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Communications of the Association for Information Systems

Volume 45 Article 25

12-2019

Tutorial: A Descriptive Introduction to the Blockchain

Meg Murray
Kennesaw State University, mcmurray@kennesaw.edu

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Murray, M. (2019). Tutorial: A Descriptive Introduction to the Blockchain. Communications of the
Association for Information Systems, 45, pp-pp. https://doi.org/10.17705/1CAIS.04525

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 C ommunications of the

A ssociation for
I nformation
S ystems

Tutorial DOI: 10.17705/1CAIS.04525 ISSN: 1529-3181

Tutorial: A Descriptive Introduction to the Blockchain

Meg Coffin Murray

Kennesaw State University
mcmurray@kennesaw.edu

Abstract:

Blockchain technology, which supports the bitcoin cryptocurrency, has risen to prominence as the technology that will
transform how business transactions occur and parties manage assets over the Internet. A decentralized system, the
blockchain provides a way to digitally record and securely store verifiable and immutable transactions, which
eliminates the need for trusted third-party intermediaries. While simplistically described as a decentralized ledger, the
blockchain is a complex technology that integrates peer-to-peer networking, cryptography, and distributed consensus.
In this paper, I explain blockchain’s components, describe how a blockchain works, identify use case examples from
various industries, explore potentials and limitations, and speculate on the progressive adoption of the blockchain as a
transformative technology.

Keywords: Blockchain, Decentralized Ledger, Value Transfer, Bitcoin, Technology Adoption.

This manuscript underwent editorial review. It was received 12/16/2018 and was with the author for 2 months for 2 revisions. Eric
Ngai served as Associate Editor.

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Communications of the Association for Information Systems 465

1 Introduction
Blockchain technology, a decentralized ledger technology, provides a trusted and secure platform for
digitally recording and securely storing verifiable and permanent transactions between multiple parties in
the digitized networked world. Accordingly, the technology eliminates the need for costly middleman
validation and verification processes. Blockchain technology first supported the Bitcoin cryptocurrency and
remains the foundation from which other blockchains have emerged. While Bitcoin’s future remains
volatile, many have touted blockchain as the technology that will transform how business transactions
occur and parties manage assets over the Internet. While blockchain remains in the early stages of the
technology adoption lifecycle, its acceptance has begun to rapidly expand beyond innovators to early
adopters (Rogers, 2003).
A complex technology, blockchain at its core refers to “an open, distributed ledger that can record
transactions between two parties efficiently and in a verifiable and permanent way" (Iansiti & Lakhani,
2017, p. 4). However, the term decentralized ledger better describes the technology; the blockchain relies
on variations of distributed computing principles (Herlihy, 2019). Rather than being distributed, networked
computers duplicate the entire blockchain in a peer-to-peer fashion. The blockchain is decentralized—not
stored in a single location—which makes it more difficult to hack or exploit. The ledger holds details of all
transactions that the blockchain has processed. Transactions are verified and validated through a process
that employs cryptography and digital signatures and groups such transactions into blocks that all the
computers that participate in a blockchain network regularly replicate and reconcile through consensus. In
short, the blockchain integrates three concepts: peer-to-peer networks, public-key/private-key
cryptography, and distributed consensus. One needs to understand the intricacies involved in
orchestrating the blockchain’s technologies to conceive its usefulness and benefits. In this paper, I explain
blockchain’s components, describe how a blockchain works, identify example use cases from various
industries, explore its potential and limitations, and speculate on the progressive adoption of the
blockchain as a transformative technology.

2 The Origin and the Legend

A white paper called Bitcoin: A Peer-to-Peer Electronic Cash System (Nakamoto, 2008) first introduced
the blockchain concept. Although the paper lists Satoshi Nakamoto as the author, the individual’s true
identity remains unknown. Today, ardent Bitcoin and blockchain followers commonly speculate on the
author’s identity. Interestingly, the word blockchain never appeared in the white paper; instead, the paper
referred to a “chain of blocks”. Instead, Hal Finney, the well-known computer scientist who also received
the first Bitcoin from Nakamoto, coined the term (Satoshi Nakamoto Institute, 2008). In October 2008,
three months following the registration of the domain Bitcoin.org, Nakamoto distributed the white paper to
a cryptocurrency mailing list. In January, 2009, Nakamoto released the Bitcoin software as an open
source project and mined the first Bitcoin. To memorialize the event, Nakamoto encoded the date and
headline from the London Times, “The Times 03/Jan/2009 Chancellor on brink of second bailout for
banks” into the coinbase (first) transaction of the genesis (first) block of the Bitcoin blockchain (“Genesis
Block”, 2017). In 2011, after communicating via email and on digital message board posts for two years,
Nakamoto ceased communication. Today, however, his legend lives on—more than one million unspent
Bitcoins attributed to Satoshi Nakamoto exist, and the Bitcoin community has adopted the term “satoshi”
to reference fractions of a Bitcoin. Figure 1 outlines Satoshi Nakamoto’s activity timeline.
The precepts put forth in the original paper referenced technology and ideology. As its underlying theme,
the paper posited that one could create a democratized currency free from government control that
permitted parties to directly and anonymously transfer funds between one another (Feuer, 2013). As such,
some claim Bitcoin represented a rebirth of the “cypherpunk” dream, a vision that cryptographic
technology could generate social and political change by weakening government power (Narayanan,
2013). Nakamoto architected Bitcoin without the need for a third-party intermediary to validate
transactions or a centralized authority to issue currency, but many believe Nakamoto did not envision
Bitcoin as a radical political movement. Instead, they believe Nakamoto designed it to deal with
challenges associated with digital currency—most notably, the double-spend problem and the need for
decentralized trust (Au & Power, 2018). Narayanan, Bonneau, Felten, Miller, and Goldfeder (2016) review
prior attempts to establish digital cash systems and how these systems influenced the development of
Bitcoin in detail. While many continue to debate the ideology behind the Bitcoin currency, the notion of the
blockchain as a mechanism to track digital assets has quickly gained traction.

