Blockchain 101 – an Executive Introduction to Distributed Ledger Technology Abstract

Blockchain 101 – An Executive Introduction to Distributed Ledger Technology Abstract

This report is a starting point for enterprise executives and IT leaders to better understand the basics as to what blockchain is, how it works, how it compares and integrates with existing technologies, why it is of value to the enterprise, and potential enterprise use cases. We also describe some of the significant roadblocks that must be overcome to achieve the lofty potential of this industry movement.

Blockchain is a simple concept that can be game changing as adoption increases and a supporting ecosystem is built. That said, it has the potential of disrupting many long-standing processes. Blockchain tends to be either over-hyped or totally dismissed by analysts and vendors because of their a vested self-interest. In contrast, we seek to provide a balanced, independent perspective for our enterprise clients.

Throughout this report we address many aspects of blockchain technology. We start with some of the basics on the technology itself, provide five business reasons to at least evaluate blockchain, and we’ll share five roadblocks you may need to address. We’ll also share blockchain patterns that may help you discover opportunities in the context of your business needs and provide educational guidance. Finally, we’ll recommend an enterprise blockchain action plan for your consideration.

Authors: Gary Zimmerman Gary Rowe CMO / Principal Consulting Analyst CEO / Principal Consulting Analyst [email protected] [email protected]

Blockchain 101 Zimmerman & Rowe

Table of Contents

Introduction Most IT and business executives have or will shortly be exposed to blockchain. This executive level-set report is designed to provide a basic understanding of the technology; what it is, how it works and how it can impact your business. We start with this high-level blockchain explanation.

Blockchain is simply a secure, shared database. In its purest form, everyone connected to a blockchain network has access to the same set of information. Think of blockchain as a permanent, replicated, distributed, yet secure ledger where all parties have access to the same information. Much like an accounting ledger, blockchain is a platform for recording transactions, but it intrinsically makes this shared data available.

So why the fuss around blockchain since replicated databases have been here for a long time? It is because of specific elements associated with the security of the shared database; permanence, transparency and the network effect are major enhancements as blockchain gains momentum. So if you are a CIO, Business Architect, or Business Unit Head and are

• looking to cut transaction costs, • deliver new products or services, • or are worried that upstarts can disrupt your business because they have better capabilities...

This report is a great starting point in understanding and assessing the value of blockchain and other related distributed ledger technologies.

It’s easy to get swept up in the hype of blockchain, the protocol that will change the world. As Don and Alex Tapscott expressed so eloquently, “Today thoughtful people everywhere are trying to understand the implications of a protocol that enables mere mortals to manufacture trust through clever code. This has never happened before—trusted transactions directly between two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by large corporations motivated by profit.” It has been said that blockchain will do for assets what the Internet did for information. But to reach this future state, we all have to take practical, pragmatic steps along the journey. Consider this report a first step in a blockchain journey of a thousand miles.

Throughout this report we’ll address many aspects of blockchain (distributed ledger) technology. We’ll share some background on the technology itself in the basics section of this report. We’ll give you five good reasons to evaluate blockchain to improve your competitive position, and we’ll share five areas of concern you’ll need to consider as you explore the technology. We’ll share the different ways you can identify opportunities in

terms of what you can do with blockchain and the best ways to learn more about it. We’ll give you key concepts of the technology so that you are grounded as you explore the subject further. Finally, we’ll recommend a blockchain action plan to help you get started. None of these sections will be at the level of detail you’ll need to complete the journey, but they can get you started down the path. The Basics Over the last few years, a major IT innovation known as blockchain has emerged as a potentially disruptive technology. The core of this innovation is built around the concept of a distributed consensus ledger, where the ledger or record is kept and maintained on a distributed network of computers. This ledger makes it possible for the entire network to jointly create, evolve and keep track of one immutable history of transactions or other successive events. While this paper describes a broader distributed ledger technology, the ledger is today most commonly known as the blockchain. Up until recently, the most prominent blockchain technology application has been a cryptocurrency known as Bitcoin. It used a ledger called the Block chain, from where blockchain technology got its name. The Bitcoin blockchain, however, is just the first of many potential applications of distributed ledger technology.

