Blockchain (II): Basic concepts

Blockchain is a distributed information storage technique, without centralized management. This technique makes use of consensus policies to validate the information included and makes use of policies to obtain the integrity of the recorded data.

Distributed storage techniques can ensure data availability. Traditional distribution models are hierarchical: a central node determines what information, when and where it will be stored, as well as who will have access to it and with what level of privileges. This central node controls the interaction with the services (its own or those of others) distributed in different locations and / or entities. This is the case of traditional cloud storage services, such as Dropbox, Google Drive, ...

Distributed storage techniques evolved to allow other types of services, based on increased computing power and connectivity. Thanks to these advances, peer-to-peer or P2P information exchange techniques were developed. In these, all the nodes of the network are hierarchically equal nodes that store and share information in a distributed manner without the need for centralized management (or intermediary). An example of this model was eMule, in which the participants could join freely and dynamically without the need for intermediaries. In this model there were also content generators or nodes that only stored information. This configuration guarantees the availability of information in an open and permission-less mode. However, it neither implement a policy to validate the information stored, nor mechanisms to determine if such information has been altered in one or more nodes. In short, to determine the integrity of the information.

Blockchain is a distributed information storage technique that, depending on the chosen configuration, can work in a P2P approach and in a form a decentralized network of nodes. It uses certain strategies, called consensus algorithms, to validate the information stored by each participating node and implements a mechanism to detect alterations in the registered information.

Blockchain is based, fundamentally, on the following elements:

  • A joint policy that establishes under what conditions and with what role to participate in the network.
  • A policy for distributed information storage.
  • A data exchange policy.
  • A consensus policy to validate new information in the system
  • An information integrity management policy

The previous policies are supported by governance elements (which define who can access or participate in the network, with what permissions, what levels of service are provided, block validation strategies, information traceability, etc.) and technical and technological elements (P2P communication, encryption, hashing, etc., and their specific implementations). Up until now, these elements are not agreed in a distributed way, but they are established, de facto or by law, by some entity or committee.

In the case of Blockchain, the information is recorded in physically independent data blocks. Each new block is related to the immediately preceding block by including the hash of the previous block among its data. This way, all the blocks are virtually chained and hence the blockchain name.

This structure confers to Blockchain one of its main properties: detection of the integrity of the stored data. It is not possible to add, delete or modify the information stored in a block without producing a change in the value of the hash used as a link in the next block.

Blog - Blockchain II
Figure 1 –Link between blocks

This property, often described as 'immutability', guarantees the detection integrity failures of the stored blocks. However, it does not mean that the data contained in any of the blocks, or the blocks themselves, are permanent. It only means that they cannot be altered or deleted without leaving a trace or evidence of it. To manage the integrity of modified blocks, it would be necessary to implement a traceability policy of the nodes that store them and a consensus policy among all the participants to implement and / or sanction the modifications. Therefore, when talking about the ‘immutability’ of Blockchain, it must be understood in a figurative way.

Blockchain is not a treatment but a distributed information processing technique on which different treatments and business models can be implemented. There are many different implementations of Blockchain technology that can radically differ from one to another. In turn, many different business models could be implemented, and very different processing’s carried out simultaneously using this technique. In fact, Blockchain is a particular case of a more generic information storage technique called distributed ledger or DLT (Distributed Ledger Technology).

The best known and successfully first developed Blockchain use case is Bitcoin. Bitcoin dates to 2008 when someone, under the pseudonym Satoshi Nakamoto, published a document that established the governance, techniques, and technologies to be used in the operation of the first cryptocurrency based on Blockchain technology.

Bitcoin makes use of the characteristics of the Blockchain to implement a business model without intermediation, that is, without any type of central regulatory entity. Therefore, Bitcoin is not subject to any official legislation or control, although it is subject to the de facto standards defined by the project developers. The underlying idea was to develop a decentralized payment system, without intermediaries or the control of third parties.  The confidence in the business model relies in the guarantees established in the model itself.

Bitcoin specifies and expands the regular elements of Blockchain to be able to implement its business model:

  • A permission-less participation policy. The participants can join and leave freely without any restrictions to process transactions or to build blocks (permission-less Blockchain).
  • A policy of distributed storage of information elements, called transactions, in the blockchain itself.
  • A P2P data exchange policy where there are no network access requirements, there is no traceability of data communication and where any node can be part of it (public Blockchain).
  • A consensus policy to validate the information to be stored into the chain based on the resolution of complex problems (Proof of Work)
  • An information integrity management policy without considering the updating of the data stored.
  • A reward policy for those involved in the building of new blocks.
  • A policy of automatic decision execution that, based on pre-established conditions, allows the execution of an agreement defined by the parties (Smart Contracts).
  • An ecosystem of interaction between the virtual and the real world: exchange offices, wallets, decentralized applications or DApps, etc.

Bitcoin would not be a processing by itself. As noted above, Bitcoin would be a business model defined by established rules: governance elements and technological elements. The participants who freely decide to participate in the Bitcoin business accept the ad-hoc rules defined before running the process. In short, they behave like any other participant in any market: financial market, telecommunications market, on-line advertising,  etc.; where sector regulations (soft law, legal, technological, etc.) have to be complied with in order to work in them. Ultimately, Bitcoin defines a virtual financial market model.

Despite being the most famous, Bitcoin is not the only cryptocurrency out there. Ethereum, Ripple, Dash, Zcash or Monero are examples of cryptocurrencies, each with its own characteristics, some implemented on top of existing blockchains and others created from scratch. And you could find entities working on several of them simultaneously.

Blockchain has sparked interest in its possibilities beyond cryptocurrency. The models that can be implemented using Blockchain technology are as unique as the imagination of the developers and can be implemented in many ways and with so many particularities. Trying to give a simple and generic answer to the benefits and problems posed by their use in a treatment would be a mistake.

Among the wide range of possible uses in other areas and sectors beyond financial are: supply chain management, asset tokenization, traceability and inventory of goods, management of a digital identity, fraud identification systems, voting, property registries or development of financial services among many others.

Before develop processing’s on Blockchain, it is recommended to review the guides prepared by the AEPD to apply the principles of proactive responsibility that can be found in the Innovation and Technology microsite, among others: