What Is Blockchain?
Traditional Business Network
In a traditional business network, participants such as business organizations, governments, and financial institutions do not have a shared system and separately maintain their own data. When a transaction is conducted, both parties modify their own ledgers and maintain the ledgers locally. This results in a network architecture shown in Figure 1.
Such a network faces the challenges of low efficiency, high cost, and being subject to attacks due to the following facts:
- Each participant maintains its own ledger. The transaction information is not transparently shared among participants, and it is not easy to discover data tampering, if any.
- If a transaction involves multiple parties, additional workload and costs are needed to reconcile disparate ledgers for data consistency.
- Data is scattered among participants, resulting in low efficiency of the overall business process.
- The network relies on a single or multiple central systems. Once the central systems experience fraud, attacks, or errors, operation of the entire network will become chaotic.
Basics of Blockchain
In a narrow sense, a blockchain is data blocks chained based on the block generation time and uses cryptography to ensure that distributed ledgers cannot be tampered with or forged. In a broad sense, the blockchain is a distributed architecture and computing mode that uses the blockchain data structure to verify and store data, distributed consensus algorithms to generate and update data, cryptography to ensure data transmission and access security, and smart contracts compiled by automated script code for programming and data operation.
Blockchain uses a set of technologies including shared ledgers, consensus algorithms, security and privacy protection, and smart contracts. It features multi-centralization, consensus and trust, immutability, and traceability. In a blockchain system, all participants share ledgers, which can solve the challenges in traditional business networks. Figure 2 shows the architecture of a blockchain system.
All participants in a business network share the ledger and update all the copies of the ledger upon each transaction.
Cryptography algorithms ensure that participants have access only to the ledger content related to them, thus ensuring transaction security.
Transaction-related contract clauses are embedded into the transaction database to comprise smart contracts, which are automatically executed when the business conditions are met.
Consensus algorithms ensure that transactions are validated by all involved parties and requirements of supervision and audit are met.
Benefits of Blockchain
Time saving: Shortens the time that a transaction takes from days to real time or quasi real time.
Reduced costs: Reduces extra costs and the participation of third parties required to ensure data consistency.
Lower risks: Precludes the possibility of tampering to reduce risks of frauds and cybercrimes.
Stronger trust: Builds up trust between transaction participants using shared ledgers, processes, and records.
- Data in a blockchain system is generated and stored in blocks, which are chained in a time sequence. Hence the term "blockchain".
- All nodes in a blockchain system participate in data verification, storage, and maintenance. Consensus must be reached to create a block. Any new block is broadcast to all nodes, ensuring synchronization on the entire network. After this, it cannot be modified or deleted.