• India
  • Feb 08

Explainer / What is blockchain technology?

The Reserve Bank of India (RBI) has informed that blockchain technology (BCT) is one of many promising technologies and its usefulness will depend on how it is adopted and adapted to a wide array of uses, Union Minister of State for Finance Bhagwat  Karad said in a written reply in Rajya Sabha.

Further, RBI has informed that BCT has been listed as one of the innovative technologies, leveraging on which innovators can apply to test their products in RBI’s sandbox environment, he said. 

Last year, the RBI launched India’s first digital rupee (e₹) pilot project, which has components based on blockchain technology. 

What is blockchain?

• Blockchain is an innovative distributed ledger technology which was first introduced in the design and development of cryptocurrency — Bitcoin — in 2009.

• Distributed ledger technology is a digital system for recording the transaction of blocks in which the blocks are recorded in multiple places at the same time. The distributed ledger the data is replicated to multiple nodes and all nodes maintain the same data. 

• Distributed ledger technology is an umbrella term used to describe technologies which store, distribute and facilitate the exchange of value between users, either privately or publicly. Blockchain is one type of distributed ledger technology.

• In blockchain technology, when a transaction occurs, it is broadcast to all computers on the network. A set of new transactions, called a block, are authenticated by an agreed consensus mechanism, and then the validated transaction block is added to the previous chain of blocks. Every block is linked to the previous block, making double spending difficult because it would involve changing every subsequent block. 

• Blockchain enables a layer of trust and eliminates the need for a third party to validate the transactions. 

• Blockchain technology is an amalgamation of various technologies such as distributed systems, cryptography, etc.

• Each block contains details of transactions, hash of the previous block, timestamp, etc. 

• It is difficult for an adversary to modify the stored details at majority points. Therefore, Blockchain provides better security when compared with a centralised system.

• Data and transactions executed over the network are stored in the ledger in a decentralised manner over peer-to-peer network. Transactions are validated and verified through consensus (consensus protocols) across nodes of the blockchain network.

• Blockchain technology and cryptocurrencies have become globally famous and known to most of the people. Usage and awareness levels related to blockchain technology are growing fast. Many countries have recognised the potential of blockchain technology and are trying to become the global pioneers.

Key features of blockchain:

i) Decentralised: The network is decentralised. A group of nodes maintains the network making it decentralized. As the system doesn’t require any governing authority, the users can directly access it from the web and store  assets there.

ii) Immutability: Immutability is something that can’t be changed or altered. It ensures that the technology will remain as it is a permanent, unalterable network. As it is a distributed system, every node on the system has a copy of the digital ledger. When a transaction is added every node needs to check its validity. If the majority thinks it’s valid, then it’s added to the ledger. This promotes transparency and makes it corruption-proof. Without the majority consent from the nodes, no one can add any transaction blocks to the ledger. Once the transaction blocks are added to the ledger, no one can change it. Thus, any user on the network won’t be able to edit, delete or update it.

iii) Enhanced security: As it gets rid of the need for a central authority, no one can just simply change any characteristics of the network for their benefit. Using encryption ensures another layer of security for the system. Every information on the blockchain is hashed cryptographically. So, changing or trying to tamper with the data means changing all the hash IDs. If someone wants to corrupt the network, he/she would have to alter every data stored on every node in the network. There could be millions and millions of people, where everyone has the same copy of the ledger.

iv) Distributed ledger: A public ledger will provide every information about a transaction and the participant nodes. Many people can see what really goes on in the ledger. The ledger on the network is maintained by all other users on the system. Distributed ledger responds really well to any suspicious activity or tamper. Nodes act as verifiers of the ledger. If a user wants to add a new block others would have to verify the transaction and then give the green signal. To make the blockchain features work, every active node has to maintain the ledger and participate for validation.

v) Consensus: Every blockchain succeeds because of the consensus algorithms. Every blockchain has a consensus to help the network make any transactions. In simple terms, the consensus is a decision-making process for the group of nodes active on the network. Here, the nodes can come to an agreement quickly and relatively faster. When millions of nodes are validating a transaction, a consensus is absolutely necessary for a system to run smoothly. Nodes might not trust each other, but they can trust the algorithms that run at the core of it.

