Draft Discussion Paper

Blockchain: The India Strategy

Economic Forum, blockchain technologies are one of the 7 technological forces alongside AI, IoT,
etc. with the potential to fundamentally change the way the global economy works.

Common Terms

Computer algorithms that define the modality of how the blockchain

Consensus
based system defines what is the correct updated state of the database.
Protocols
The simplest version of this would be a simple majority amongst nodes.
Method of protecting information and communications through the use of
codes so that only the recipient can read it. In computer science,
cryptography refers to secure communication techniques based on
Cryptography
algorithms which transforms confidential messages (like email, credit
card transactions, web browsing) in ways that are hard to decipher by
third parties.
Mathematical functions that convert data of indeterminate length to a
Hashes ‘fingerprint’ of a fixed length. It is astronomically unlikely for two different
sets of data to have the same ‘hash’.
Structure (also used in BitTorrent, Git, Bitcoin and Ethereum) that
summarises data of all related transactions in a block by producing a
digital fingerprint in the form of a hash (or a transaction ID) for each
transaction and thereafter for every pair of transactions until only one
unique ID/ hash is left (called the Root Hash/ Merkle Root). The structure
Merkle Tree
is built from the bottom up from hashes/ Transaction IDs of individual
transactions and tests whether a specific transaction is included in the
block or not. It records transactions in a chronological order and can
verify whether the record has been altered or tampered with, or whether
the record has been branched or forked
Refers to the actions nodes take to authenticate transactions. Miners are
Mining economically incentivized to spend resources for maintaining the network
by a reward of tokens which are generated by the distributed network.
Entities a blockchain system that maintain a copy of the most updated
state of the blockchain database and participate in the authentication of
Nodes
new changes. However, all nodes may not store a full copy of a
blockchain or validate transactions.
Represent an if-else construct which enable blockchain based systems
Smart Contracts to autonomously record a transaction if certain pre-requisites are
completed.
Essential components of most public blockchains. They are a unique
Token(s) asset class which not only denote ownership of the network (like shares
of a company) but also form the basic unit of value exchange.

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How does blockchain work – a simple explanation

Blockchains are a new type of network infrastructure (a new way to organize how information and
value moves around on the internet) that create ‘trust’ in networks through introducing distributed
verifiability, auditability, and consensus.

Blockchains act as a shared database, distributed across vast peer-to-peer networks that have no
single point of failure and no single source of truth. No individual entity can own a blockchain
network, and no single entity can modify the data stored on it unilaterally without consensus of peers.
New data can be added to a blockchain only through agreement between the various nodes of the
network, a mechanism known as distributed consensus. Each node of the network keeps its own
copy of the blockchain’s data and keeps the other nodes honest -- if one node changes its local
copy, the other nodes reject it.

Blockchains record information on a timestamped chain that extends forward infinitely. New data is
added to the end, and once added, it is permanent. Older data can neither be removed nor modified
because a snapshot of it is captured in the blocks of data that come after it.

Blockchains leverage techniques from a field of mathematics and computer science known as
cryptography to sign every transaction (e.g. the transfer of assets, like money, from one person to
another) with a unique digital signature belonging to the user who initiated the transaction. These
signatures are held privately but are publicly verifiable.

This means that if a user with identity A sends money to identity B, anybody can verify that the
money was sent by A, but cannot use A’s signature for their own transactions. This cryptographic
system creates accountability while preventing identity fraud: if you send money or update

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information on a blockchain, you cannot later claim that you did not or shift the responsibility for the
action.

Unlike present day networks which depends on trusted intermediaries for security and trust,
blockchains create trust organically through the underlying technology of distributed networks. They
allow users to exchange digitized assets directly, in a way that is incorruptible (data cannot be
changed once added) and transparent (all transactions are logged onto the timestamped ledger,
with the identity of the person who committed the transaction).

As they effectively reduce the dependency on ‘middlemen’, blockchains can also generate savings
by streamlining processes and reducing inefficiencies typically introduced to systems due to multiple
layers of control. Gartner estimates that distributed ledgers and blockchains will create USD3.1
trillion in added business value by 2030, driven by fraud prevention, cost savings, and added
transparency.

Core features of blockchain

1. Recordkeeping on a time-stamped, fault-tolerant ledger:

At their core, all blockchains make it technically and economically infeasible to modify a
record already added to the blockchain.