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466 Tutorial: A Descriptive Introduction to the Blockchain

Figure 1. Activities of Satoshi Nakamoto

Researchers have hailed blockchain technology as having the potential to revolutionize business, redefine
companies, and reshape economies (Iansiti & Lakhani, 2017). They have attributed this disruptive
potential largely to three factors: decentralization, the elimination of trusted intermediaries (Kaushal &
Tyle, 2015), and a transaction system that supports irreversible transactions and an immutable ledger
(Boaventura, 2018). They have frequently cited the benefits inherent in these features as motivations for
organizations to adopt blockchain technology. Table 1 lists various blockchain traits mapped to commonly
cited benefits. Blockchain remains in its infancy, so we have yet to try and test its benefits. However,
genuine interest in and momentum around blockchain exists. The International Data Corporation (IDC)
has forecasted an annual compound growth rate in blockchain spending of 81.2 percent until at least 2021
(Shirer & Goepfert, 2018), and Gartner has predicted this decade will end with blockchain business value
growing to US$360 billion and surging to US$3.1 trillion by 2030 (Kandaswamy & Furlonger, 2018).
Table 1. Often-cited Blockchain Benefits

Blockchain trait Benefit

User-controlled, open- The blockchain is an open source project; no central authority owns or controls the
source project software, which gives developers and users control over technology decisions.
Decentralized ledger The blockchain is a decentralized system with no single point of failure.
Everyone can see all transactions in a blockchain, which provides traceability, but it retains
Transparent yet private
no personally identifiable information.
One-way, non-reversible The blockchain avoids double-spend and chargebacks, which reduces the risk of
transactions fraudulent transactions.
One cannot easily change data in a blockchain, which provides a permanent unalterable
Immutable
transaction history that facilitates an efficient and cost-effective audit process.
No third-party verification
The blockchain reduces transaction costs.
required
Versatile One can use the blockchain with any valuable asset that can be represented digitally.
The blockchain incorporates cryptography, hashing, and consensus protocols to maintain
Security
transaction integrity.

3 The Blockchain Ledger

Blockchain verifies and records transactions. Specifically, a blockchain comprises a series of blocks
contain transactions linked together in chronological order. An individual block comprises a listing of
transactions and a block header. The metadata of the block header serves three purposes: it provides a
unique summary of the block, a reference to the previous block, and parameters related to the consensus
protocol used to validate newly formed blocks. Table 2 lists the type of data in a block header of blocks on

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the Bitcoin blockchain. The first two fields contain basic information such as software version and
timestamp. Blockchain uses cryptographic hashing to uniquely identify each block, but it retains only the
identifier of the previous block in the block header of the current block. Blockchain also uses cryptographic
hashing via a Merkle tree root to create a unique summary identifier of all transactions included in the
block. The remaining two fields, the difficulty target and the nonce, relate to the proof-of-work consensus
protocol that Blockchain uses to create new blocks (i.e., mining in Bitcoin). I describe hashing and Merkle
trees in detail in Section 4.2 and consensus mechanisms in Section 4.3.
Table 2. Metadata Fields in a Bitcoin Blockchain Block Header

Field Description
Software version Denotes validation rules used in this version of the blockchain software.
Timestamp Creation time of the block (seconds from Unix epoch time)
Previous block identifier Hash of the previous block’s block header
Merkle root Unique summary identifier derived from the hashes of all transactions included in the block
The difficulty target level of the consensus mechanism mathematical challenge—in Bitcoin,
Difficulty target this level relates to the number of leading zeros that the hash of the block header needs to
include
Nonce Numerical value that solves the mathematical challenge
One can find a detailed specification of the Bitcoin block header in the online Bitcoin developer reference at
https://bitcoin.org/en/developer-reference#block-headers

Public blockchains are open ledgers, and one can use online block explorers to examine blockchain
transactions. Figure 2 shows sample information that BlockExplorer (www.blockexplorer.com), an open
source Bitcoin block explorer, reports. The block number, also referred to as the block height, appears at
the top immediately followed by the block header hash that uniquely identifies the block. The block
summary reports the number of transactions, the size of the block in bytes, and block header metadata. If
available, the explorer also reports the type of hardware used to create or mine the block. In this instance,
a node running the Antminer brand hardware “mined” this block. Finally, the explorer notes the block
reward, the amount of new Bitcoin the miner received for mining the block (in this instance, 12.5 Bitcoin).

Figure 2. Sample Block Information Provided by Blockexplorer.com

Blockchain rules state that every block must be uniquely identified. The unique identifier, known as the
block header hash, is software generated by nodes on the network through a process of aggregating
block header metadata and hashing it twice. The block itself does not retain the identifier. Instead, nodes
on the network dynamically compute the block header hash for the previous block when network nodes
validate block transactions or when a mining node forms a new block and uses it as the value of the
previous block identifier in the new block’s block header. The genesis block, the first block in a chain,
needs to hard code the value of the previous block hash (usually zero). The linkage created makes it
possible to work backwards and reach the genesis block from any given block in the chain as Figure 3
shows. This linkage also makes it difficult to change data contained in a block. A change in data in one

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block means that nodes on the blockchain must regenerate the block header hash of all subsequent
blocks in the ledger they maintain in order to retain a valid blockchain.

Figure 3. Example Blockchain Highlighting the Linkage between Blocks

Transactions represent value transfer between parties. On a blockchain, an address associated to an

asset represents a party. Users of the blockchain compute addresses using public/private key
cryptography. Transactions use public keys, or a derivative of a public key, as input and output addresses.
I describe cryptography and hashing in detail in Section 4.2.
A typical transaction includes inputs that denote where assets come from and outputs that denote where
assets go to (e.g., see Figure 4). This transaction has one input and two outputs. The input (see the left
side in Figure 4) includes the sender’s (or the Bitcoin’s owner’s) address and the amount the sender
wants to send. The right side in Figure 4 shows the output addresses. Addresses are 256 bits, but block
explorers typically show them in hexadecimal notation.

