Setting the record straight on blockchain
Three common myths debunked - Blockchain does not always mean decentralized decision-making, immutability, or cryptocurrency
Blockchain is a ~$1TN+ commercial opportunity globally in the coming decade.
“Blockchain” is also a noisy buzzword.
In this article, I debunk three common myths about blockchain that are not true:
Blockchain means decentralized decision-making
Blockchain is immutable
Blockchain means cryptocurrency/Bitcoin
But first, what is blockchain?
Blockchain is a digital record-keeping system
Record-keeping systems help store, organize, track, and recall various types of information – from the events of nations and wars to the details of money transactions, supply chains, and source codes for apps. Record-keeping systems help overcome the limitations of human memory in remembering the past, which informs decision-making in the present and future.
Record-keeping systems aim to be:
Trusted as a source of credible, reliable information
Used as widely as possible by the intended userbase
The more a record-keeping system is trusted, the more likely it will be used.
Figure 1: Trust and usability - Comparison of record-keeping systems
Trust in record-keeping systems is based on perception. The number of decision-makers and the decision-making process required to increase trust in a record-keeping system typically depends on the use case. For example, many would agree that few decision-makers (e.g., doctors) as opposed to many (e.g., the wider public) – should decide what information counts as official medical records because the appropriate decision-making process likely requires highly specialized knowledge that only doctors typically have. Conversely, many would agree that many decision-makers (e.g., the wider public) as opposed to a few (e.g., doctors) – should determine the official outcome of a presidential election (e.g., one vote per person).
Blockchain technology marks a historic advancement in enabling few or many to efficiently decide what information gets officially recorded. The process of making record-keeping decisions is clear and predefined in blockchain protocols, pre-empting any debate on what decision-making process should be used.
Usability of record-keeping systems is based on technology. The intended userbase may be small or large. Some record-keeping systems consist of information intended for small userbases (e.g., proprietary information like Coca-Cola’s recipe and trade secrets). Conversely, some record-keeping systems consist of information intended for public consumption (e.g., details of national history). There is often heated debate on whether the intended userbase has been appropriately determined (e.g., Coca-Cola’s competitors want access to the same information that Coca-Cola does not want to share). But there is little dispute that ideally, the latest, official set of records can easily reach all members of the intended userbase as quickly as possible.
Blockchain technology marks a historic advancement in improving the usability of record-keeping systems. The work of updating the latest set of official records needs to be done only once, and the very latest set of official records can be distributed in real-time to all members of the intended userbase.
How does blockchain technology establish trust and usability?
Blockchain technology is an umbrella term that refers to blockchain protocols, blockchain platforms, blockchain networks, and blockchain ledgers. Figure 2 provides definitions and examples of these terms.
Figure 2: Blockchain terminology - protocol, platform, network, ledger
Just as Internet Protocols govern how data is exchanged from one computer to another on the internet, so blockchain protocols govern how data is exchanged on blockchain networks. Just as Internet Protocols can be used to create decentralized or centralized platforms, so blockchain protocols can be used to create public or private platforms [i]. For example, the Ethereum Mainnet protocol has been used to create both Ethereum, a public platform that anyone can use to make ether (ETH) transactions, and Ethereum Enterprise, a private platform that companies can use to create private networks.
Blockchain platforms and their corresponding networks and ledgers can be categorized into “private” and “public.”
Figure 3: Comparison of private and public blockchain networks
1. Who can propose information to be officially recorded?
Related terms: transactions; anonymity; permissionless; consortium; permissioned; digital signature; cryptography; public key; private key
In public blockchain networks, anyone with access to the internet can make and propose transactions for entry as official records while maintaining anonymity. Public blockchain networks are sometimes referred to as “permissionless” because anyone can join.
In private blockchain networks, only individuals with permission from the authority that owns the private blockchain network can propose information for entry. The authority can be a single organization (e.g., a company) or a consortium (e.g., a group of companies) that collectively owns the blockchain network. Individuals with permission to participate on private blockchain networks are commonly described as “permissioned and known.” Private blockchain networks are sometimes referred to as “permissioned” because participants require authorization from the entity that owns the private blockchain network.
Regardless of whether the identity of participants in blockchain networks is anonymous or known, identity must be verifiable to prevent fraud (e.g., so that someone cannot pretend to be you while spending your money). Every transaction must have a verifiable digital signature, which proves that the individual who proposes the transaction for official record-keeping is who they claim to be.
