As stated in our guide “What is Blockchain Technology?”, there are three principal technologies that combine to create a blockchain. None of them are new. Rather, it is their orchestration and application that is new.

These technologies are: 1) private key cryptography, 2) a distributed network with a shared ledger and 3) an incentive to service the network’s transactions, record-keeping and security.

The following is an explanation of how these technologies work together to secure digital relationships.

Cryptographic keys

Two people wish to transact over the internet.

Each of them holds a private key and a public key.

The main purpose of this component of blockchain technology is to create a secure digital identity reference. Identity is based on possession of a combination of private and public cryptographic keys.

The combination of these keys can be seen as a dexterous form of consent, creating an extremely useful digital signature.

In turn, this digital signature provides strong control of ownership.

 

Identity

But strong control of ownership is not enough to secure digital relationships. While authentication is solved, it must be combined with a means of approving transactions and permissions (authorisation).

For blockchains, this begins with a distributed network.

A Distributed Network

The benefit and need for a distributed network can be understood by the ‘if a tree falls in the forest’ thought experiment.

If a tree falls in a forest, with cameras to record its fall, we can be pretty certain that the tree fell. We have visual evidence, even if the particulars (why or how) may be unclear.

Much of the value of the bitcoin blockchain is that it is a large network where validators, like the cameras in the analogy, reach a consensus that they witnessed the same thing at the same time. Instead of cameras, they use mathematical verification.

In short, the size of the network is important to secure the network.

That is one of the bitcoin blockchain’s most attractive qualities — it is so large and has amassed so much computing power. At time of writing, bitcoin is secured by 3,500,000 TH/s, more than the 10,000 largest banks in the world combined. Ethereum, which is still more immature, is secured by about 12.5 TH/s, more than Google and it is only two years old and still basically in test mode.

System of record

 

When cryptographic keys are combined with this network, a super useful form of digital interactions emerges. The process begins with A taking their private key, making an announcement of some sort — in the case of bitcoin, that you are sending a sum of the cryptocurrency — and attach it to B’s public key.

Protocol

 

A block – containing a digital signature, timestamp and relevant information – is then broadcast to all nodes in the network.

 

Network servicing protocol

A realist might challenge the tree falling in the forest thought experiment with the following question: Why would there be a million computers with cameras waiting to record whether a tree fell? In other words, how do you attract computing power to service the network to make it secure?

For open, public blockchains, this involves mining. Mining is built off a unique approach to an ancient question of economics — the tragedy of the commons.

With blockchains, by offering your computer processing power to service the network, there is a reward available for one of the computers. A person’s self-interest is being used to help service the public need.

With bitcoin, the goal of the protocol is to eliminate the possibility that the same bitcoin is used in separate transactions at the same time, in such a way that this would be difficult to detect.

This is how bitcoin seeks to act as gold, as property. Bitcoins and their base units (satoshis) must be unique to be owned and have value. To achieve this, the nodes serving the network create and maintain a history of transactions for each bitcoin by working to solve proof-of-work mathematical problems.

They basically vote with their CPU power, expressing their agreement about new blocks or rejecting invalid blocks. When a majority of the miners arrive at the same solution, they add a new block to the chain. This block is timestamped, and can also contain data or messages.

Here’s a chain of blocks:

 

The type, amount and verification can be different for each blockchain. It is a matter of the blockchain’s protocol – or rules for what is and is not a valid transaction, or a valid creation of a new block. The process of verification can be tailored for each blockchain. Any needed rules and incentives can be created when enough nodes arrive at a consensus on how transactions ought to be verified.

It’s a taster’s choice situation, and people are only starting to experiment.

We are currently in a period of blockchain development where many such experiments are being run. The only conclusions drawn so far are that we are yet to fully understand the dexterity of blockchain protocols.

More on this point in our guides “What are Applications and Use Cases for Blockchain Technology?”and “What is the Difference Between Open and Permissioned Blockchains?”

As the implications of the invention of have become understood, a certain hype has sprung up around blockchain technology.

This is, perhaps, because it is so easy to imagine high-level use cases. But, the technology has also been closely examined: millions of dollars have been spent researching blockchain technology over the past few years, and numerous tests for whether or not blockchain technology is appropriate in various scenarios have been conducted.