Figure 4. Example Inputs and Outputs in a Bitcoin Transaction

A block typically contains multiple transactions that average in the thousands. Further, every block must
have at least one transaction, the coinbase transaction. The coinbase transaction has no inputs and its
output pays the block’s creator. The payment, which comprises transaction fees, rewards the work the
creator did to validate transactions. In Bitcoin, the awarded fee comprises the aggregate value of the
difference between the input and output values of every transaction in the block. Bitcoin has no fee
attribute; the technology simply tallies fees when a new block is formed. In tokenized blockchains, such as
cryptocurrencies, the reward may also include new coins (also the process by which new Bitcoins enter
circulation).

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Unlike other record-keeping systems, a blockchain does not retain account balances. The blockchain
transaction process requires that all inputs be spent in their entirety. Further, the transaction process
checks to insure inputs have not been previously spent. Figure 5 depicts the flow of inputs to outputs from
three transactions using coins from a fictitious generic cryptocurrency. The coinbase transaction awards
20 coins to AddressA for creating the new block. AddressA wants to spend 15 of those coins. The second
transaction depicts how AddressA might do so. AddressA sends 15 coins to a different address (i.e.,
AddressB) and then sends the leftover coins back to itself. In the third transaction, AddressA spends four
of its five coins (i.e., sends two coins each to two different addresses). Bitcoin uses the remaining coin as
a transaction fee. AddressA has now spent all five coins associated with it. The third transaction also
demonstrates that inputs in a transaction may come from multiple addresses. AddressZ does not appear
in this block. To determine the number of coins held by AddressZ, the transaction process searches
previous blocks until it finds the last time AddressZ was used as an output address. In this case, this
occurred in the seventh transaction in the second block (a previous block not shown in this diagram).
AddressZ spends all 15 coins by sending coins to two different addresses.

Figure 5. Example Blockchain Transactions Spending All Coins

3.1 Scenario: Spending Bitcoin

Transactions vary in form and content depending on the particular blockchain technology. However, a
scenario that uses a simplified version of Bitcoin as an example provides a way to conceptualize how
parties spend Bitcoins in a blockchain transaction. In this scenario, Bob needs to pay Alice 100,000
satoshis (a Bitcoin contains 100,000,000 satoshis). Bob has 150,000 satoshis.
Before Bob can initiate a transaction, he needs to know his private/public key pair. He also needs to know
Alice’s Bitcoin address. Alice emails Bob her address as a QR code. Bob selects 5,000 satoshis as the
amount he will offer as a fee to incentivize mining nodes to select and validate his transaction.
Transactions are not final until they are validated, included in a block, and confirmed (see Section 4.3).

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Bob can now create his transaction. If Bob’s computer is a node on the network that runs the Bitcoin-core
software, he can write the code needed to execute a raw-transaction (Baczuk, 2018). If Bob lacks
programming skills, he will use a digital wallet. Various types of wallets exist, but most include the ability to
create and store addresses (private/public key values), create and broadcast transactions, and report
balances. Bitcoin (2019a) describes wallets in detail. Bob uses a wallet to create and store his
private/public key pairs and to generate transactions. The input address that this transaction uses will be
an address that Bob's wallet has already stored. The wallet software will generate and use a new
private/public key pair and corresponding Bitcoin address as the output address to receive Bob's change.
Alice’s address will receive 100,000 satoshis and Bob's new address will receive 45,000 satoshis. To
maintain his privacy, Bob did not return the 45,000 satoshis to the input address that this transaction used.
Nakamoto (2008) recommended creating a new key pair for every transaction to make it difficult to link
addresses to a common owner (p. 6). The block creator will collect the remaining 5,000 satoshis, the
difference between the input (150,000 satoshis) and output (145,000 satoshis). This amount will be the
output amount contained in the coinbase transaction generated when a new block is formed. Bob will
spend his transaction in its entirety when the new block containing his transaction joins the chain.

4 How the Blockchain Works

Nakamoto originally devised the blockchain by integrating three technologies: peer-to-peer networks,
cryptography, and distributed consensus. The blockchain as a system constitutes a network of computers,
called nodes, that each retain a complete copy of the blockchain ledger (i.e., all the data in all blocks).
Nodes participate in the blockchain in different ways. Full nodes retain copies of the blockchain, relay
transaction information, and participate in transaction validation and confirmation. Mining nodes, also
referred to as full function or forger nodes, additionally participate in creating nodes. Figure 6 provides an
abstracted view about how the blockchain works. Once a node creates a transaction, it broadcasts it to
the network. Other nodes on the network verify the transaction and combine it with other transactions to
form a block. The node that is first to form a new block that meets the rules established by an agreed-on
consensus protocol broadcasts it to the network. Peer nodes validate the block and, if it adheres to the
rules, append it to the existing blockchain.

Figure 6. Overview of How a Blockchain Works

4.1 Peer-to-Peer Networking

A public blockchain operates in an unstructured peer-to-peer network in which nodes can participate
voluntarily; nodes connect or disconnect at will. For example, anyone, provided they have adequate
computing resources, can become a node on the Bitcoin blockchain by simply downloading and running

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the open source Bitcoin-core software (https://bitcoin.org/en/download). P2P networks have no central
authority and no hierarchy; all nodes have equal status and can freely communicate with one another. In
the blockchain, this network typography provides two protection points: 1) no single node can take control
of the network and 2) no single point of failure exists. Multiple nodes store exact copies of the full
blockchain.

