Let’s see how the hashing process works. We are going to put in certain inputs. For this exercise, we are going to use the SHA-256 (Secure Hashing Algorithm 256).
As you can see, in the case of SHA-256, no matter how big or small your input is, the output will always have a fixed 256-bits length. This becomes critical when you are dealing with a huge amount of data and transactions. So basically, instead of remembering the input data which could be huge, you can just remember the hash and keep track.
A cryptographic hash function is a special class of hash functions which has various properties making it ideal for cryptography. There are certain properties that a cryptographic hash function needs to have in order to be considered secure. You can read about those in detail in our guide on hashing.
There is just one prpoerty that we want you to focus on today. It is called the “Avalanche Effect.”
What does that mean?
Even if you make a small change in your input, the changes that will be reflected in the hash will be huge. Let’s test it out using SHA-256:
You see that? Even though you just changed the case of the first alphabet of the input, look at how much that has affected the output hash. Now, let’s go back to our previous point when we were looking at blockchain architecture. What we said was:
The blockchain is a linked list which contains data and a hash pointer which points to its previous block, hence creating the chain. What is a hash pointer? A hash pointer is similar to a pointer, but instead of just containing the address of the previous block it also contains the hash of the data inside the previous block.
This one small tweak is what makes blockchains so amazingly reliable and trailblazing.
Imagine this for a second, a hacker attacks block 3 and tries to change the data. Because of the properties of hash functions, a slight change in data will change the hash drastically. This means that any slight changes made in block 3, will change the hash which is stored in block 2, now that in turn will change the data and the hash of block 2 which will result in changes in block 1 and so on and so forth. This will completely change the chain, which is impossible. This is exactly how blockchains attain immutability.
#3 Transparency to Increase Accountability
One of the most interesting and misunderstood concepts in the blockchain technology is “transparency.” Some people say that blockchain gives you privacy while some say that it is transparent. Why do you think that happens?
Well… a person’s identity is hidden via complex cryptography and represented only by their public address. So, if you were to look up a person’s transaction history, you will not see “Bob sent 1 BTC” instead you will see “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC”.
The following snapshot of Ethereum transactions will show you what we mean:
So, while the person’s real identity is secure, you will still see all the transactions that were done by their public address. This level of transparency has never existed before within a financial system. It adds that extra, and much needed, level of accountability which is required by some of these biggest institutions.
Speaking purely from the point of view of cryptocurrency, if you know the public address of one of these big companies, you can simply pop it in an explorer and look at all the transactions that they have engaged in. This forces them to be honest, something that they have never had to deal with before.
However, that’s not the best use-case. We are pretty sure that most of these companies won’t transact using cryptocurrencies, and even if they do, they won’t do ALL their transactions using cryptocurrencies. However, what if the blockchain technology was integrated…say in their supply chain?
A great example of this is the food industry. If there ever was an industry which requires transparency, then it is the food industry. One of the most fundamental questions that we should ask whenever we consume any food product is: “Where is my food coming from?”
More and more people are becoming increasingly indifferent as to the source of their food and this is causing a lot of problems to not only the consumers but the suppliers as well
By utilizing the blockchain one can keep track of where exactly the food is coming from and who all are the middlemen involved who are taking care of our food. In this way, if a certain batch of crops gets infected or spoilt, it will be easier and faster to locate and pinpoint the source of the infection.
#4 Blockchain is Cheaper
In order to understand this point, let’s looks at the Banking industry. The Harvard Business Review said that. “The Blockchain Will Do to the Financial System What the Internet Did to Media.”
But why is that the case? Let’s looks at one of the biggest places where Banks lose a lot of money, Know Your Customer (KYC) regulations. Here are some pretty shocking stats that we got from this article.
- An average bank spends £40m a year on KYC Compliance. Some banks may spend up to £300m
- JP Morgan has reportedly spent up to a staggering £1.6 billion on their compliance department and employed more than 13,000 people to keep track of regulatory changes
- 70% of the 722 corporate correspondents, who took part in the survey by Reuters, said that client on-boarding can take up to 2 months while 10% claimed it can even exceed four months.
The two chief culprits are:
- The ever-changing regulation policies.
- Draconian methods which are still followed by certain banks. Some banks still do their compliance process using papers.
So, how will the blockchain technology change this space? Well, there are two ways that it can work.
