3. Blockchain as a Distributed Ledger Technology

We have seen how the field expanded considerably as the Bitcoin project progressed. The emergence of new applications as well as changes and extensions to the code led to the objectification of Bitcoin's conceptual structure. Attention gradually shifted away from the Bitcoin project as a whole and towards one of the technical concepts underpinning it: blockchain.

This chapter explains how the success of Bitcoin actually led to the objectification of blockchain technology, when the technical concept that permitted the operation and administration of Bitcoin became an object of study in itself. We then examine how the concept became relevant to the handling of all types of transactions. Lastly, we look at the ways in which industrial sectors have tried to adapt the concept to their requirements by integrating other conceptual and semantic changes -- from blockchain to distributed ledgers.

3.1. Other applications of the Bitcoin protocol

Namecoin was the first project to use the Bitcoin protocol for a type of asset other than money. In 203. a discussion took place on the #bitcoin-dev IRC channel regarding the possibility of using the Bitcoin protocol to create a DNS system for generating domain names that could circumvent the risk of the Bitcoin domain being censored, as Wikileaks had been. The Namecoin code base consists of the Bitcoin code base with some relatively minor changes and a few additional features. In 2012, the American engineer J.R. Willett was seeking ways of promoting greater acceptance of Bitcoin by the general public. Rejecting the idea of creating a new cryptocurrency to compete with Bitcoin, he designed a new feature within the Bitcoin protocol intended to serve as a base on which everyone could build their own currencies. Mastercoin software (today OmniLayer), which implements this new feature, provides the tools required to design and publish proprietary currencies with their own rules by configuring a new token. The idea of layering other software on top of Bitcoin arose from the custom of stacking protocols (for example, the HTTP protocol is stacked on top of TCP/IP).

The concept of adding new layers to the Bitcoin protocol was then tested for other applications. The challenge was to find ways of using the Bitcoin protocol to represent other assets. These included personalised currencies and financial products like Colourcoin, property ownership (Smartproperty), and even contractual relationships for executing clauses (Smartcontract) and the management of organisations (DAOs). In 2013 the Colourcoin project published its prospectus and described the situation in the following terms:

"The natural question is: is it possible to use the same functionality for other applications as well? The answer, it turns out, is yes. The fundamental innovation behind Bitcoin, that of using cryptographic proof-of-work to maintain a secure distributed database, is good for more than just the single limited-supply currency originally envisioned by Satoshi Nakamoto in 2009; exactly the same technology can be used to maintain ownership of company shares, 'smart property', alternative currencies, bank deposits and much more. Anything which is representable as a digital asset, and a 'rivalrous good', meaning that only one person can own it at a time, is potentially fair game for representation in the Bitcoin blockchain."

3.2. The objectification of blockchain

In 2014, Vitalik Butarin, one of the authors of whitepapers for Colored Coins, finalised the conceptualisation of Ethereum: a new platform that used a more generalised scripting language than Bitcoin and intended to facilitate decentralised application development.

Ethereum borrows most of Bitcoin's design concepts but operates on its own network with its own protocol. It also has its own cryptocurrency, called Ether.

Ethereum implements the smart-contract concept invented by Nick Szabo. In this context, however, the term 'smart-contract' is somewhat of a misnomer. It is actually a type of computer programme. Network users can run the programme whenever they want as long as they pay the costs of executing it. It can perform a variety of procedures, such as notarial and financial contracts, equipment rental, or equity sharing. The results, whether movement of Ethers or information storage are held in a type of distributed database: a blockchain.

The blockchain is considered here to be a type of administrative ledger that is not managed from a single point but is distributed over the network. Despite this distributed architecture, the ledger establishes and maintains the uniqueness of an asset, or any piece of information for that matter. It establishes an inviolable link between an object and its identifier. For example, it guarantees that a Bitcoin has not been spent twice (the problem known as double spending), or that a property asset or contract has not been forged or registered twice. It is this technical characteristic that attracted the attention of major industrial and financial players and resulted in services being developed to meet the needs of specific industrial sectors and groups.

For example, Ripple is a settlement infrastructure system that enables payments to be sent and received without an intermediary, regardless of their value or the financial institution. The project relies on a database that records all the information from all Ripple accounts. Financial transactions are verified, validated and compared in a closed network of servers that can belong to anyone, including banks and market players.

Another example is the Hyperledger project, a blockchain development platform created in 2015. Hosted by the Linux Foundation, Hyperledger was founded by major industry players such as IBM, Intel, Cisco Accenture, and J.P. Morgan. Hyperledger aims to improve the performance and reliability of blockchains and distributed ledger techniques to enable them to handle global business transactions for leading technology, finance, and supply-chain companies. The platform combines a number of development structures (frameworks) and tools to explore the capabilities of distributed ledger techniques when faced with a wide variety of problems, such as those of supply chains and digital identities. The goal of Hyperledger is to enable large industrial companies to create blockchains that guarantee the confidentiality of certain types of information. The Fabric project was one of the first Hyperledger projects: a protocol for the deployment and exploitation of permissioned blockchains. Like all Hyperledger projects, Fabric is hosted by the Linux Foundation. Members must abide by a code of conduct, and the protocol is shared under a free opensource licence (an Apache 2 licence, which is GPL-compatible).