4.2 Cryptography
Blockchain heavily uses cryptography, which includes public key cryptography, digital signatures, and
cryptographic hash functions. Public key or asymmetric cryptography uses an encryption scheme that
creates two mathematically related keys, a public key and a private key. Most blockchains use the Elliptic
Curve Digital Signature Algorithm (ECDSA), a U.S. Government standard (National Institute of Standards
and Technology, 2013). Johnson, Menezes, and Vanstone (2001) describe ECDSA in detail. A private key
generates a public key, but the reverse lacks computational feasibility. As I note in Section 3, a blockchain
transaction uses public keys or a derivation of them as input and output addresses. The Bitcoin blockchain
uses a Bitcoin address derived from a hash of the public key.
Public keys and private keys take on special meaning in cryptocurrencies. Bitcoin provides a good
example. We can think of Bitcoins as digital money with no physical counterpart. Owning a Bitcoin is
exclusively affiliated with a private key; whoever knows the private key can spend the Bitcoin. Bitcoin
owners need to protect their keys. If owners forget or lose their private key, they lose their Bitcoin forever.
Indeed, in a well-known example, a Bitcoin owner accidentally threw away a hard drive that contained the
private keys to more than 7,500 Bitcoins (Young, 2018). Bitcoin users also have responsibility over
sharing their correct public Bitcoin addresses. Users lose Bitcoins that they send to a non-existent
address forever, and they cannot reverse Bitcoins that they send to the wrong address. With Bitcoin,
users cannot find the recipient of misdirected Bitcoin as addresses on the blockchain do not include any
personally identifiable information. Consequently, Bitcoin users have come up with creative ways to
manage their addresses, although most use some form of a digital wallet.
Blockchains also use digital signatures. Digital signatures use a private key to sign and verify a
transaction using an associated public key. In Bitcoin, for example, a node that generates a transaction
broadcasts a digital signature along with transaction data and a public key to the network. Nodes in the
network use the public key to verify the signature and validate that the holder of the private key owns the
Bitcoin. Nodes also use the public key to trace back through transactions to ensure that no one has
previously spent the Bitcoin. Figure 7 identifies the steps in the blockchain that employ public-key
cryptography. Nodes use public-key cryptography to create key pairs and sign and verify transactions to
insure that only verified transactions are added to a block.

Figure 7. Public-key Cryptography in a Blockchain

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Blockchain frequently uses hashing. A hash refers to a one-way function that reduces data to a fixed
alphanumeric string. The same input always hashes to the same value. The National Institute of
Standards and Technology (2015) has published the most commonly used hash function (i.e., SHA-256).
Anders Brownworth, while teaching at MIT, created an interactive website to demonstrate how hashing
works and how blockchain technology applies it (https://anders.com/blockchain/hash.html). Figure 8
demonstrates the hash of the string “Hello World”.

Figure 8. Example Hash of a String of Text

Following how Merkle trees apply hashing (Merkle, 1987), blockchains use it to generate unique identifiers
for transactions. The node that forms a new block constructs a Merkle tree root by hashing paired data
until a single hash remains. In the blockchain, the process includes hashing, pairing, and rehashing every
transaction (see Figure 9). The Merkle root is the hash of all hashes of all transactions in a block. As I
note in Section 3, the block header retains the Merkle root.

Figure 9. Merkle Tree Root

Blockchains use hashing in this way due to their immutability. As Figure 10 graphically depicts, one
cannot easily cheat a blockchain because one cannot easily change any data in a block. Specifically, a
change in data in one transaction changes the hash value of that transaction, which leads to cascading
changes in the Merkle root and the value of the block header hash. This eliminates the link with the next
block and breaks the chain. To reestablish the link, one would have to rehash the current block header’s
value and recalculate the attribute for the previous block identifier’s value for each consecutive block in
the chain. The user who creates the modified block headers must have enough control over the network
to ensure nodes on the network accept the modified blocks before a mining node adds additional blocks to
the chain. Consequently, users would have little chance to achieve success; other nodes in the blockchain
will almost certainly reject such changes.

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Figure 10. Why it is Difficult to Change Data in a Blockchain

4.3 Distributed Consensus

One fundamental challenge in a distributed computing environment involves finding a way to reach
agreement among remote processes that must operate together to achieve a common outcome (Fischer,
Lynch, & Paterson, 1985). To describe this challenge, researchers have often used the Byzantine
General’s Problem as an analogy (Lamport, Shostak & Pease, 1982). In this scenario, a general who
commands several divisions must effectively communicate a plan of attack to various lieutenants. If more
than one-third of the lieutenants are dishonest, the general will fail. On the other hand, if loyal lieutenants
come to consensus, they will be able to thwart the efforts of a small number of traitors and the general will
succeed. The challenge in a blockchain involves ensuring that all nodes act on the same data and that a
bad node cannot transmit and post false transaction data. The nodes need a way to reach consensus to
ensure that the addition of newly created blocks results in continuing a single ledger. In the blockchain,
consensus refers to a set of computer science algorithms that define the processes that nodes in a
distributed system use to achieve agreement on a single data value (Fischer, 1983). The most common
include proof of work (PoW) and proof of stake (PoS).

4.3.1 Proof-of-work Consensus

In his white paper, Nakamoto (2008) proposed the proof-of-work (PoW) consensus mechanism. PoW has
since become synonymous with the term mining. Describing PoW in the Bitcoin blockchain represents a
good way to demonstrate consensus and connect it to the mining process. In Bitcoin, PoW addresses
many issues, some particularly relevant to cryptocurrencies. Consensus had to provide a way to resolve
the Byzantine General’s problem, incentivize nodes to participate in verifying transactions, and provide a
way to distribute Bitcoins into circulation (Nakamoto, 2008). Nakamoto proposed that one could achieve
integrity in the consensus process by instituting a system where the expense to defraud (the cost of
computing hardware and electricity) would exceed the cost to earn a reward (the award of Bitcoin). One
achieves PoW by finding the solution to a mathematical puzzle that only brute force can solve. In the
Bitcoin blockchain, the solution involves finding a nonce, a number that results in a hash of a block header
that contains a specified number of leading zeros. The Bitcoin protocol sets the number of leading zeros
as the target difficulty. The more leading zeros, the more computing power one needs to find the nonce.
Bitcoin protocol rules specify that mining nodes adjust the target difficulty every 2016 blocks (about every
two weeks) by increasing or decreasing the required number of leading zeros to meet an average time of
10 minutes for someone to mine a successful block. Mining activity simply iterates different values for a
nonce until the node finds a valid hash. The node that first finds the nonce claims the block reward of
transaction fees and “newly minted” Bitcoins. (The Anders Brownworth website
(https://anders.com/blockchain/block.html) provides an interactive activity that allows users to experiment
with creating a nonce.) Once a mining node finds a nonce, the node adds it the block header and

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broadcasts the block to the network. Other nodes in the network verify block transactions and validate the
nonce’s legitimacy. Consensus arises when those nodes append the new block to the chain and when
mining nodes use the newly accepted block’s block header hash as the value of the identifier of the
previous block hash in the header of the block they are now working to create. At this point, the network
also confirms a transaction. A transaction is reconfirmed each time a mining node adds a subsequent
block to the blockchain. Figure 11 displays the image of how a blockchain works with annotation specific
to the Bitcoin mining process that Nakamoto (2008) outlined.