Firstly, there is the concept of self-sovereign identity. Self-sovereignty is the idea that it is an individual’s moral right to have ownership over their own body and life. Self-Sovereign Identity (SSI) is critical now, more than ever, because each and every company and entity has an online presence. Having so many siloed identities greatly increases the chances of online fraud or identity mismanagement.
By uploading your identity to the blockchain, you have full and complete control over yourself. So, how will that help with KYC? Suppose you have to go and open an account in a bank, the bank will simply ask you to give access to your identity instead of a centralized third party.
Secondly, the banks could be part of their own private and permission blockchain network (more on this later). Now suppose Alice has completed KYC regulations with Bank A, they can then simply upload the details on the blockchain. Since the blockchain is not owned by the central repository, anyone, who is part of the network can upload information and share it with everyone else.
Suppose Alice wants to open an account in bank B. Instead of starting the whole compliance process from scratch, they can simply access the blockchain and get the required KYC data.
The blockchain’s KYC protocol can help in both intra-bank and inter-bank functions:
- Intra-Bank: The KYC which has been performed by the bank can be used by another branch of the same bank. This leads to a smooth transference of services.
- InterBank: The KYC performed by one bank can be used easily by another bank.
According to a report co-authored by Santander, it’s estimated that blockchain technology could reduce banks’ infrastructure costs alone by up to $20 billion a year.
#5 Blockchain is Faster
Note: Sure we understand that scalability and throughput is a big problem with blockchain and cryptocurrencies, and we are going to address it later as to why that shouldn’t be a problem with enterprise blockchains.
Charley Cooper, the managing director of R3 consortium, believes that trade finance is the ideal sector which can be disrupted by the blockchain. He said:
“Trade finance is an obvious area for blockchain technology. It is so old it’s done with fax machines and you need a physical stamp on a piece of paper.”
In fact, there is a working PoC of how blockchain technology can exponentially reduce transaction times in these areas.
SAP recently collaborated with ATB Financial and fintech startup Ripple to send the first international blockchain payment from Alberta, Canada to ReiseBank in Germany. The bank used the SAP HANA Cloud Platform and the SAP Payment Engine application to take advantage of Ripple’s pioneering blockchain network.
The $1000 CAD (€667 EUR) blockchain payment, which would typically have taken from two to six business days to process was completed in about 20 seconds. The proof of concept has since been enhanced, and we are able to complete the transactions in just 10 seconds.
From 2-6 business days to 10 seconds. Now, that is disruption!
Public vs Private Blockchains
So, now that you know why companies should look into integrating blockchain, we need to look into what kind of blockchains they should look to integrate. There are two kinds of blockchains out there:
- Public Blockchains
- Private Blockchains
Before we get into individual definitions and see what sets them apart, let’s get into the similarities. So, what are the similarities between public and private blockchains:
- Since they are both peer-to-peer networks, both of them offer a decentralized ecosystem.
- Every single participating node must download a copy of the blockchain.
- The blockchain is kept up-to-date through consensus protocols.
- Both the blockchains guarantee immutability.
All the blockchains that we are familiar with are public blockchain. bitcoin and ether have pretty much championed the cause of public blockchains. You must have pretty much guessed why they are called public blockchains.
They are completely open ecosystems where anyone can take part in the ecosystem. The network also has an in-built incentive mechanism which rewards participants for taking part more thoroughly in the system.
Alright, so till now it sounds pretty good. However, it turns out that public blockchains are extremely impractical for enterprise purposes. Let us tell you why.
- Firstly, as has been extremely well documented, the blocks in bitcoin and ethereum have a storage issue. Bitcoin has a little over 1mb of space per block which is simply not enough to run the kind of transactions and store the kind of data that enterprises require.
- Then we have the throughput problems which have been pretty well-documented. Bitcoin can barely manage 7-8 transactions per second. The block confirmation time is 10 mins which just adds to the latency. Big enterprises need to deal with millions of transactions per day with near 0 latency.
- Public blockchains, especially the ones that follow the proof-of-work protocol like Bitcoin require an immense amount of computational power to solve hard puzzles.
- Finally, the openness of the public chains is itself a detriment. Think about it. If you have a company which runs on a blockchain which can be accessed by malicious actors and trolls, would you really want to integrate a system like that?
Because of these reasons, public blockchains are not a practical method to go forward for enterprises.
As opposed to the public blockchains, private blockchain is not open for everyone. People who want to participate in the private chain must gain permission. This is the reason why these kinda blockchains are also referred to as “permission blockchains.”
Because of this, there are restrictions to the kind of people who can actually take part in the consensus. Access for new participants could be given by the following:
- The existing participants who are taking part in the ecosystem.