Blockchain technology offers new tools for authentication and authorization in the digital world that preclude the need for many centralized administrators. As a result, it enables the creation of new digital relationships.

By formalizing and securing new digital relationships, the blockchain revolution is posed to create the backbone of a layer of the internet for transactions and interactions of value (often called the ‘Internet of Value’, as opposed to the ‘Internet of Information’ which uses the client-server, accounts and master copy databases we’ve been using for over the past 20 years.)

But, with all the talk of building the digital backbone of a new transactional layer to the internet, sometimes blockchains, private cryptographic keys and cryptocurrencies are simply not the right way to go.

Many groups have created flowcharts to help a person or entity decide between a blockchain or master copy, client-server database. The following factors are a distillation of much of what has been previously done:

Is the data dynamic with an auditable history?

Paper can be hard to counterfeit because of the complexity of physical seals or appearances. Like etching something in stone, paper documents have certain permanence.

But, if the data is in constant flux, if it is transactions occurring regularly and frequently, then paper as a medium may not be able to keep up the system of record. Manual data entry also has human limitations.

So, if the data and its history are important to the digital relationships they are helping to establish, then blockchains offer a flexible capacity by enabling many parties to write new entries into a system of record that is also held by many custodians.

Should or can the data be controlled by a central authority?

There remain many reasons why a third party should be in charge of some authentications and authorizations. There are times when third-party control is totally appropriate and desirable. If privacy of the data is the most important consideration, there are ways to secure data by not even connecting it to a network.

But if existing IT infrastructure featuring accounts and log-ins is not sufficient for the security of digital identity, then the problem might be solved by blockchain technology.

As Satoshi Nakamoto wrote in his (or her) seminal work, “Bitcoin: A Peer-to-Peer Electronic Cash System”: “Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable.”

Private key cryptography enables push transactions, which don’t require centralized systems and the elaborate accounts used to establish digital relationships. If this database requires millions of dollars to secure lightweight financial transactions, then there’s a chance blockchains are the solution.

Is the speed of the transaction the most important consideration?

Does this database require high-performance millisecond transactions? (There is more on this point in our guide: “What is the Difference Between a Blockchain and a Database?”).

If high performance, millisecond transactions are what is required, then it’s best to stick with a traditional-model centralized system. Blockchains as databases are slow and there is a cost to storing the data – the processing (or ‘mining’) of every block in a chain. Centralized data systems based on the client-server model are faster and less expensive… for now.

In short, while we still don’t know the full limits and possibilities of blockchains, we can at least say the use cases which have passed inspection have all been about managing and securing digital relationships as part of a system of record.

If cryptocurrency is decentralizing the world of money, a new bitcoin wallet startup thinks it could also help decentralize the world of work.

Revealed exclusively to CoinDesk, Misthos launched its multi-signature wallet Monday on top of Blockstack’s decentralized application platform. One of the first enterprise products launched on Blockstack, the wallet is designed for project teams, investment partnerships and other ad hoc ventures to manage the divvying up of income (received as bitcoin) among their individual members.

These organizations, which often form to carry out a specific objective before disbanding (more like a Hollywood production than a corporation), “want to have transparency into where their cash is going and want to be able to distribute their income in a fair way,” Misthos founder Justin Carter told CoinDesk.

To that end, all proposed payouts from a venture using a Misthos wallet must be approved unanimously by the partners in that venture. Carter described this model as “moving away from an employee-employer relationship to a group consensus about who contributed value.”

In other words, instead of a getting paid according to a salary or contract negotiated before taking on a job, the individual is compensated based on social consensus among the team. Misthos makes its money by collecting a 1.49 percent cut of the payouts.

Similarly, proposals to add partners are subject to approval by all the existing participants, and in order to kick one person out, everyone else in the group must agree to it. Several partnerships are already using Misthos to distribute bitcoin among members, including the four-person team behind Munich-based bitcoin publication Coin Trainer.

“It helps us create a transparent environment where contributions are rewarded fairly and democratically,” Marcel Kasper, one of the co-founders of Coin Trainer, told CoinDesk.

Eventually, this collaborative model could be applied to managing fiat currency income for projects as well, but bitcoin was a natural starting point, Carter said.