Blockchain – a new paradigm of trust

• Removed from the context of finance, a ‘transaction’ is commonly defined as “the act of carrying out or conducting a deal or exchange to a conclusion or settlement”. Today, an individual ‘transacts’ with multiple entities every day, either offline or online, and in a variety of forms. 

• Transactions could take the form of small purchases from a roadside vendor or a deal between two very large organisations. Immaterial of the size or nature, however, a common underlying feature of transactions is that they require the parties involved to trust each other, or adhere to a system that enables this trust to be executed.

• These ‘trust systems’ can take a variety of forms, depending on the nature of transactions being executed, to create checks and balances to ensure that parties involved fulfil their responsibilities and recourse in the case of disagreements is available. 

• Economic structures, as we know them today, have evolved to create these systems of trust. Banks are perhaps the most well-known of these systems, existing largely to facilitate creation of trust while transacting in money. 

• Regulatory bodies and certain government agencies exist almost exclusively to establish enforceable guidelines or regulations to create trusted environments for stakeholders to transact. 

• In essence, the need for trust in execution of these processes necessitated the need to create ‘centralised authorities’ to oversee their procedures and enforce them.

• With development and growth, the complexity of these systems has increased, making them more susceptible to inefficiencies.

• Blockchains can broadly be defined as a new type of network infrastructure (a way to organise how information and value moves around on the Internet) that create ‘trust’ in networks by introducing distributed verifiability, auditability, and consensus. 

• Blockchains create trust by acting as a shared database, distributed across vast peer-to-peer networks that have no single point of failure and no single source of truth, implying that no individual entity can own a blockchain network, and no single entity can modify the data stored on it unilaterally without the consensus of its peers.

• New data can be added to a blockchain only through agreement between the various nodes of the network, a mechanism known as distributed consensus. Each node of the network keeps its own copy of blockchain’s data and keeps the other nodes honest – if one node changes its local copy, the other nodes reject it.

• Blockchains record information on a timestamped chain that extends forward infinitely. New data is added to the end, and once added, it is permanent. Older data can neither be removed nor modified because a snapshot of it is captured in the blocks of data that come after it. 

• Blockchains leverage techniques from a field of mathematics and computer science, known as cryptography, to sign every transaction (the transfer of assets from one person to another) with a unique digital signature belonging to the user who initiated the transaction. These signatures are held privately but are verifiable publicly. 

• This means that if a user with identity A sends an asset to identity B, anybody can verify that the asset was sent by A, but cannot use A’s signature for their own transactions. This cryptographic system creates accountability while preventing identity fraud. If you send assets or update information on a blockchain, you later cannot claim otherwise or shift the responsibility for the action.

Blockchain in e-governance domain

• Blockchain has been positioned as a revolutionary technology, the much needed ‘silver bullet’ that can address all business and governance processes.

• In the e-governance domain, usage of blockchain technology ensures vigilance, transparency and possibly avoids insider attacks on the crucial data related to governance matters. 

• The key features of e-governance are trust and accountability which are very well supported by blockchain technology. 

• Since every data or transaction that is recorded in blockchain is near impossible to tamper with and also due to consensus-based transaction data replication across blockchain distributed nodes, this technology assures trust among its stakeholders in the digital world. 

• The trust is especially brought in since all the stakeholders access the same source of truth in terms of application data stored on the blockchain network.

• This kind of technology can bring significant changes in e-governance where several services have societal impact. 

• For example, in the educational system, student’s certificates, scholarship details, etc can be stored in a blockchain network. Various stakeholders such as educational institutions, different departments entrusted with disbursement of scholarships and respective administrative boards can become partners and have student’s records stored on consensus basis. 

• Likewise, in supply chain domain, the track and trace capability of blockchain network makes it possible to avoid any inadvertent mistakes or insider attack with regard to data maintenance across various stakeholders.

• Thus, this technology can effectively be used in situations where multiple organisations or departments are involved in a particular workflow which not only makes the underlying system more efficient but also brings trust and transparency in the system.

• Blockchain can enable the officials to verify the proof of existence of documents by comparing the attributes of the provided copy of the document against the details of the original version stored in Blockchain. 

• Storing the digital artefacts related to documents in a blockchain makes it secure and immune to tampering.

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