- A regulated authority.
- A consortium.
Once an entity has joined the ecosystem, they can play a role in network maintenance. The Linux Foundation’s Hyperledger Fabric is an example of a permissioned blockchain framework implementation and one of the Hyperledger projects hosted by The Linux Foundation. It has been designed ground up to cater to these enterprise requirements.
These private chains have been specifically designed for enterprise needs and offer a lot of features.
Required Features of Enterprise Blockchains
Let’s check out some of the features of enterprise that they will require to function properly.
#1 High Performance
Like we have already said, public chains don’t even approach 100 transactions per second. When you consider the fact that most of the enterprises like telecom and credit processors need 10,000 – 100,000 tps, that’s not really the most ideal of scenarios.
In order to reach those levels of tps, blockchains need to adopt an architectural approach which:
- Efficiently compartmentalizes different tasks.
- Uses asynchronous flows.
- Uses faster consensus protocols.
- Utilizes parallelization
- Executes itself in optimized environments.
Hyperledger Fabric, a Linux Foundation project has already implemented some of these architectural principles. Trusted hardware aka SGX is also another avenue that has been looked into.
There is another thing that enterprise blockchains need to keep in mind. Most of these enterprise PoCs have had just a dozen participants during their test runs. One must keep in mind that a proper permissioned chain will need to accommodate for 100s of participants. As such, it must have an efficient onboarding process.
#2 High Resilience
Enterprise blockchains must be able to come back from downtime and potential failure scenarios. To ensure high availability, they must be able to avoid issues which may lead to major outages. To have that level of resilience, the system should assume that failures are bound to happen and must be prepared to keep the system running during these situations.
Think about how traditional enterprise software survives system failure. They often utilize service replication and redundancy to make sure that they don’t go through low availability. Similarly, enterprise chains should deploy redundant peer nodes, clustered ordering services, and replicate other working blockchain network components to work seamlessly without any glitches.
Privacy and security is obviously a huge need for enterprise-level blockchains. Since these are permission blockchains, all members are known entities and carefully vetted before they enter the ecosystem.
According to this article by Coindesk:
“Digital signatures applied to all network messages enable all nodes and clients to verify the sender and validate message integrity. This is coupled with transport security to authenticate the communications end points and encrypt the message traffic.
Further, automatically applying encryption for the stored data completes the best practices for encrypting data in transit and at rest. When this foundation is used transparently and pervasively for all secure communications and stored ledger data, it’s a big step forward in maintaining the integrity and security of the blockchain network, preventing most hacking attacks.”
Examples of Companies Using Enterprise Blockchains
Let’s look at some of the industry leaders who are looking to implement enterprise blockchains.
Several financial institutions like Santander, RBC, JP Morgan, Citibank, BNY Mellon, and Goldman Sachs have been conducting multiple blockchain-related efforts. Because of regulation issues, blockchain testing is being done in a measured manner.
The interested banks are either involved with R3 consortium, which is dedicated to banking, while several are also in Hyperledger consortium and the Ethereum Enterprise Alliance (EEA).
So what about payment processors you ask? Turns out that they are knee deep in blockchain PoC implementation as well.
American Express is looking to implement a customer rewards program which uses the blockchain. Also in November 2017 they announced that they will be using Ripple to help clients send funds from US banks to UK Santander branches.
Visa has also revealed their intention of implementing its blockchain-based business-to-business payments service called “B2B Connect.” Mastercard had applied for a patent for faster blockchain-based payments processing for merchants way back in May 2016.
Not to be left behind, the automobile industry also seems to be pretty keen on implementing the blockchain.
Volkswagen Financial Services and Renault led PoCs in 2017 testing vehicle telematics tracking. This is an extremely interesting use-case because turns out that a third of the used car sales in Germany have manipulated odometers.
This is why, they are tracking a vehicle’s mileage data, engine usage history, repair and maintenance history and putting it on the blockchain. This, in essence, makes sure that people know a vehicle’s history and activity with accuracy.
The aviation industry seems to be pretty enthusiastic about the blockchain as well. In spring 2017, Airbus, along with Blockchain at Berkeley, executed a PoC for jet plane parts tracking.
It looks like enterprise blockchains are here to stay. More and more companies from diverse platforms are looking to implement a working PoC to disrupt their respective spaces. Looking at the sheer amount of positive change the blockchain can usher in, it is easy to see why. As of right now, rigorous testing still needs to be done.