Blockchain – Understanding the Principles and the Potential

February 17, 2017 | Pierre Combelles

Blockchain is a much talked-about technology; but is it hype or a revolution? Although it is probably at the peak of the hype curve, it does have the potential to transform how businesses operate.

One could describe blockchain as a distributed ledger that provides a way to record and share information between members of a community. Within this community, each member maintains its own copy of information, and members must validate any updates collectively. The information could represent contracts, identities, transactions – any assets or events that can be described in a digital form. Blockchain entries are permanent, transparent, and searchable, which makes it possible for community members to view transaction-historical data with a guarantee that the entries are valid, have a clear origin and have not been modified. The distributed ledger takes the form of a series of linked blocks of data, hence the name “blockchain”.

Although blockchain was originally designed for virtual currency transactions, it provides a mechanism to apply decentralised consensus to a variety of applications. Any service which requires a method to systematically record an event (such as ownership transfer, contract agreement, contract realisation etc.) could potentially benefit from blockchain.

The main characteristics of blockchain are the following:

  • Classic cryptographic techniques are used in blockchain (such as asymmetric cryptography and digital signature) to guarantee integrity and attest the original source of the data. But it also includes protocols managing how new entries are initiated, validated, recorded and shared. And it describes how to enforce policies and procedures about handling the information.
  • A key aspect of blockchain is that it allows data (or transactions) to be securely stored and verified without any centralised authority. Instead, the data is validated by the network – hence the term Distributed Ledger Management.
  • A blockchain can also be the depository of the business logic associated to the data it stores. This is achieved via smart contracts. A smart contract is the “interpreter” of the blockchain. It typically includes:
    • an underlying, legally binding contract between parties
    • a set of instructions that describe the “payload format” (type of data, authorised values etc.)
    • sets of instructions (or business logic) to be executed by each party once a block has been validated, enforcing the legal contract mentioned above.

So, why is Blockchain considered so important? Because it has the potential to remove the need for any intermediary to check the validity of a transaction or the authenticity of data; when created, the data is recognised as valid by all parties, and cannot be modified afterwards without making the change visible to all. The finance industry has been first to identify blockchain’s impact, as an opportunity to improve their business processes, but also as a threat because the banks could potentially be a “removed intermediary” from financial transactions.

Beyond finance, far more business processes could be deeply altered by blockchain. As far as mobile operators are concerned, blockchain could potentially optimise the recording of billing and roaming data, micro payments, money transfers, service provisioning, authentication and identity management (activity log) and more. Another interesting area is the Internet of Things, where machines and devices connected to the internet automatically interact with each other by collecting and exchanging data; blockchain and smart contracts could both monitor and orchestrate these interactions.

So, where is the snag? Of course Blockchain is not an immediate panacea. We can mention that replication of databases and validation by consensus are computing power-intensive. But the main challenge is likely to be the maturity of the ecosystem and supporting infrastructure: how is a blockchain recognised as reliable? Who manages it? How is it deployed? What is its impact on legacy systems? What is its impact on the companies’ organisations? How will the data stored in blockchain’s be considered valid from a legal point of view? All this will take time to settle, but the potential is there!

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