Blockchain and smart contract automation: Blockchains defined

The end game for public and private blockchains isn’t just digital currency—it’s digital business flows.

By Alan Morrison

This PwC Technology Forecast series about blockchains and smart contracts consists of five short articles and one interview.

If you don’t know much about blockchain technology, we suggest reading all five articles. If you are steeped in blockchain knowledge, we suggest reading at least parts 1 and 5. The interview is well worth reading in any case.

  1. Introduction and forecast
  2. Blockchains defined
  3. Why are blockchains important?
  4. Private blockchains, public, or both?
  5. How smart contracts automate digital business

Interview: Gideon Greenspan of Coin Sciences on alternatives to public blockchains

Blockchains defined, and how definitions vary

Blockchains are primary enablers of smart contracts. This section compares and contrasts both general and banking-industry-specific blockchains and describes banking industry viewpoints on the issue.

A blockchain—the technology underlying bitcoin and other cryptocurrencies—is a shared digital ledger, or a continually updated list of all transactions. This decentralized ledger keeps a record of each transaction that occurs across a fully distributed or peer-to-peer network, either public or private. A blockchain’s integrity hinges on strong cryptography that validates and chains together blocks of transactions, making it nearly impossible to tamper with any individual transaction record without being detected.

What is a blockchain?

Some of the most useful elements of a blockchain such as bitcoin’s include these:

  1. Digital signatures:
    1. Verify possession of a private key
    2. Verify that messages came from the right person
    3. Verify that messages haven’t been changed or tampered with
    4. Allow fine-grained version control of documents and contracts
  2. Signed blocks of transactions:
    1. Preserve the sequences of transactions
    2. Allow fine-grained access control at the level of a transaction
    3. Create continually updated audit trails
  3. Distributed, shared ledgers:
    1. Establish a single version of transaction truth
    2. Reduce or eliminate the need for centralized third parties
    3. Open the door to the autonomous agents, processes, and organizations implied by smart contract technology

Cryptocurrencies have their own momentum and utility, of course. Among other factors, transactions involving bitcoin or other digital currencies can serve as the core of a smart contract capability. In the simplest case, a smart contract would make it possible to lock out a driver whose authorization to drive a rental car had expired. In more complex scenarios, rental car companies could automate the operation of entire facilities.1

The definition of a blockchain is open to various interpretations. Some of these eliminate or reduce the role of cryptocurrency and focus on the use of these chains by themselves for process improvement purposes. Smart contract vendors such as Eris Industries, for example, don’t overly concern themselves with currency issues. “The real challenges within an enterprise context are around the processes of potentially changing ownership rather than just the representation of the ownership transfer,” says Eris Industries CEO Casey Kuhlman. Securities origination and trading is a prime example.

Of necessity, the banking industry has developed its own definition of a blockchain, one that’s also suitable for enterprises generally. This definition speaks volumes about what banks plan to do with the core blockchain technology that’s behind immutable, shared, encrypted transaction ledgers. Smart contracts are central to the banking industry’s long-term plan. Smart contracts are computable agreements stored in the shared ledgers that dramatically reduce the need for human validators in the transaction loop.

“Can you define blockchain in one or two sentences?” a member of the audience asked the Blockchain for Enterprise Panel at Fintech Week in London in September 2015. Panelist Lee Braine, a computer science PhD in the CTO’s office at Barclays, responded: “It’s a way of chunking transactions into a batch, called a block, and then a way of hashing them with the previous block to ensure immutability.”

(A hash is something like a unique digital fingerprint. It is a representation of a file as a fixed-length string of bits, a representation that can be used to ensure that nothing tampers with the file. Hashing a block together with the previous block—thus the reference to a blockchain—makes it even harder to tamper with any part of the chain.)

Panelist Richard Brown, head of technology for R3, a private company funded by a consortium of banks focused on blockchain standards, added a bit more to the definition. The term blockchain, he noted, doesn’t just refer to the public shared, anonymous ledger that bitcoin uses. The bitcoin blockchain architecture could be decomposed, and the useful parts could become “building blocks from which you can build new things. You don’t need to have the bitcoin problem statement.”

With their definition, Braine and Brown captured the sentiment of the banking industry. Banks see the emerging blockchain phenomenon as the catalyst for an unprecedented process reengineering opportunity, not as something necessarily tied to any digital currency. To their minds, most of the bitcoin media buzz misses the point, or at least doesn’t anticipate the full benefits to established financial institutions. Blockchain technology on its own has pointed the way to removing inefficiencies from the financial institutions’ administrative processes permanently. In a period of rising costs, intense regulatory scrutiny, and increasing competition, the opportunity couldn’t have come at a better time.

Next: Why are blockchains important?


1. For a legal perspective on smart contract technology, see Samuel Bourque and Sara Fung Ling Tsui, “A lawyer’s introduction to smart contracts,” http://www.crypto-law.com/doc/A%20Lawyer's%20Introduction%20to%20Smart%20Contracts.pdf, 2014, accessed February 11, 2016. For a conceptualization of autonomous distributed business activities at various levels of complexity, see “A Next-Generation Smart Contract and Decentralized Application Platform,” Ethereum white paper, November 15, 2015, https://github.com/ethereum/wiki/wiki/White-Paper, accessed February 11, 2016.