Cryptography is used in public blockchain networks to verify identity while maintaining anonymity (i.e., not disclosing personal information such as name, home address, etc.). Participants in public blockchain networks disclose a public key, a public-facing address with which participants can send and receive information, and a private key, which is cryptographically paired to the public key and kept secret from all other participants. Network participants interact with an individual’s public key without knowing the identity of the individual who holds the private key paired with the public key. Public blockchain network participants must use their private keys to create a unique digital signature associated with each transaction. Authenticating the digital signature involves verifying that whoever proposes the transaction holds the correct private key associated with the public key address.
Digital signatures in private blockchain networks do not need to be encrypted since participants’ identities are known.
2. Who decides what information gets officially recorded, and how?
Related terms: node; decentralized decision-making; centralized decision-making; transaction validation; smart contracts; block; double spending; immutability; consensus mechanism; miners; mining; validator; Proof-of-Work; Proof-of-Stake; transaction fees; cryptocurrency; Bitcoin (BTC); gas fees; Ether (ETH)
Who decides…:
In both public and private blockchain networks, nodes decide what information gets officially recorded – according to the decision-making rules defined by the underlying blockchain protocol. A “node” is a computer (hardware) that runs a blockchain protocol (software), participating in a blockchain network via an internet connection.
In public blockchain networks, any participant (i.e., anyone with a computer and internet access) can be a node; this corresponds to decentralized decision-making.
In private blockchain networks, only permissioned participants with authorization from the network owner can be nodes; this corresponds to centralized decision-making.
…what information gets officially recorded…:
Transaction validation refers to the process by which nodes use rules defined by the underlying blockchain protocol to decide what information counts as official for record-keeping. When blockchain network participants propose new information to be officially recorded, nodes receive these requests and verify:
Identity associated with the transaction (e.g., I am who I say I am) by verifying that the digital signature associated with the transaction has been authenticated (as explained above)
Validity of proposed information (e.g., I can do and have done what I say for official records) by verifying against a complete copy of the latest official records, which can consist of various types of information, from the entire history of money transactions to smart contracts. Smart contracts are collections of code that outline the terms and conditions of an agreement and can automatically execute specific functions when these predefined terms and conditions are met.
…how:
Nodes order and organize verified transactions into “blocks.” A block is an organizational unit containing official records on the blockchain ledger. Information in blocks can be encrypted so that sensitive information is not publicly accessible. On private blockchain networks, information sent to a public key can be decrypted only if one has the private key paired with that public key. To become officially recorded, each block is added – chained – to the blockchain ledger in sequential order marked with a timestamp – hence the name “blockchain.”
The sequential, chronological order of blocks is important for two security reasons:
Fraud: The order in which transactions happened matters for validating transactions. For example, whether I sent $50 to Bob before Bob claims to have received $50 from me matters, so Bob cannot claim $50 out of thin air). Double spending is a type of fraud where a person tries to spend the same $50 more than once
Immutability (close to): Blocks containing official records on a blockchain ledger cannot be changed without changing all subsequent blocks that are sequentially chained to it in order of respective timestamps
The process by which nodes decide on the sequential, chronological order by which new blocks get added to the blockchain is commonly referred to as “consensus mechanism.” There are numerous types of consensus mechanisms (e.g., Proof-of-Work, Proof-of-Stake, Proof-of-Elapsed-Time, Redundant Byzantine Fault Tolerance, Sumeragi, etc.). The two most commonly recognized consensus mechanisms are arguably Proof-of-Work (PoW) and Proof-of-Stake (PoS). The Bitcoin and Ethereum networks use PoW consensus mechanisms today. The Ethereum network plans to transition to PoS in the future. To create a new block using the PoW consensus mechanism, 51% of miners must agree on the sequential, chronological ordering of blocks. Representation in PoW is determined by “one-CPU-one-vote.” To create a new block using the PoS consensus mechanism, 51% of validators must agree on the sequential, chronological ordering of blocks. Representation in PoS is determined by the amount of ether (ETH) staked by validators who want a chance at being selected to create new blocks.
The terms “miners” and “mining” are specific to the Proof-of-Work consensus mechanism. Miners are a subset of nodes that have access to the required technology for mining and compete against one another to create new blocks. Mining refers to the work and process of creating new blocks using the Proof-of-Work consensus mechanism. The term “validator” is specific to the Proof-of-Stake consensus mechanism and denotes a subset of nodes selected in a lottery-based system to create new blocks using the Proof-of-Stake consensus mechanism.