3.3. The emergence of permissioned distributed ledger techniques

In the Bitcoin and Ethereum blockchains, anyone can join the network. This means that anyone can read and write transactions and take part in validating them; the blockchain is considered to be public. In 2015, developments began that sought to create distinctions between public, private and consortium blockchains.

In 2015, the family office R3 CEV (Crypto Consulting Exchanges Ventures), chaired by David E. Rutter, a former Wall Street executive, organised a number of roundtables for those working specifically on blockchain projects such as Ripple, the beginnings of the Hyperledger project as well as other major public and private players in the banking industry like the Bank of England and Bank of America. These roundtables were intended to examine the transformation of the finance sector by cryptocurrencies. One of the issues discussed was how banks could trade foreign currencies on community-managed ledgers, as in a blockchain.

Following the roundtable discussions, R3 published an article summarising the lessons learned: Consensus-as-a-Service: A Brief Report on the Emergence Of Permissioned, Distributed Ledger Systems. The article raised the issue of permissions, i.e., the ways in which transactions are validated, differentiating between Bitcoin and distributed ledgers. For the author, distributed ledger models like Hyperledger and Ripple solved some of the problems associated with Bitcoin and Ethereum in that the information was managed by an identified community and authenticated using a permission system. The author, Tim Swanson, concluded that this capacity enabled the various distributed ledgers to be interoperable.

The article laid the foundations for differentiating between permissioned and permissionless blockchains, and also examined the use of private blockchains (Table 12). Unlike Ethereum and Bitcoin, so-called closed blockchains are forms of centralised ledgers, the decision-making powers for which are centralised within a single organisation. They can be used to test new techniques and increase expertise in this area. A consortium blockchain is a closed network that is partially decentralised and requires permission from members to join it. The power to audit it can be reserved for members and decisions regarding it are taken by this closed community. This aspect of permissioned blockchains serves to keep certain information confidential. The model is intended to prevent inappropriate sharing of customer information in that not all transactions can be shared with all network participants.

Table 12. Permissioned and permissionless public and private blockchains.

R3 sent this paper to the banks with which it regularly worked, garnering a good deal of attention. In 2015, R3 and nine major financial players (Barclays, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street, and UBS) founded an interbank consortium called the Distributed Ledger Group (later to take on the name R3). Between 2015 and 2018, nearly 200 major players in industry and finance joined the consortium. They included Bank of America, Thomsons Reuters, Société Générale, UniCredit, BNP Paribas, Toyota Financial Services, and the Bank of Canada.

The intention of this consortium was to create a framework, based on the Hyperledger model, for the development of distributed consortium ledgers in order to share information between companies in the banking sector. In 2016, the consortium announced the Corda software project, designed to record, execute, and manage the financial arrangements of companies within a community of financial institutions. The platform was also intended to be used to launch financial applications for a number of markets, including foreign exchange and loans.

In 2016, the consortium announced that the source code for the Corda software was to be shared under the same licence as that of the Hyperledger projects: Apache 2.0. The use of this license demonstrated the formal rapprochement between the two projects, with Corda becoming a Hyperledger project, though remaining distinct.

Some members left the consortium to develop their own networks. In 2017, J.P. Morgan left the Hyperledger and Corda consortiums to develop Quorum, which was presented as a 'permissioned implementation of Ethereum supporting data privacy'. Quorum might be called a hybrid blockchain, in that it combines several characteristics of public and private blockchains. Like Ethereum, Quorum is shared on Github and under a free GPL (General Public Licence). Quorum determines which information should remain private and which information can be made public. Instead of transactions being shared privately within a consortium, they could now be displayed in other blockchains, such as Bitcoin. This feature enabled companies to use a number of ledgers and to selectively share information in the course of their business operations.

3.4. Other distributed ledger techniques

A dissection of the issue of distributed ledgers reveals that blockchain is not the only technique that can be used. The majority of distributed ledger implementations, like Bitcoin and Ethereum, are based on a blockchain, whether closed or consortium, such as Hyperledger or Corda, but other techniques have also been explored. The differences can include the ways in which transactions are stored in the ledgers, or the transaction validation rules themselves.

For example, the Internet of Things Application (IOTA) is a distributed ledger that is not based on a blockchain, but on an open-source experimental protocol known as The Tangle. IOTA aims to provide a secure payment method for transactions between different devices connected via the Internet (the Internet of Things). It is designed to process micropayments and payments between devices, creating an entire machine-to-machine micro-economy. The very large number of possible transactions between connected objects in the IOTA project requires a highly scalable architecture, which is difficult for blockchains to achieve.

Other experiments exist, such as the Hashgraph, another patented distributed ledger technique. Hashgraph is based on consensus and information-sharing techniques that differ from blockchain: the so-called 'Gossip about Gossip' technique. Hashgraph uses information-sharing and polling techniques that demand network participants share all their information, meaning that all participants are aware of all the information that has been created since the outset.