Figure 11. Bitcoin Blockchain Mining Process

As an aside, the Bitcoin currency has interesting blockchain rules. As I mention in Section 4.3.1, through
PoW, Bitcoins enter circulation when they are awarded to the mining node that creates a new validated
block. At genesis, Nakamoto set this award to 50 Bitcoins for each new block. Bitcoin, however, has a
fixed supply. Nakamoto intentionally stipulated as much since a fixed monetary supply does not
experience inflation. Consequently, the number of Bitcoins awarded is reduced over time; the number
halves every 210,000 blocks (about every four years). The award of new Bitcoins ceases when the
number of Bitcoin reaches 21 million, which will occur in approximately 2140. From this time forward, the
reward for mining will revert to only transaction fees.
Scenario: Bitcoin blockchain workflow: this scenario describes the Bitcoin workflow from transaction
creation to transaction finality based on block confirmation. Bob needs to pay Alice 100,000 satoshis; Bob
has 150,000 satoshis and chooses a transaction fee of 5,000 satoshis.
Bob uses his digital wallet to generate a transaction to transfer 100,000 satoshis to Alice and broadcast it
to the network. Nodes on the network retrieve the transaction and add it to a “mempool”, a queue of
pending transactions. Miners set parameters—such as preferred transaction size and fee amount—for
prioritizing transactions. When selected from the mempool, mining nodes validate or reject Bob's
transaction. The validation process assures the transaction meets blockchain protocol rules, which
includes verifying the digital signature, that the total input value exceeds than the total output value, and
that no one has previously spent the input addresses. Bitcoin nodes maintain an address database with
unspent transaction outputs (UTXO) that they update as they confirm transactions. Only addresses in the
UTXO are considered unspent.
A mining node validates Bob’s transaction and adds it to the forming block. The mining node works to win
the block by finding the nonce. The first node to find the nonce adds the coinbase transaction and block
header metadata to the new block and broadcasts the new block to the network. Other nodes on the
network retrieve the block, verify the transactions, and validate the nonce. If a node accepts the block, it
appends it to the blockchain and publishes it to the network. At this point, the network has confirmed the

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block containing Bob's transaction. However, users should wait for at least six confirmations (Comben,
2018) to make certain nodes on the network have not reversed a transaction (“Irreversible Transactions”,
2018). Thus, Bob and Alice should wait until other nodes add five more blocks to the chain (i.e., six
confirmations) before they consider their transaction final. Multiple confirmations ensure that network
nodes did not append the block to an unintended fork in the chain and also avert double-spend, the risk
that users spend a Bitcoin more than once. Each block added to the chain reconfirms the validity of the
transactions contained in previous blocks.

4.3.2 Other Forms of Consensus: Proof of Stake

PoW consensus has several drawbacks, such as its vulnerability to the 51 percent attack whereby a
single entity gains control over the majority of the mining power. This entity can now take control of the
blockchain ledger, which allows the entity to alter past transactions and reject future transactions. PoW
mining also consumes many resources (mostly in terms of power consumption). One study projected the
annual energy consumption rate for mining Bitcoins when one Bitcoin costs US$8000 to be 67 TwH
(terawatt hours), equivalent to approximately 20 percent of Britain's total energy use (DeVires, 2018). The
excessive costs associated with mining have been attributed to a reduction in the number of Bitcoin
miners and represent one reason other consensus mechanisms have started to gain in popularity.
Many have touted proof-of-stake (PoS) consensus mechanisms as a possible alternative to PoW
consensus mechanisms. In PoS consensus, protocol rules are used to select block creators based on
predetermined criteria (Rosic, 2017). Blockchain developers have proposed different forms of PoS, but
they all basically require some type of investment in a pay-to-play scheme that sets the rules for how
blockchain nodes choose the creator of the next block. For example, in an ownership-based PoS,
ownership percent determines the chance a blockchain node will be selected to create the next block.
Other schemes use criteria such as ownership age, available hard drive space, or willingness to use coins
that will be “burned” or taken out of circulation. The Intel Corporation developed Proof of Elasped Time
(POET) that uses a random lottery scheme to establish wait time before a node can participate in block
creation, and others have proposed implementing directed acyclic graph (DAG) data structures into
consensus mechanisms. Ripple, a global payment system and the second largest cryptocurrency,
developed its own version of a proof-of-consensus mechanism based on the Byzantine agreement
protocol (Chase & MacBrough, 2018). As blockchain technology has evolved, new forms of consensus
have also emerged; various parties have proposed at least 30 consensus mechanisms (Vasa, 2018).
While consensus makes up a core component of a blockchain, each blockchain implements its own
version of a consensus mechanism.

4.3.3 Blockchain Fork

Every node in a blockchain network works independently, which makes it is possible for any node on the
network to create and simultaneously broadcast multiple blocks to the network. If different nodes accept
and append different blocks, a fork in the chain occurs and more than one version of a blockchain exists
(as Figure 12 depicts). Consensus ensures that the majority of nodes on the network reject forks.
Unintended or accidental forks occur when mining nodes create and broadcast valid blocks to the network
at the same time, which results in two versions of the chain. Bitcoin always accepts/recognizes the longest
chain, which ensures that the majority of nodes on the network will eventually reject and eliminate
unintended forked chains. Unintended forked chains occur more commonly in open participation
blockchains that employ PoW consensus, less commonly in blockchains that limit participation in block
validation, and not at all in PoS systems that select a single block creator.