Depending on the consensus mechanism, creating new blocks – the act of creating official records – is more or less difficult. Creating new blocks is intentionally made difficult so that once information is officially recorded, it is difficult to undo. To change official records, the work of ordering and organizing into blocks must be undone. Clearly, creating new blocks takes work. So why would someone choose to create new blocks? In private blockchain networks operated by a company or consortium of companies, the work of creating new blocks can be assigned to salaried employees. In public blockchains that are not owned by anyone, transaction fees - monetary incentives, often in cryptocurrency - are provided to people who volunteer to create new blocks. On the Bitcoin network, miners are rewarded with Bitcoin (BTC). On the Ethereum network, validators are rewarded with “gas fees,” so named to denote the computational effort required to validate transactions and create new blocks. Gas fees are determined by the supply of validators and demand for transaction validation on the Ethereum network (last week, gas fees skyrocketed in response to a surge in demand stimulated by the launch of Otherside, Bored Ape Yacht Club’s new Metaverse). In exchange for validating transactions and creating new blocks, validators are rewarded with ether (ETH).
Once a node successfully creates a block, it broadcasts the block to all other nodes on the same blockchain network. All nodes on the network verify that all transactions in the block are valid before accepting the block to add to the existing blockchain ledger for official record-keeping.
3. Who can change officially recorded information, and how?
Related technical terms: 51% attack; consensus mechanism
The more challenging it is to create blocks in the first place (according to the consensus mechanism used), the more challenging it is to change the same blocks later. Consensus mechanisms used in public blockchain networks (where participants are anonymous) tend to make creating new blocks more difficult than those used in private blockchain networks (where participant identities are known).
All blockchain ledgers can technically be changed. The same consensus mechanism used to create blocks can be used to modify blocks and change the history of official records. To change official records on the Bitcoin network, one would need to amass 51% of the computing power on the network – hence the term “51% attack”. To change official records on the Ethereum network, one would need to amass 51% of ether staked by validators. There are numerous examples of 51% attacks that have successfully reorganized transaction history, leading to stolen funds.
In private blockchain networks, a limited number of permissioned and known nodes run the consensus mechanism chosen by the network owner (e.g., a company or group of companies). This means that getting nodes to achieve the consensus needed to change the history of official records on private blockchain ledgers will tend to be easier than doing the same on public blockchain ledgers.
4. Who can read the latest officially recorded information, where, and when?
Related terms: distributed ledger technology; Peer-to-Peer technology
The latest set of official records is immediately available for access in blockchain networks. In public blockchain networks, anyone with a computer and access to the internet can access the latest state of the blockchain ledger in real-time as new blocks get added. In private blockchain networks, only authorized individuals can access the latest state of the blockchain ledger in real-time as new blocks get added.
Blockchain technology is a subset of distributed ledger technology (DLT), which enables distributing the same set of records to multiple locations (e.g., nodes) at the same time without relying on a third-party entity to coordinate distribution. Blockchain technology is a specific type of DLT that organizes official records in blocks chained to one another in sequential, chronological order (as described above). DLT leverages Peer-to-Peer (P2P) technology, which enables decentralized networks. P2P technology allows all participating entities (e.g., computers) of networks to request and send data directly to one another without relying on a third-party entity[ii].
Three common myths about blockchain technology debunked
Blockchain networks use decentralized networking technology that allows all network participants to share information peer-to-peer (i.e., without going through a third party). However, decision-making - on what information gets officially recorded - can be decentralized or centralized and depends respectively on whether the blockchain network is public or private.
Blockchain ledgers are technically not immutable. All blockchain ledgers can be changed or deleted if a sufficient number of nodes (e.g., 51%) agree to make modifications, using the same decision-making process - the consensus mechanism - that they used to previously agree on what gets officially recorded. The more difficult it is to achieve consensus on official records in the first place, the more difficult it is to change the consensus later.
Cryptocurrency like Bitcoin is just one type of monetary reward used to incentivize public blockchain network participants to take on the difficult work of validating transactions and building new blocks of official records.
Blockchain technology is still relatively nascent and there are many new protocols, platforms, and networks that are emerging - and along with them, new use cases. It is incumbent on both public and private network participants to understand the emerging opportunities and risks of official record-keeping that blockchain technology brings us.
[i] Today’s internet is technically decentralized – no one individual or entity “owns” or can shut off the internet, and practically anyone can access and contribute to the internet. However, in practice, today’s online world is dominated by technology companies that own centralized platforms (e.g., social media platforms). It is possible to build centralized platforms on top of the decentralized infrastructure. See here for more detail.
[ii] Peer-to-Peer technology is often explained in contrast to client-server networks, which follow a hierarchical network structure where one central computer (“server”) maintains records and other computers on the network (“client”) must make requests. The server controls access to its data.
This article was prepared by Jaymin Kim in her personal capacity. The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of Marsh McLennan.
About the Author: Jaymin Kim is a Director at Marsh McLennan and drives global commercial strategy with a focus on cyber and digital. In her role, Jaymin explores longer-term commercial opportunities in the areas of risk, strategy, and people.