The blockchain is being heralded as the fifth disruptive computing paradigm, which would bring with it an ubiquitous experience of value exchange across the Internet.

1970’s 1980’s 1990’s 2000’s 2010’s Mainframes PCs The Internet Social Media Blockchain

While the potential is there for the next wave of digital value, it remains a potential and not a reality. As we describe later in this report, a few roadblocks need to be removed before blockchain becomes ubiquitous.

Blockchain technology was first developed to provide an alternative approach to payments, by using cryptographic methods to provide an algorithmic trust mechanism between two transacting parties. Now it is being tested as a solution for a wider variety of transactions.

We live in a world of transactions. It’s the basis for everything we do in IT. As early as the 1970’s, mainframes were used to capture online and batch transactions that served as the

backbone for the enterprise’s financial and operational activity. Blockchain, or distributed ledger technologies don't change our need for transactions, but they do radically change the way we execute and confirm those transactions.

Let’s start by looking at what most enterprises are typically doing today. Whether it is between internal applications or across enterprise boundaries, the general architecture template is to capture and process transactions in internally controlled data stores. That creates a workflow similar to this.

1. Receive transaction, Receive Record Verify Accept 2. Record transaction, transaction transaction transaction transaction 3. Verify transaction, 4. Accept transaction, 5. Reconcile transaction, 6. Audit transaction, 7. and all along the way, handle errors and exceptions. Reconcile Audit transaction transaction

Of course, applications add value beyond these simple steps, but this is a good portion (as much as 40%) of the processing typical enterprise operational systems and organizations do every day.

In figure 1, the transaction is shared between six different entities, each must execute some form of the above transaction processing steps and if there is anything amiss in the processing of any of these entities, the entire work flow needs to be examined for integrity. This is inefficient, expensive, and vulnerable to weakness in any of the exchanges.

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FIGURE 1

What if you could share a single data store among all participants that is secure, immutable, auditable, trusted?

As shown in figure 2, a blockchain world, a verified transaction is recorded once, replicated to everyone involved with no error processing or reconciliation required, and the audit trail is built in. This is efficient, cheap, and secure. That’s the promise of blockchain technology.

FIGURE 2

Blockchains We’ll now add to the blockchain explanation we started with. A blockchain by itself is just a data structure that is broken up in to pieces called blocks. That is, it’s how data is logically put together and stored. Other data structures are databases (rows, columns, tables), text files, comma separated values (csv), images, lists, and so on. In the end, a blockchain is just another file.

Blocks in a chain are like pages in a book You can think of a book as a chain of pages. Each page in a book contains: • The text: for example, the story. • Information about itself: at the top of the page there is usually the title of the book and sometimes the chapter number or title; at the bottom is usually the page number which tells you where you are in the book. This ‘data about data’ is called meta-data.

Similarly, in a blockchain, each block has: • The contents of the block, for example in Bitcoin it is the Bitcoin transactions. • A ‘header’ which contains the data about the block. In Bitcoin, the header includes some technical information about the block, a reference to the previous block, and a fingerprint (hash) of the data contained in this block, among other things. This hash is important for ordering.

Block ordering in a blockchain Books are organized page by page. With books, predictable page numbers make it easy to know the order of the pages. If you ripped out all the pages and dropped them on the floor, it would be easy to pick them up and put them back into the correct order so that the story makes sense.

As shown in figure 3, Blocks in a chain refer to precedent and subsequent blocks. They help you know where you are, just like page numbers in a book. Within the blockchain, each block references the previous block, not by ‘block number’, but by the block’s hash value, a fingerprint which is more robust than a page number because the fingerprint itself is determined by the contents of the block.