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Figure 12. Forks in a Blockchain

Forks occur for other reasons as well (Asolo, 2018). A soft fork happens when developers make agreed-
on software updates to the blockchain core software. In the lag time before all nodes implement the new
rules, two sets of blocks might emerge: blocks that adhere to the old rules and blocks that adhere to the
new. This temporary situation resolves when all nodes complete the software upgrade. Hard forks, on the
other hand, arise intentionally. Hard forks occur when disagreement among software developers results in
two separate versions of the blockchain core software and various nodes on the network opt to implement
the different versions. At this point, the chain splits in two with one fork following the old rules and the
other following the new rules. Each fork continues as its own independent chain, but both retain a
common history up to the split. The cryptocurrencies Bitcoin Cash and Bitcoin Gold exemplify hard forks
to the Bitcoin blockchain.

5 Types of Blockchains: Public versus Private

Nakamoto (2008) defined the original blockchain to be open, public, and permissionless. The Bitcoin
blockchain allows anyone to establish a node on the network, participate in consensus and mining, and
view transactions in the blockchain ledger. However, as parties have proposed various blockchain
applications, so too have they proposed restrictions to blockchain participation. Juxtaposed to the open
blockchain lies the closed, private, permissioned blockchain that people can participate in by invitation
only. While more efficient, they are also more vulnerable to manipulation. Other blockchains adopt a
hybrid model that allows anyone to establish a node on the network or view transactions but restrict
further participation, such as block creation or block validation. Many Hyperledger projects fall into this
category. Federated or consortium blockchains support a specific group or function. In these private
blockchains, a select group of nodes control consensus (e.g., blockchains that banks form to support
financial transactions between them).
Figure 13 depicts the different types of blockchains on a continuum. The classification system is not
discrete; other combinations can exist. For example, one could implement a permissioned blockchain in
either a public or private network. Some argue that movement along the continuum further from the public
blockchain simply describes a centrally controlled system that existing database technologies typically
support (Narayanan, 2015). Others argue that a blockchain’s openness does not define its applicability or
usefulness (Thompson, 2017). Rationales for implementing a permissioned blockchain include the need to
manage transaction’ digital identity (e.g., retaining patient privacy when sharing healthcare data) or to
speed up transaction throughput. However, all blockchains, public and private, rely on similar principles
with the sole distinction between them relating to “who is allowed to participate in the network, execute the
consensus protocol, and maintain the shared ledger” (Jayachandran, 2017).

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Figure 13. Continuum of Blockchain Implementations

5.1 Distributed Ledger Technology

Distributed ledger technology (DLT) refers to “a digital system for recording the transaction of assets in
which the transactions and their details are recorded in multiple places at the same time” (TechTarget,
2017). Distributed database technology has been around for decades, but interest in distributed ledgers
did not proliferate until blockchain technology appeared. In 2015, under The Linux Foundation’s
guardianship, various companies formed the Hyperledger project. Hyperledger membership comprises
more than 230 companies from various industries with major contributors including IBM and Intel. The
project represents an open source collaborative effort to advance blockchain technology through
developing modular blockchain solutions (The Linux Foundation, 2018).
Blockchain researchers often use the terms DLT and blockchain interchangeably, but, while all
blockchains are distributed ledgers, not all distributed ledgers are blockchains (Au & Power, 2018, p. 45).
For example, some distributed ledger systems do not use a blockchain as their data structure, and private
distributed ledger systems do not need a complex consensus mechanism. The challenge going forward
does not involve clarifying the terminology but rather interjecting them where they can best address the
problem at hand.

6 Blockchain Challenges
We have learned much about blockchain possibilities and challenges since Nakamoto operationalized the
Bitcoin blockchain in 2009, lessons that bound and inform how the technology will evolve. Table 3 lists
themes related to the Bitcoin blockchain that have frequently appeared in the trade press and news media
and strategies to address them. While this analysis focuses on Bitcoin, issues examined apply to other
blockchains as well. Ultimately, we need to address these issues to more deeply diffuse blockchain
technologies.
Table 3. Lessons Learned from the Bitcoin Blockchain

Theme Issue
Blockchain technology is complex and requires deep technical knowledge to understand. On
the other hand, we can and must simplify how one interacts with it as a prerequisite to
widespread adoption. The ability to interact with a blockchain (i.e., buy, sell, and spend
Bitcoin) needs to be accessible to all types of users regardless of their technical prowess.
Usability
Resolution strategies: a blockchain ecosystem must include applications that simplify the
user experience similar to how graphical browsers abstract HTTP’s complexities for Web
users. For example, digital wallets provide a user interface for cryptocurrency blockchains,
and many have begun work to improve wallet design’s user interface and user experience.
The Bitcoin blockchain has grown to more than 205GB in size (Blockchain, 2019). As the
size of a blockchain increases, it becomes more expensive for nodes to participate in the
network. Decentralization and, subsequently, the blockchain’s integrity depends on volunteer
Scalability: Size of the nodes to validate transactions and create blocks.
blockchain
Resolution strategies: one approach to addressing blockchain size includes creating partial
or light weight nodes; another approach proposes splitting the chain into multiple subchains
or peer-level side-chains.

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Table 3. Lessons Learned from the Bitcoin Blockchain

Bitcoin blockchain protocols restrict block size to one megabyte and set the average time to
mine a block to 10 minutes, which limits transaction throughput to an average of 4.6
transactions per second and transaction confirmation to 10 minutes (one hour to attain the
recommended six confirmations). Visa, the well-known global payment company, reports
Scalability: Block size, transaction throughput as 1700 transactions per second and transaction confirmation in
transaction throughput seconds (Li, 2019). The blockchain transaction bottleneck prevents Bitcoin from becoming
and block confirmation competitive as an alternative online-payment method.
time
Resolution strategies: solutions to this complex issue, such as increasing the block size or
decreasing block creation time, have yielded limited success. Other proposals include off-
chain channels, sharding techniques, and adding a transaction processing layer to the
blockchain (Kasireddy, 2017).
To encourage participation in the blockchain, Bitcoin instituted an award incentive (i.e., new
Bitcoins and transaction fees) to nodes who first “mine” a block. Nakamoto designed mining
to consume many resources so that the cost to defraud the system would exceed the cost to
earn the reward. As Bitcoin's price increases, interest in mining soars. Increased mining
activity has consequences: an unsustainable growth in energy consumption (Digiconomist,
Mining 2019), which results in increasing costs and ultimately reduces interest in mining.