“We are starting to build out the product on bitcoin is because of the reduced friction, as we have no institutional dependencies,” he told CoinDesk, adding:

“Crypto-first is about first developing a financial service for the new platform (cryptocurrencies). And once the overall experience is well-defined, adapting it to the old platforms, integrating with legacy financial institutions operating in fiat.”

Free agents

Misthos is part of a broader push across the cryptocurrency community to support less centralized employment models.

Opolis, for example, is a professional employment organization (PEO) that handles outsourced human resources functions such as benefits and payroll for employers. However, it caters to a specialized clientele, including blockchain projects and startups, and has close ties to ConsenSys, the ethereum design studio.

By the end of the month, roughly 300 Opolis users will be able to facilitate crypto or fiat payrolls, employee benefits, and tax documents through this one-stop-shop service provider. The company also runs an employment marketplace for recruiters and job seekers, and it has a grander vision of future “decentralized employment organizations,” or DEOs.

John Paller, a co-founder of Opolis, told CoinDesk his platform is optimized for individual contractors instead of corporate hierarchies.

“[Freelancers] can choose and vote on any benefits they want, any number of things, including things that are out of the scope of traditional options today,” he said. “For example, you could have part of your income go to a group investment model.”

Both Misthos and Opolis use decentralized data solutions of some kind for worker IDs and credentials, making it easier to recruit, onboard and offboard collaborators.

“There’s also storage that Blockstack provides, and part of that we’re leveraging,” Carter said of Misthos, which uses Blockstack IDs for logins and wallet management. “All the history of the ventures is all stored with the individual partners.”

Human factors

Stepping back, it’s easy to see why these entrepreneurs see an opportunity in offering solutions tailored for project-specific, flexible employment arrangements. These days many of the ecosystem’s leading developers prefer to work independently. Turnover at crypto startups is particularly high.

Indeed, Wall Street veteran turned startup advisor Jill Carlson told CoinDesk a wide range of workers with soft skills could benefit from employment opportunities modeled after open source collaborations.

In traditional freelance contract negotiations, “You have very little leverage,” Carlson said. “I want to be able to do this style of work but to scale it in some way.”

On the other hand, Carlson also emphasized the importance of training and mentorship provided by traditional employers. To bring bitcoin’s ethos to the workplace, some collaboration will need to take place offline, face-to-face. “I do my best work when I’m with other people,” she said.

Plus, in her view, it’s important to consider how crypto community politics, and arguments on social media platforms where “a lot of nuance is being lost,” could impact project governance on Misthos, which she nevertheless said offers a compelling idea for on-chain bounty management.

Carter agreed that much of the social governance will take place off of the Misthos payroll platform.

“The point Misthos steps in is for a form of documentation and execution,” he said.

This is why Jude Nelson, lead blockchain engineer at Blockstack, told CoinDesk such democratic projects will require both on-chain and off-chain coordination.

He concluded:

“On-chain smart contracts are likely necessary for users of a dapp who don’t know each other. But since all partners in a Misthos venture must know one another before signing off on a payment, they are able to coordinate pay-outs off-chain without needing a potentially cumbersome on-chain smart contract.”

Even private and permissioned blockchains need to build ecosystems and achieve network effects, just like their permissionless, public counterparts.

At least, that’s the thinking behind LedgerConnect, a financial blockchain “app store” that aims to make it easier for banks to access distributed ledger technology (DLT) solutions from fintech and software providers, and for those vendors in turn to reach bank customers.

Announced Monday, LedgerConnect is the offspring of bank-owned currency trading utility CLS and enterprise software giant IBM, and counts major banks Barclays and Citigroup among its founding members.

In fact, nine financial institutions are participating in the proof of concept (PoC) and have selected services from a number of vendors including Baton Systems, Calypso, Copp Clark, IBM, MPhasis, OpenRisk, SynSwap and Persistent Systems.

On LedgerConnect, financial institutions will be able to access DLT-based services in areas such as know-your-customer processes, sanctions screening, collateral management, derivatives post-trade processing and reconciliation and market data.

This new hub will address a connectivity gap, where upstart fintechs and large tech firms alike are faced with the cost and complexity of spinning up their own distributed networks so banks can consume their various applications, according to Keith Bear, IBM’s vice president for financial markets.