FIGURE 3

A cryptographic hash function is software which takes an input, like a block, and returns a unique fixed-size alphanumeric string, a hash value. The hash value is generated based on the content of the input. Because of the way hashing works, changing just one character in the input generates a completely different hash value. By using a hash value instead of a timestamp or a numerical sequence, you get a way to order the blocks and a way to validate them. For any block within the chain, you can generate the block hash value yourself by using certain algorithms and compare it to the original hash value. If the hashes match, they are consistent with the data, and if the hash values are consistent along the chain, then you can be sure that the blockchain has integrity. If anyone wants to meddle with any of the data, they have to regenerate all the hash values from that point forwards and this particular copy of the blockchain will look different. That creates the property of

immutability; no one can alter the past without everyone knowing about it.

Managing Blockchain Files It’s not just the file structure that is unique, how the file is managed is also unique. A blockchain is a shared resource that is designed to operate in a trustless environment. That means you can always trust the data it contains, regardless of who put it there. You can trust the data because of the following properties inherent in a blockchain network.

Replication – in a blockchain network, each participant maintains an exact copy of the ledger, so you don't have to trust an outside authority to manage the data for you. But that creates an issue; how you keep all of the copies in sync? Through consensus.

Consensus – is the mechanism that the nodes use to keep their copies in sync. While there are many different consensus mechanisms, they all ensure the file remains consistent throughout the network. But what about the validity of the transactions themselves? That occurs through provenance.

Provenance – transactions related to assets managed on the blockchain can be traced back to the recorded beginning of the asset’s existence. If you hear the term genesis block, it refers to the first block recorded on the chain. And since each block is chained to the previous block, it is possible to walk back from any point in time to the genesis block to prove the provenance of any asset and any transaction that affected it. But what happens if someone tries to change history? Immutability kicks in.

Immutability – As mentioned earlier, the ability to verify the fingerprints (hashes) of each block as well as the order of appearance allows each node the ability to verify the work of any other node. Once the block is committed, it cannot be changed without creating noise in the system. Great, but in this network, can’t everyone see everyone else’s business? That’s where pseudonymity steps in.

Pseudonymity – through a combination of cryptographic techniques including hashing, digital signatures, and data encryption, the right balance of public disclosure, transparency, and privacy is maintained even though the blockchain is a shared resource. But if identity is obscured, how do you know transactions are authentic? Finality steps in.

Finality – Digital signatures at the transaction level provide the means of demonstrating authenticity and non-repudiation. When a signed transaction is validated and written to the ledger, it is final; it cannot be disputed.

So, it’s not just the file system, it’s also how it’s managed that makes it revolutionary. We’ll next look at a few of the early foundational blockchain offerings and provide some context.

Bitcoin and Ethereum If you have heard or read anything about blockchain, you have probably heard it in the context of Bitcoin and Ethereum.

The Bitcoin protocol was first described in a nine-page 2008 paper by Satoshi Nakamoto. “Satoshi Nakamoto” is assumed to be a pseudonym, so it’s not clear whether the protocol was developed by an individual or a group, and attempts to identify the developer or development team have been unsuccessful.

In January 2009, the Bitcoin network came into existence with the release of the first open source Bitcoin client and the issuance of the first Bitcoins, with Satoshi Nakamoto mining the first block of Bitcoins ever (known as the genesis block).

At the core of the Bitcoin network is a blockchain, a ledger that records the rightful owner of every Bitcoin in existence. When you initiate a Bitcoin transaction, you announce to the network that you want to transfer an amount of Bitcoin on the ledger from one owner to another. As mentioned earlier, these transactions are grouped into a block and members of the network then compete to be the first one to confirm that the transactions in the block are legitimate. Once a block is confirmed, the ledger or blockchain, is updated to reflect the most recent transactions.

Bitcoin is the original version of the “blockchain client and network server software set” and it implements decentralized trading of the Bitcoin cryptocurrency among peers. If you try to use the Bitcoin blockchain architecture to implement something besides cryptocurrency exchange, you need to implement a discrete blockchain because the protocol is the scripting code and accordingly is the blockchain. In other words, a blockchain is purpose-built to support the particular problem it is trying to solve.

