Demystifying Blockchain

Block-chain is a framework that provides the ability to build highly efficient, decentralized business processes between various participants to manage an asset(digital or physical). The key components of this framework are -

Wallets/Users/Asset

Usually a business process is managing an asset that needs to be transitioned across its various participants. The location of the asset is called the wallet and everybody within the business has their own wallet which is storing some the asset being used to facilitate the business process. The wallet uses a public and private cyptographic key mechanisms to control the access to the asset to provide security and trace-ability within the distributed network.

Distributed Ledger

A common shared data object also referred to as a distributed ledger. This distributed ledger is shared and distributed across the decentralized network of participants leveraging cryptographic keys and functions to provide a transparent, immutable and tamper evident data store. This provides a single view of truth by storing/tracking

1. A Smart Property — This could be to an asset or its reference to the wallet of the participants within the business process. It’s called a smart property as this asset is tracking its ownership within the business process at every moment and provides verification and tracking capability.
2. A Smart Contract — This manage the autonomous behavior of the asset driven the various events/operations possible on it. It also defines how the asset will maintain its state across the various transitions, hosts the rules / business logic / programmability for the operations possible on the asset to ensure a valid state.
3. Transaction data — the ability to store all the transactions associated with that asset

Since everybody has a copy of the Ledger at any point of time which including the state of the asset , the contract that everybody agreed to and the transaction history providing a precise order of events and their timings to provide end to end trace-ability and joint accountability, collective trust and effective risk and audit management within the distributed network and its participants.

Trust Mechanism

The participants in this process define a trust or privacy mechanism between themselves on how the participants will register themselves, who all can view / perform operation on this ledger etc.

The scope of this distributed ledger within the network of the business process can be

• Public (shared with anybody who is part of the network)
• Semi-Private or consortiums based ( shared with a group of organizations/users)
• Private ( limited to pre-determined group of organizations/users participating in that contract)

The trust mechanism setup helps control the users/participants in this business process and provides the authentication/authorization framework.

Participants Roles

Depending on the business process there can be various roles that the participants can play including technical, business and legal functions. Each participant is uniquely identified in the system by a key and some of the roles they can play are

• Users/Clients who are initiating the transactions on the asset
• Asset Managers storing the wallets for the users/Clients
• Contract Executors / Transaction Managers who are helping the user perform the transactions on the network
• Consensus Managers / Auditors who are tracking all the transactions and then confirming them making sure they are valid according to the contract rules

Some of participants in the network could be playing multiple roles depending on how much they want to be involved in the business process.

3rd Party and Charge-back mechanisms

Because some of these cryptographic functions are resource intensive and can require high computing power it might make sense to be outsourced to a 3rd party to execute there will be need to be a chargeback mechanism setup to incentivize them to support that function. The chargeback models can be

1. a reward for running the algorithms .
2. chargeback based on the transactions being performed.

Since in a distributed environment there is no central authority validating this the 3rd party has to leverage the shared distributed ledger for this. If the charge is based on running the algorithms the 3rd party will also have to provide a proof of work that can be stored on the distributed ledger along with the charge transaction.

Example Implementations of Blockchain

Bitcoin

Bitcoin is the first implementation of this framework creating a digital cypto currency in this process to facilitate this distributed and has been the most successful implementation yet. I will address Bitcoin in a separate article.

Sample Business Process

Lets take an example of a business process that we all might have encountered and associate with that we can possibly implement with the blockchain framework.

Buying or renting a house

Here the assets will be the house itself, Title of the House and the money that is getting transferred within this process. The various operations possible can be Buy House, Rent House, Sell House , Collect Rent, Maintain House, Pay Property Tax, Pay Mortgage, Pay Income Taxes , Pay Insurance, Buy Insurance , File Insurance Claim etc.

The various participants can be the House Owner, Current and Previous tenants, Government entities such as IRS, county Tax authority, Gardner, Handymans, Insurance companies etc.

All the transactions possible can then get tracked in a common ledger and can be shared among its participants. Some of the data and transactions could be setup to be public and others can be private.

There can be 3rd parties such as Title companies who can help facilitate the buying transactions and charge back to the users for providing the consensus/audit services in case of buying the house and then there are Property brokers who can helping facilitate the buying or renting the house and are charging based on the transaction fees.