Once added, the timestamp of the transaction, the metadata contained within the
transaction, and the digital signature of the parties involved in the transaction are recorded
on all nodes of the network. These data cannot be modified unless a majority of the nodes
in the network collude (a situation that becomes increasingly unlikely and expensive as the
network grows).

Person A transferred 500 Rupees to Person B (timestamp t=1)

Person B transferred property LAND_XYZ to Person C (timestamp t=2)

Company ABC transferred domain XYZ.com to Company DEF (timestamp t=3)

Blockchains inherently maintain an audit trail, and therefore are an ideal choice for
recordkeeping of any digitizable asset – money, land, rare collectibles, domain names, etc.

2. Smart Contracts for decentralized, corruption-proof, self-triggering applications: So far, we

have discussed blockchains as a global, peer-to-peer database, but they can also be
extended to act as a global, peer-to-peer computer – one that runs code and applications
published by developers in an incorruptible manner.
Code that is executed on a blockchain network is known as a ‘smart contract’ for it acts as
a legally binding document – once published, the code cannot be tampered or unpublished.
More importantly, it can self-trigger blockchain transactions when encoded conditions are
met, without allowing any room for corrupt parties to intervene.

Take for example the following script (encoded as a smart contract):

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When Person A Transfers Property XYZ to Organization B,

Transfer Rupees 1 crore from Org B’s account to Person A’s account

The above contract self-executes when transfers of property (represented as a digital asset
on the blockchain) occur between a person and an organization, and auto-transfers funds
from the new property owner to the former.

Because both code execution and funds transfer occur on the blockchain, a
serverless/decentralized infrastructure, no third party may prevent the transaction or
intervene to route funds to itself.

3. Digitization of assets and new economic models: A real-world asset can be represented
digitally – be it tangible or non-tangible (gold vs. an IP copyright), fungible or non-fungible
(money vs. collectible artwork), movable or non-movable (cars vs. land).
Blockchains are a perfect platform for asset digitization as they allow any asset to be
represented as a token that represents either full or partial ownership of the underlying
economic resource. Blockchain tokens can be traded in a frictionless manner between
parties (without intermediaries), creating liquidity even when the underlying asset is illiquid
and opening the door for innovative economic models, e.g. automatic dividends to partial
land owners using smart contracts, or automatic payments from asset consumers to asset
providers.

Unlike digital assets and tokens on traditional database systems, tokens implemented on
blockchains are cryptographically secured – identity of the token’s owner can be verified but
not faked or modified. Transfers of these tokens on blockchain systems are incorruptible –
double-spending is inherently impossible and middlemen cannot intercept transfers or steal
funds.

What are the different types of blockchains?

Blockchain can be categorized into groups differently on the basis of a number of different underlying
technological choices. The definition stated above, however, remains largely consistent; as does the
potential of the technology to radically improve our existing processes. Some of the technological
choices and corresponding groups of the technology have been highlighted below.

 Should transactions be public? Public blockchains and Private blockchains

 Achieving consensus for addition of new information? Different consensus protocols

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Private blockchains systems

In a private blockchain system, every single node in the peer-to-peer network is a known entity and
is invited to be part of the network and the system administrator is able to determine the read/write
scope of each node on the network. E.g. think of a large company that builds a private blockchain
for its manufacturing supply chain. Every member of the supply chain will be sanctioned to run a
node in this network. Nobody else will be able to do so.

Thus, the parties involved can be considered to recognize (if not trust), requiring a more relaxed
mechanism to establish consensus or make modifications to the database. Private blockchain
systems like this are permissioned – they provide fine-grained access controls that allow the system
administrator to determine the read/write scope of each node on the network.

Public blockchain systems

In a public blockchain system, anybody can join the peer to peer network without needing invitation.
All nodes have the same permissions – all of them can read everything from the blockchain network
and can submit transactions to the blockchain network.

Unlike private blockchains, where all nodes are assumed to be trustworthy, public blockchains are
completely open and can have corrupt or colluding actors that, for example, try to overwrite/delete
past transactions, or change a piece of data. To prevent dishonest behavior, public blockchain
systems offer economic rewards for honest behavior and economic penalties for bad actors. The
nature of how public blockchains scale require them to have a token economy – since it is highly
likely that the most promising use cases will come from public blockchains due to a variety of factors,
regulatory clarity will be required to enable this important type of blockchain in India.

Figure 15: Types of blockchain

Source:
McKinsey

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