Academic journal article Federal Reserve Bank of St. Louis Review

Blockchain: What It Is, What It Does, and Why You Probably Don't Need One

Academic journal article Federal Reserve Bank of St. Louis Review

Blockchain: What It Is, What It Does, and Why You Probably Don't Need One

Article excerpt

Public interest in blockchain has never been higher. This is in large part due to the eye-popping price dynamics of Bitcoin--the original bad-boy cryptocurrency--which everyone hears is powered by blockchain. But what, exactly, is blockchain? The answer, it seems, depends on who you ask.

Things are confusing out there in part because not enough care is taken in defining terms before discussing the subject. And when terms are defined, they sometimes include desired outcomes as a part of their definition. For example, blockchain is often described as consisting of (among other things) an immutable ledger. To me, this is like defining a titanic to be an unsinkable ship.

So what do people mean when they bandy about the term blockchain? I recently had a chance to learn how blockchain is viewed from a corporate perspective at a blockchain panel recently hosted by the Olin School of Business at Washington University in St. Louis. My discussion here is based on a presentation I delivered there, (1) and it complements a recent article published in this Review (Berentsen and Schar, 2018). My co-panelist at that event, Ed Corno of IBM, provided the following definition:

Blockchain: a shared, replicated, permissioned ledger with consensus,
provenance, immutability, and finality.

To put things another way, blockchain is a record-keeping system possessing a specific set of attributes. But which of the attributes listed above distinguish it from other record-keeping systems? Shared, replicated ledgers requiring permissioned access have been around for a long time, so these are not distinguishing characteristics. Provenance simply means a ledger containing all relevant information, starting from the beginning of any relationship. Provenance is nothing new, at least in principle.

The key would seem to lie in the nature of consensus. Consensus means that all relevant parties agree that the information contained in the ledger is true. Depending on how one defines "all relevant parties," consensus in itself is not new either. What is new is the consensus mechanism--the protocol designed to achieve consensus. Immutability and finality are simply properties that one hopes will be the outcome of the consensus mechanism in place.

Conventional protocols for achieving consensus can be thought of as reputation-based mechanisms. The solution to the record-keeping problem is to delegate the responsibility to a trusted intermediary (or a set of trusted intermediaries). "Trust" in this context means believing that personal and business reputations have too much long-run economic value to be squandered by exploiting an attractive one-time gain.

The promise of blockchain is to replace reputation-based consensus with a "trustless" protocol invulnerable to human foibles. In particular, the reputable delegated record-keeper is replaced by a set of anonymous (hence, untrusted) agents drawn from the broader community who compete amongst themselves by playing a game on a period-by-period basis to update and secure information. In this sense, blockchain can be thought of as a game-based consensus mechanism.

I can't be entirely sure, but I believe the corporate versions of blockchain are likely to stick to the standard model of reputation-based consensus. If this is correct, then the efficiency gains of "blockchain" boil down to the gains associated with making databases more synchronized across trading partners, more cryptographically secure, more visible, more complete, etc. In short, there is nothing revolutionary or radical going on here--it's just the usual advancement of the technology and methods associated with the on-going problem of database management. Labeling the endeavor blockchain in this case has more to do with good marketing practices.

On the other hand, game-based blockchains--such as the one that powers Bitcoin--are, in my view, potentially more revolutionary. …

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