What is a block chain? Numerous answers to this question claim that a block chain is a ledger. Not only is this technically incorrect, but holding this view will prevent you from understanding both Bitcoin and its block chain.
Case in point is a recent “Blockchain” explainer from Deloitte which makes the following claim:
A blockchain is a digital and distributed ledger of transactions, recorded and replicated in real time across a network of computers or nodes (figure 1). Every transaction must be cryptographically validated via a consensus mechanism executed by the nodes before being permanently added as a new “block” at the end of the “chain.” There is no need for a central authority to approve the transaction, which is why blockchain is sometimes referred to as a peer-to-peer trustless mechanism.
A Common Misconception
Deloitte isn’t alone in its confusion. A few examples from high-profile sources include:
- “… blockchain is an open, distributed ledger …” Harvard Business Review;
- “A blockchain is a tamper-evident, shared digital ledger that records transactions in a public or private peer-to-peer network.” (IBM); and
- “The original blockchain is the decentralized ledger behind the digital currency bitcoin.” (Wired).
Bitcoin is hard enough to grasp without taking bad definitions on board. What’s needed is a better way to describe what’s going on. Here’s one way to think about it: A block chain is a tool enabling a group of users to produce a single, unique transaction log.
Log vs. Ledger
The distinction between a transaction log (aka “journal”) and a ledger may not be clear. A transaction log is a list of transactions. A ledger, however, summarizes the contents of a journal to produce a high-level digest. Investopdia describes the differences this way:
The general journal is recognized as the first book of entry. This journal is the first place where transactions are recorded. …
A general ledger is generally a file or book used to keep records of all relevant accounts. The ledger is used to track up to five relevant accounting items that include expenses, assets, revenues, liabilities and capital. …
Why bother with a transaction log? Because it’s crucial for defending against double-spending. Bitcoin is an electronic cash system in which users exchange value by exchanging ownership of electronic tokens. Double-spending occurs when two or more users are paid with the same token. Bitcoin solves this problem with a transaction log and a policy of rejecting further attempts to spend a coin after a logged transaction already spends it.
To enable users to arrive at a single global log, transactions are grouped into blocks. A block references two pieces of information:
- its ordered list of transactions; and
- its parent block.
Two or more blocks may claim the same block as a parent. Therefore, a collection of blocks can be assembled into a tree with one or more children pointing to the same parent.
Each user maintains its own copy of the tree, applying the same procedure. First, all paths through the tree are followed and scored. The path with the highest score is then designated as the active chain. This is what many people are actually thinking of when they use the term “Blockchain,” especially in marketing presentations.
Extracting Meaning from the Log
A chain of blocks by itself is unremarkable as a piece of technology.
What makes block chains interesting is the sequence of transactions they define. Even the simplest Bitcoin transaction contains machine-readable instructions. Chaining transactions together creates an executable program. The output of this program can be interpreted financially to produce a ledger. However, this is but one of many possible interpretations. Ethereum, for example, has taken the idea of transactions-as-software to its logical conclusion.
Incentives are King
The secret sauce of “Blockchain” boils down to incentivizing each user to choose the same active chain in an adversarial environment. The best-tested procedure uses proof-of-work. Under this system, a block is only valid if its hash value falls within a predetermined range. Users score each branch of the block tree by summing the proof-of-work for each block.
A user finding an acceptable block is rewarded with a payment. The network remains secure as long as this payment exceeds the benefit of producing an alternative active chain.
What most sources refer to as “blockchain” is really the active chain traced through a block tree. Users apply the same deterministic procedure to navigate the tree, leading each one to the construct the same transaction log. From this log, a ledger can be produced, but that’s just one application.
From this perspective, it’s easy to see why the “Blockchain not Bitcoin” crowd fails to produce much of value. Fixating on the end result, a chain of blocks, obscures the underlying magic: a combination of incentives and protocols leads each user to trace the same path through the block tree, producing the same transaction log.