Executive Summary
Blockchains are immutable digital ledger systems implemented in a distributed fashion (i.e.,without a central repository) and usually without a central authority. At their most basic level, they enable a community of users to record transactions in a ledger that is public to that community, such that no transaction can be changed once published. In 2008, the blockchain idea was combined in an innovative way with several other technologies and computing concepts to enable the creation of modern cryptocurrencies: electronic money protected through cryptographic mechanisms instead of a central repository. The first such blockchain based approach was Bitcoin. These currency blockchain systems are novel in that they store value, not just information. The value is attached to a digital wallet—an electronic device (or software) that allows an individual to make electronic transactions. The wallets are used to sign transactions sent from one wallet to another, recording the transferred value publicly, allowing all participants of the network to independently verify the validity of the transactions. Each participant can keep a full record of all transactions, making the network resilient to attempts to alter that record (or forge transactions) later.
Because there are countless news articles and videos describing the “magic” of the blockchain, this paper aims to describe the method behind the magic (i.e., how a blockchain system works). Arthur C. Clarke once wrote, “Any sufficiently advanced technology is indistinguishable from magic” [1]. Clarke’s statement is a perfect representation for the emerging use cases for blockchain technology. There is a high level of hype around the use of blockchains, yet the technology is not well understood. It is not magical; it will not solve all problems. As with all new technology, there is a tendency to want to apply it to every sector in every way imaginable.
This document attempts bring a high-level understanding of the technology so that it can be applied effectively.
As stated above, blockchain technology is the foundation of modern cryptocurrencies, so named because of blockchain’s heavy usage of cryptographic functions. Users utilize public and private keys to digitally sign and securely transact within the system. Users of the blockchain may solve puzzles using cryptographic hashing in hopes of being rewarded with a fixed amount of the cryptocurrency. However, blockchain technology is more broadly applicable than its application to cryptocurrencies. In this work, we try to show this broader applicability while still focusing to a large extent on the cryptocurrency use case (since that is the primary use case today).
Organizations considering implementing blockchain technology need to understand important aspects of the technology. For example, what happens when an organization implements a blockchain system and then decides they need to make modifications to the data stored? When using a database, this can be accomplished through a simple query (or major changes can be made by updating the database schema or software). However, on a blockchain, it is much more difficult to change data or update the ‘database’ software. Organizations need to understand the extreme difficulty in changing anything that is already on the blockchain, and that changes to the blockchain software may cause forking of the blockchain. Another critical aspect of blockchain technology is how the participants agree that a transaction is valid. This is called “reaching consensus”, and there are many models for doing so, each with positives and negatives for a specific business case.
Some existing blockchain technologies focus on storing wealth, while 154 others are a platform for smart contracts (software which is deployed on the blockchain itself, and executed by the computers running that blockchain). New blockchain technologies are being developed constantly to enable new use cases and to improve the efficiency of existing systems. Some blockchain implementations are permissionless, meaning anyone can read and write to them.
Other implementations limit participation to specific people or companies, allow finer-grained controls, and may be managed by a central entity. Knowing these specifics allows an organization to understand what will be most applicable to its needs.
Despite the many variations of blockchain systems and the rapid development of new technologies, most blockchains use some common core concepts. Each transaction involves one or more addresses and a recording of what happened, and it is digitally signed. Blockchains are comprised of blocks, each block being a group of transactions. All the transactions in a block are grouped together, along with a cryptographic hash of the previous block. Finally, a new hash is created for the current block’s header to be recorded within the block data itself as well as within the next block. Over time, each block is then chained to the previous block in the chain by adding the hash of the previous block to the header of the current block.
Each technology used in a blockchain system takes existing, proven concepts and merges them together in a way that can address problems that were previously difficult. This document explores the fundamentals of how blockchain technologies work, how the participants in the network come to agree whether a transaction is valid, what happens when changes need to be made to an existing blockchain deployment, and how permissions work. Additionally, this document explores specific blockchain applications and examples of when to consider using a blockchain system.
The use of blockchain technology is not a silver bullet, and there are issues that must be considered such as how to deal with malicious users, how controls are applied, and the limitations of any blockchain implementation. That said, blockchain technology is an important concept that will be a basis for many new solutions.
For more information visit https://csrc.nist.gov/publications/detail/nistir/8202/draft#pubs-abstract-header