Resolution strategies: a notable solution has included alternative consensus mechanisms,

such as proof of stake, that replace “mining” with selecting block creators based on
predetermined criteria.

Miners find transactions with higher fees more attractive. At the height of the Bitcoin frenzy
when users made many transactions, fees rose quickly. Stories abound of transaction fees
that exceeded transaction value. The volatility in transaction fees impacts whether people
adopt Bitcoin as a viable digital payment option.

Resolution strategies: fees directly relate to transaction throughput; increasing throughput

Transaction Fees decreases fees. Two approaches have had promising results. The Segregated Witness
(SegWit) protocol increases block size primarily by removing signature data from a
transaction (Lombrozo, Lau, & Wuille, 2015). The Lightning Network (LN), an off-chain
payment channel, allows two parties to transact with each other multiple times in between
two blockchain transactions, an initial funding transaction and a final closing transaction. LN
is especially useful for micro or small payments that do not justify high transaction fees
(Poon & Dryja, 2016).
The blockchain supports a secure and immutable ledger. However, if a miner assumed
majority control of the mining computing power or flooded the network with fraudulent data,
the miner would compromise the ledger’s integrity (Orcutt, 2018b). The greatest threat to
security, however, resides with third-party applications and currency exchange websites
where hackers have gained access to private keys and absconded with large amounts of
Security Bitcoin.

Resolution strategies: people find vulnerabilities and flaws in any technology no matter
how secure (Orcutt, 2018b). Suggestions to reduce vulnerability in the blockchain include
implementing controls by switching to PoS consensus mechanisms or permissioned
blockchains.
Bitcoin is an open source software project (Bitcoin, 2019b). The user community
recommends software revisions, a group of volunteer software developers manage software
developments, and implementation occurs through acceptance from stakeholders (Light,
2016). Disagreement that results in different versions of the software split the chain (i.e.,
hard fork) into separate chains that operate independently. For Bitcoin, such splits create
Governance competing cryptocurrencies.

Resolution strategies: to achieve stability in the software-development process,

recommendations call for stakeholders to establish metrics to assess software changes’
necessity and thresholds to determine when changes should be made (Trump, Well, Trump,
& Linkov, 2018).

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Table 3. Lessons Learned from the Bitcoin Blockchain

Blockchain technologies support cryptocurrencies, yet many use the terms interchangeably.
As such, many people project volatility in a cryptocurrency’s currency to volatility in the
technology. However, acceptance of cryptocurrencies as stable and viable alternatives to fiat
currencies represents the primary issue with cryptocurrencies, not the technology (Adkisson,
2018). That is, interest in blockchain technology may rise and fall with the hype surrounding
Sustainable Interest
individual cryptocurrencies.

Resolution strategies: investment in blockchain projects has not subsided, and

organizations across many industries continue to propose, test, and implement blockchain
applications and related Hyperledger technology.

7 Blockchain Use Cases and Applications

Nakamoto (2008) originally developed blockchain technology to support digital currency. Currency,
however, represents just one type of asset. One can easily extend blockchain platforms to any asset that
one can digitize, represent with a digital identity, or tokenize. Tokenization refers to a process in which a
percentage of rights is associated to an asset. Blockchain technology as a record system has many
benefits and applications.
Smart contracts, such as the ones that Ethereum supports (https://www.ethereum.org/), represent another
well-known way to use a blockchain. Smart contracts, however, differ from legal contracts; rather, they
comprise if-then statements that run in self-executing software code (Orcutt, 2018a). Nodes on a
blockchain implement a smart contract as a software program, which allows blockchain users to associate
additional information with a transaction. Contract authors write the code that stipulates the contract’s
rules and trigger the code to automatically execute according to specified conditions. As smart contract
code resides on the blockchain, one cannot alter it, which increases the reliability that a contract’s parties
will carry out its terms as set forth and, ultimately, eliminates the need for third-party dispute resolution or
intermediation. Some even speculate smart contracts will replace the need for lawyers in business
transactions (Sonderegger, 2018).
Blockchain enthusiasts have projected blockchain technology to impact all industries. Reports of use case
scenarios and example pilot projects abound. For example, Business Insider has highlighted potential
applications for finance, business, government, and technology (Meola, 2017), and Forbes has identified
more than 30 initiatives already underway that span industries such as entertainment, retail, healthcare,
and logistics (Marr, 2018). Blockchain enthusiasts believe that blockchain has limitless uses and endless
possibilities (Smith, 2017). Table 4 includes some proposed blockchain applications from various
industries.
Table 4. Blockchain Use Case Examples from Various Industries

Industry Sample use case

System that tracks the buying and selling of energy decentralizing the energy market by helping
Energy small suppliers sell energy, which includes individuals who want to sell energy from their solar
panels
Entertainment System that tracks ticket sales to thwart ticket fraud
Exotic cars System that supports fractional ownership of collector cars
Finance System that supports global payments
Finance System that supports peer-to-peer transactions (which includes money transfers)
Land-registry system that records property transactions and makes ownership verifiability open
Government
to the public
System that allows healthcare professionals to store and retrieve electronic patient records for
Healthcare
telemedicine consultations
Identify
System that verifies someone’s identity via biometric information stored on a blockchain
management
Insurance System that supports proof-of-insurance verification in real time

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Table 4. Blockchain Use Case Examples from Various Industries

Service that provides a secure way for devices to register and validate themselves on a network
Internet of things
in order to maintain integrity in device-to-device communication
Money Platform that supports cryptocurrency
Non-profit System that allows donors to see how recipients spend their contributions
Real estate System that connects buyers and sellers with real estate agents who accept lower commissions
System that tokenizes loyalty reward programs, which makes it easy for consumers to swap
Retail
earned points
Social engagement Matchmaking service that rewards “matchmakers” for connecting people in various venues
System that tracks food from the farm to the table, which allows consumers to see exactly
Supply chain
where their food comes from
Voting System that allows voters to verify their votes were recorded