Ethereum is an evolution of Bitcoin’s initial blockchain version and is focused on broader use cases including smart contracts. The inventor of Ethereum recognized the limitations of the Bitcoin scripting language and developed a new approach. Ethereum is a computing engine that allows application code to be imbedded in a blockchain allowing transaction processing that exceeds the fixed capabilities of the Bitcoin protocol. This allows for “smart contracts” or bits of code that no only record and validate a transaction, but can actually execute the transaction based on state changes either within the chain itself or external

sources. This approach eliminates the need for separate purpose-built chains required by the Bitcoin architecture and allows for more sophisticated processing through decentralized applications. With Ethereum, the network becomes a computing engine.

Now that you have the basics as to what blockchain is, we’ll turn our attention to why enterprises are evaluating and, over time, moving towards blockchain-based services. About TVR World-class research requires world-class consulting analysts and our team is just that. Gaining value from research also means having access to research. All TechVision Research licenses are enterprise licenses; this means everyone that needs access to content can have it. We know major technology initiatives involve many different skill-sets across an organization and limiting content to a few can compromise the effectiveness of the team and the success of the initiative. Our research leverages our team’s in-depth knowledge as well as their real-world consulting experience. We combine great analyst skills with real world client experiences to provide a deep and balanced perspective.

TechVision Consulting builds off our research with specific projects to help organizations better understand, architect, select, build, and deploy infrastructure technologies. Our well- rounded experience and strong analytical skills help us separate the hype from the reality. This provides organizations with a deeper understanding of the full scope of vendor capabilities, product life cycles, and a basis for making more informed decisions. We also support vendors when they carry out a product and strategy review and assessment, a requirement analysis, a target market assessment, a technology trend analysis, a go-to- market plan assessment, or a gap analysis.

About the Authors

Gary Rowe is a seasoned technology analyst, consultant, advisor, executive and entrepreneur. Mr. Rowe helped architect, build and sell two companies and has been on the forefront the standardization and business application of core infrastructure technologies over the past 35 years. He was President of Burton Group from 1999 to 2010, the leading technology infrastructure research and consulting firm through the sale of Burton to Gartner.

Mr. Rowe has personally led over 100 consulting engagements, 50+ educational seminars, published over 50 research reports/articles and led three significant technology industry initiatives. His combination of business skills and his deep understanding of technology provide a balanced perspective for clients. Core areas of focus include identity and access management, directory integration, cloud computing, security/risk management, digital transformation, IT business model changes, privacy and blockchain/distributed ledger."

Gary Zimmerman is an experienced executive known for helping companies deliver new offers and expand markets. Accomplishments include launching four companies, 20+ products, building high-performance organizations, and generating millions in sales.

His experience at Neustar, Respect Network, and Sovrin allows him to provide a broad perspective on a variety of subjects including self-sovereign identity, blockchain, enterprise data management, and the data brokerage industry.

Other related TechVision Research works

Smart Contracts and Blockchain Authors: Gary Rowe – CEO / Principal Consulting Analyst, John Myracle – Principal Consulting Analyst

Identity is the New Perimeter Authors: Doug Simmons – Managing Partner,Consulting / Principal Consulting Analyst, Nick Nikols – Managing Partner, Research / Principal Consulting Analyst, Gary Rowe – CEO/ Principal Consulting Analyst, Gary Zimmerman – CMO / Principal Consulting Analyst

Blockchain Call-to-Action for Bankers Author: Rhomaios Ram – Principal Consulting Analyst

Contributing Authors: Bill Bonney – Principal Consulting Analyst John Myracle – Principal Consulting Analyst Gary Rowe – CEO / Principal Consulting Analyst

Blockchain-based Identity Management Authors: Doug Simmons – Managing Director, Consulting / Principal Consulting Analyst; Gary Rowe – CEO / Principal Consulting Analyst

Enterprise Blockchain Level Set Author: Gary Rowe – CEO / Principal Consulting Analyst