Opinion: Blockchain for development, explained

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There’s no doubt that blockchain is one of the hot topics in tech today — but what is in doubt is a universal understanding of what a blockchain is and what it can do. The lack of familiarity with the concept is one of the major hurdles to understanding how this technological concept can be leveraged in humanitarian aid and the development sector.

What is it?

A blockchain is a type of distributed ledger — that is, a decentralized database that maintains a continuously growing list of ordered records. The attributes that make distributed ledger technology (commonly referred to as DLT) unique relate to the mechanisms designed to assure the trust of the data is kept within that ledger.

DLT came onto the scene a few years ago with the birth of Bitcoin, but it is not truly a new technology. DLT is an amalgam of proven technologies, combined and applied in a new way. At the heart of any DLT system is a mix of long-established concepts such as cryptography, ledgers, and databases, as well as more contemporary concepts, such as peer-to-peer networks and hash technology; none of these concepts are controversial, or even truly new. What is new is the way these technologies are combined.

Ledgers have existed for thousands of years. Traditionally, the ledger resided with a single owner and the transactions recorded in the ledger were verified by comparing the data in the ledger to the physical counterparts in the real world — for example, comparing a ledger entry showing the balance in an account to a physical count of the money, or comparing the list of items in the warehouse to an actual inventory of the contents of the warehouse.

A traditional ledger needed to be tied to a physical counterpart due to the fact that the ledger had no independent indicia of reliability; it was a single record maintained by a single entity. Trust in the ledger was only valid to the extent that entries could be corroborated in the physical world by a human witness.

The desire to enhance the ability to leverage traditional ledgers — and to improve the efficiencies associated with validating ledger entries — led to the rise of central authorities in which parties were willing to place their trust. Consider the role of banks in a transaction between a buyer and a seller. If Alice wishes to purchase a car from Ben, she may pay him by means of a check, or by a bank transfer. In either case, Alice needs to initiate the transaction by instructing her bank to make a payment to Ben, who is also typically represented by a bank. Alice’s bank looks at their ledger and verifies that Alice has sufficient funds to make the transfer. Alice’s bank then transfers the funds to Ben’s bank and both banks update their ledgers accordingly. Ben’s bank then notifies Ben that he has received funds. Ben is then able to access the funds via his bank.

This mechanism, where a trusted intermediary is required to represent each party, is so ingrained in various systems that it is all but invisible; it is hiding in plain sight. We tend to ignore the downside: Each time an intermediary is added to a transaction, there are additional delays and added fees. DLT is designed to replace the traditional trusted intermediary with a new type of entity: A peer-to-peer distributed network. This is a key disruptive element of DLT and it signals the start of a new era in network technology; that is, the birth of the trust layer, where peer-to-peer networks, cryptography, and hash technology combine to remove the need for a trusted third-party intermediary.

How does it work?

At the heart of DLT is a peer-to-peer distributed network of nodes, each maintaining a complete copy of the ledger. Unlike a traditional ledger system, no single entity owns the ledger, nor does the ledger reside with only one party. Rather, there are multiple copies of the ledger, each kept by a different node in the network and maintained in sync with the other ledgers in the other nodes.

The most common method for implementing a distributed ledger is through the use of a blockchain, a name that derives from the manner in which the data in the ledger is stored. As transactional data is received, it is grouped together into units, called blocks. Each block is then verified and appended to the previous block, thereby creating a chain of blocks. As a block is copied to the chain, it is distributed to all the nodes in the network, thus keeping the copies of the blockchain in harmony.

Each block in the chain carries a unique identifier and is related to the blocks on either side of it. Making a change to any data in the blockchain therefore requires not only changing the block in which the data resides, but also updating all blocks subsequently written to the blockchain. Moreover, if you change the data in one copy of the blockchain, it results in that copy of the chain being out of sync with the other copies of blockchain located on the other nodes in the network — a result that will lead to the network rejecting the non-conforming blockchain as invalid. A blockchain creates, in other words, a tamper-evident log.

Like a traditional ledger, a distributed ledger is updated whenever a transaction occurs. When a transaction is received, it is verified and processed by one or more of the nodes in the network. The validation process undertaken by each node is designed to assure that the contents of the transaction are legitimate. If the transaction data is incomplete or flawed, or the state of the assets do not support the transaction, the transaction will be rejected. Once an agreement has been reached, then the block will be added to the chain.

Why should we care?

DLT is likely to affect companies that specialize in providing trust in a similar fashion to how the internet impacted media companies — by introducing major disruption to their markets. Banks, lawyers, and financial services will be the first ones to feel the impact, but it won’t stop there. To the extent to that relief and development organizations provide trust — trust that the funds were used for the stated purpose, trust that the right beneficiaries received the aid, trust that the work was actually done on time and as described — DLT will disrupt the sector. Although the extent to which DLT affects the architecture of humanitarian actors has yet to be defined, the technology carries significant potential.