This document analyzes the potential for disruption of the current PCS industry by Distributed Ledger Technology systems like bitcoin’s blockchain. The analysis touches on the limitations of the consensus governance model in the blockchain.
As bitcoin transaction delays increase, the limitations of the blockhain implementation of the consensus model will become more evident.
A blockchain is a distributed ledger. It is the technology that underlies bitcoin and other cryptocurrencies. These distributed ledgers can track lots of different types of information. A blockchain can be implemented as a public ledger visible to all or it can be implemented with restrictions.
How Blockchain Works – Here are five basic principles underlying the technology.
1. Distributed Database Each party on a blockchain has access to the entire database and its complete history. No single party controls the data or the information. Every party can verify the records of its transaction partners directly, without an intermediary.
2. Peer-to-Peer Transmission Communication occurs directly between peers instead of through a central node. Each node stores and forwards information to all other nodes.
3. Transparency with Pseudonymity Every transaction and its associated value are visible to anyone with access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.
4. Irreversibility of Records Once a transaction is entered in the database and the accounts are updated, the records cannot be altered, because they’re linked to every transaction record that came before them (hence the term “chain”). Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.
5. Computational Logic The digital nature of the ledger means that blockchain transactions can be tied to computational logic and in essence programmed. So users can set up algorithms and rules that automatically trigger transactions between nodes.
Public blockchains are viewable to all. When bitcoin is sent from one account to another, that transaction is bundled into a list with other transaction over a specific time period. That bundle is called a block. Those bundles are confirmed through powerful computer processing and written to the general ledger.
Private blockchains offer more control to businesses than the public model. Private blockchains enable operators to control who reads and writes to the ledger.
Security of Private Blockchain
Network architecture is a key decision. Nodes communicate and achieve consensus on blocks before they are written to the blockchain. Node configuration will affect the security of a private blockchain.
The consensus process is purposefully created to take time. This delay is a vulnerability because it prevents speedy trades and the status of transactions may change over time, reducing predictability. A private block chain could increase the speed of the process but the tradeoff is a less-decentralized network. The less decentralization means that those need to be secured to ensure integrity.
Ownership is confirmed in a blockchain by the possession of a private key. A private blockchain needs a mechanism for handling lost private keys. The bitcoin blockchain does not allow recovery of assets that are lost due to lost private keys. This is a problem for tangible assets.
The benefits offered by a private blockchain — faster transaction verification and network communication, the ability to fix errors and reverse transactions, and the ability to restrict access and reduce the likelihood of outsider attacks — may cause prospective users to be wary of the system. – Allison Berke