producing the correct key, the buyer can prove the item is hers, without having to check with the event venue.
If she chooses to sell the ticket, it's assigned a new address, and the new owner gets a new private key. And the new transaction is added to the blockchain.
The ticket can be resold multiple times, and when a seller unlocks the address with his private key, the buyer knows the ticket he's getting is authentic.
Address
18PX1VPNCMSM7LU3CS796CQLAXXNMMWU
Address
S7961NMMLU3M7LM3CS799FPC3NG3NW1
Section B
More Efficient Markets
Removing the Bottlenecks
In the financial markets, trades happen in a fraction of a second. But actually exchanging the assets and payments can take days, involving multiple banks and clearinghouses. That can lead to errors, delays, added costs and unnecessary risks.
Smart
Contract
{
'id' : 'Transaction Amount',
'type' : 'Expression',
'value' : 'Cash Amount'
},{
'id' : 'Agreement Date',
'type' : 'Date',
'value' : '30-Dec-2016'
}
A Contract Written in Code
A smart contract is a piece of computer code that describes a transaction step by step. It can connect to multiple blockchains, tracking multiple assets, so it can swap those assets as needed to execute the transaction.
A broker buys stock on behalf of a client. The order is placed.
It includes private keys from both buyer and seller.
Smart
Contract
{
'id' : 'Transaction Amount',
'type': 'Expression',
'volume': 'Cast Amount'
}
That triggers the execution of a smart contract.
It connects to multiple blockchains.
It verifies the availability of the stock and the payment, and then makes the transfer between the seller and buyer.
Section C
Digital ID
Who Goes There?
Blockchain can track more than commercial transactions; it can also hold and protect sensitive information. For example, ID papers have traditionally been issued and monitored by governments. But digitally-issued identification via blockchain could be a more secure mechanism.
ID at Your Fingertips
An international ID blockchain, accessible anywhere in the world, allows people to prove their identity, connect with family members and even receive money without a bank account.
A person is fingerprinted.
The fingerprint is digitized and the information is added to the blockchain, along with her name and other key information.
When an entity needs to establish her identity, they fingerprint her again.
And that data can be used to unlock and verify her ID.
That key can be used to "unlock" the address.
So by producing the correct key, the buyer can prove the item is hers, without having to check with the event venue.
Chapter 04
Beyond the First Steps
04
Blockchain's potential is real, but the technology is still in its early stages. Before it can be widely adopted, it will have to overcome a number of hurdles.
Are Businesses Ready for Blockchain?
For businesses, blockchain could be a radical departure from manual processes. And new costs and risks come with any new technology. Companies might be reluctant to make that leap.
Are Blockchains Ready for Business?
Can the technology handle the high volume required for mainstream commercial work? Even the most established blockchain—the one used for Bitcoin—can only process five to eight transactions a second. Emerging blockchain software companies are working on solutions that could be competitive with credit card networks that already process nearly 10,000 times that volume.
[source: Interview with Goldman Sachs Research's Jim Schneider]
[source: Interview with Goldman Sachs Research's Jim Schneider]
Setting Boundaries
The transparency of blockchain has real benefits for regulators. But it's still a new technology, with no standardized implementation. Lawmakers will need time to resolve questions about liability and other legal issues.
New Tech, New Threats
Blockchain is protected by business-grade cryptography, but no technology is 100% secure. And when large sums of money are involved, hackers will try to follow. So security concerns could also slow blockchain adoption.
Chapter 05
The Takeaway
05
Blockchain could be a revolution in the way everyone—businesses, governments, organizations and individuals—work together. It provides a simple, secure way to establish trust for virtually any kind of transaction, helping simplify the movement of money, products or sensitive information worldwide.
It's a transformation that's already begun. And organizations—both the ones that it can help, and the middlemen at risk of disintermediation —will need to be prepared as the technology matures.
Source: Goldman Sachs
A transaction's address is a string of letters and numbers that uniquely identify it. Addresses are publicly viewable on the blockchain.
A database of information from multiple transactions, similar to a page in a ledger. Each block is time stamped, and those time stamps are used to order the blocks as they're added to the blockchain.
The hash, generated by the cryptographic hash function, is what makes the blockchain secure.
- Each hash is unique to the block it came from
—a kind of digital fingerprint of the original data. - This process only works in one direction: If you start with the
hash, it’s nearly impossible to recreate the original block.
The hash function is a piece of cryptographic math. It takes regular data and generates a short alphanumeric code. The function works in one direction: it's easy to turn regular data into a hash, but nearly impossible to reconstruct the original data from the hash.
A private key is a string of letters and numbers that works like a password: it "unlocks" a blockchain address, allowing one party in a transaction to establish ownership of money, items or information.
The private key is a hash of the transaction address.
A smart contract is a computer program with a fixed set of rules that have been agreed to by both parties in a transaction. When triggered, it can work with multiple blockchains to execute those rules.
For example, in a stock transaction, it can access one blockchain that tracks stock ownership and another that tracks ownership of cash. That allows it to transfer stock to the buyer and cash to the seller.
On the blockchain, a transaction is any movement of goods, payments or confidential data. That could be what we usually think of as a transaction—buying and selling—but it could also be someone sharing a piece of personal information (like a medical record), or the transfer of materials across a supply chain.