“Having a secure network and proven infrastructure allows an app store kind of model, where banks can identify applications from certified fintech and software providers and deploy these apps over a seamless blockchain network,” Bear told CoinDesk.

For Barclays, one of the most active banks in the DLT field, the app store is a way to test out a new approach.

Dr. Lee Braine of the investment bank CTO office at Barclays, explained that there are several different deployment options to consider when architecting distributed ledgers for live environments.

For example, if a financial market infrastructure provider like CLS is providing the governance and business services for a particular use case, then there may be an option for that market infrastructure provider to also host the nodes on behalf of the banks in order to accelerate the initial speed to market, said Braine.

“Some banks may also look to explore the more decentralized deployment option of hosting their nodes themselves,” said Braine. “By participating in the LedgerConnect proof-of-concept, Barclays is gaining experience of a distributed ledger private network aimed at connecting both market infrastructure-hosted nodes and bank-hosted nodes.”

LedgerConnect itself runs partly on a permissioned blockchain based on IBM’s blockchain platform, which in turn was built on Hyperledger Fabric, and all the apps currently in the store are Hyperledger-based. However, the founders are open to other enterprise blockchain solutions making use of the app store.

“We are not averse to supporting other ledger implementations, whether it is R3’s Corda, whether it is Quorum (provided these techs are robust and can meet the needs we have from security perspective etc.),” said Ram Komarraju, head of innovation and solution delivery at CLS.

He added:

“Our expectation is that in principle we will not be limited to one technoligy only.”

Original Consortium

Stepping back, CLS can perhaps be thought of as the original blockchain consortium.

Granted, it was founded in 2002 (six years before the first blockchain was conceived) to provide plumbing for FX trades. But it’s been testing blockchain technology since early 2015, before Hyperledger started and when R3 was still flying under the radar.

The early CLS blockchain efforts were later formalized into CLSNet, a way of testing blockchain to match and net trades involving a range of new currencies not on the main platform, keeping immature blockchain technology separate from the core settlement engine used by 60 large financial institutions.

“There is a lot of trade processing we do for banks and buy-side firms, without getting to the last mission-critical aspects of settlement itself,” said Komarraju.

As such, CLSNet will be one of the first applications on the new LedgerConnect portal. All these apps have been selected in the hope of removing typical reconciliation efforts and data duplication (remedies include things like capturing digitalized master agreements of derivatives contracts on a single ledger for example).

“Look at capital markets today, every bank has its own silo office systems even though they are trading typically with a counterparty that has the same type of business logic but using the same technology stack,” added Komarraju.

IBM and CLS go back a ways; the main CLS platform was built by IBM. And LedgerConnect is a way of joining the dots between their respective financial infrastructure and blockchain work, at the same time extending the blockchain work CLS has been doing beyond foreign exchange into other capital market domains.

“This is really leveraging the combination of CLS’s position as a globally systemically important market utility owned by the banks, and also IBM’s investment in that,” said Komarraju.

PoC fatigue

Unlike the average PoC, LedgerConnect is at quite an advanced state, according to Komarraju.

“We didn’t start this on Monday,” he said. “We have institutions that have selected a number of use cases and these have been implemented and we are in the very late stages of proving the technology.”

While Barclays and Citi are the only banks being named at this time, big hitters like JPMorgan and Goldman, which are both part of CLSNet, are logical candidates to take part.

Another list of likely suspects are the banks on the we.trade platform, which also uses Hyperledger in the form of an IBM software-as-a-service (SaaS) model.

Explaining why CLS couldn’t reveal all the participants in LedgerConnect, Komarraju hinted that some of these big banks are experiencing a bit of blockchain PoC fatigue.

“We cannot share the names of full list of banks because we haven’t (yet) received the approvals from some of them. Some of them wanted to wait until the proof of concept is complete and others needed more time for internal approvals,” he said.

Meanwhile, Bear of IBM said the whole reason we are seeing PoC fatigue is because so many of them don’t progress. While this can be because of a weak business case, or one that doesn’t need a blockchain, oftentimes it comes down to the cost and complexity of getting a network up and running.

“In many ways we are trying to get rid of that PoC fatigue,” said Bear. “I know we have to go through a PoC to do that, but it’s kind of inevitable.”

IBM image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.