As with any technology, one should not use blockchain technology in every situation due to its complexity
and need for resources. Blockchain researchers have proposed several models that prescribe ways to
assess whether blockchain technology would help suit a particular situation. The FITS model evaluates
suitability on four factors: propensity for fraudulent transactions, intermediary use, throughput
requirements, and data stability (McCullagh, 2017). The blockchain better fits business environments with
a high fraud risk and where third-party intermediaries provide low value. Throughput constitutes another
major consideration since blockchain technology cannot easily attain a high throughput rate. Finally,
blockchain best suits stable data or data that stays the same over time, such as property ownership. The
FITS model represents a first step in determining blockchain viability.
The World Economic Forum has produced perhaps the most comprehensive blockchain-adoption
assessment framework (Mulligan, Scott, Warren, & Rangaswami, 2018). Specifically, the framework asks
11 questions as a decision tree (see Figure 14). Like the FITS model, the framework evaluates areas such
as trust, intermediaries, throughput, and data stability. The assessment purports that a blockchain best
suits assets that one can represent in a digital format and whose form does not change. For example, a
blockchain works well for tracking wheat’s movement between buyers and sellers but not for tracking
wheat’s transition to flour or flour’s transition to bread (Mulligan et al., 2018). The World Economic Forum
ascribes a blockchain’s business value to its creating a trusted solution for managing contractual
relationships and value transfers. In summation, blockchain offers a viable solution in situations where
trust poses an issue, intermediaries participate in the process, and parties need a permanent record.

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Figure 14. World Economic Forum's Blockchain Assessment Flowchart (Mulligan et al., 2018)

8 Blockchain Adoption
Researchers have studied innovation diffusion for decades. In particular, to describe technology adoption,
they have widely used the theoretical framework that Rogers (2003) developed. Rogers proposed that the
diffusion process occurs over time and follows an S-curve pattern. The adoption rate begins with a period
of slow gradual growth followed by a period of dramatic rapid growth that eventually stabilizes and finally
declines. Rogers classified adopters into four groups: innovators, early adopters, early majority, late
majority, and laggards. Innovators, the first to experiment with a technology, take risks and willingly accept
uncertainty about the future. Innovators tend to possess a high technical skill. Early adopters recognize a
technology’s potential and assume a leadership role in advocating for its acceptance. The early majority,
risk-averse individuals who opt for adoption as an innovation attracts more followers, want to be among
the first rather than the last group of adopters. The late majority also refers to risk-averse individuals, but,
while they remain skeptical, they feel pressure to adopt. Laggards want evidence that an innovation works
before deciding to adopt. Using this scale, according to Stratopoulos and Wang (2018), blockchain
diffusion appears to reside with early adopters, which the high number of news articles, firm disclosures,
book titles, and business publications reporting blockchain initiatives and pilot projects evidences. Gartner
has concurred in noting that much activity has occurred because CEOs want to garner recognition as
innovation leaders (Kandaswamy & Furlonger, 2018). Figure 15 depicts the innovation diffusion S-curve
and blockchain adoption’s potential current state.

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Figure 15. Diffusion of Innovation S-Curve Estimating Blockchain Adoption (Adapted from Rogers, 2003)

Widespread blockchain adoption will take years, though experimentation has begun in earnest and
developers have created thousands of blockchain projects. Deloitte has reported on a study in which the
company found that the open source GitHub repository received 86,000 project submissions between
2009 and mid-2017 (Trujillo, Fronthart, & Srinivas, 2017). However, the company also noted that, by the
end of the study, only eight percent of the projects remained active—not an unusual pattern. Gartner has
described the current period as one of irrational exuberance where enthusiasm drives interest, but
adoption remains light (Kandaswamy & Furlonger, 2018). We saw a similar situation with TCP/IP and the
Internet. TCP/IP revolutionized data transmission and made the Internet possible. However, we realized
the Internet’s transformative power only after 30 years of trial applications to novel use cases (Iansiti &
Lakhani, 2017). Gartner has predicted a similar trajectory for blockchain technology (Trujillo et al., 2017).
Iansiti and Lakhani (2017) have proposed a framework for tracking blockchain adoption that relies on how
novelty and complexity affect how a foundational technology and its associated use cases evolve. The
more novel a technology, the more effort one needs to understand its application and usefulness.
Consequently, new technologies typically focus on a single-purposed application. As others begin to see
value in the technology, they envision new uses, and the technology’s impact grows. However, at the
same time, the complexity required to coordinate the growing diversity of players in the technology
ecosystem increases. The need to resolve that complexity gives rise to novel transformative applications
that can change “the very nature of economic, social, and political systems” (Iansiti & Lakhani, 2017, p.
10). The blockchain no longer exclusively supports Bitcoin; rather, a highly diverse and complex
blockchain ecosystem has emerged. Sustainable transformative applications may be far away (p. 10), but
blockchain will impact most businesses. The only question that remains concerns when the impact will
manifest (Iansiti & Lakhani, 2017, p. 11).

9 Conclusion
Conceived as a transparent, self-governing, democratized digital currency to support electronic
transaction processing (Nakamoto, 2008), the blockchain represents disruptive technological innovation.
The Bitcoin blockchain addresses problems that electronic money schemes encounter via a decentralized
trust system that adopts peer-to-peer networking, cryptography, and distributed consensus. Blockchain
retains an immutable and traceable distributed and identical transaction record, which enables new forms
of value transfer that do not require an intermediary or central authority (Kandaswamy & Furlonger, 2018).
Subsequent efforts that generalized blockchain technology to support value transfer for all types of assets
sparked many people’s imagination, and some have proclaimed it a technological breakthrough that
promises to revolutionize business and redefine economies (Iansiti & Lakhani, 2017).

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The hype is real, but blockchain is not a panacea. Blockchain entered the technology realm as a
cryptocurrency platform, which propelled it into the mainstream. However, some have expressed concern
that overpromotion of this untested, underdeveloped platform could undermine its long-term potential
(Mulligan et al., 2018). Addressing myriad issues that plague asset transfers over the Internet, blockchain
has its challenges, most notably scalability, latency, and integration. Sustainability will depend on how we
resolve these challenges, yet it will take time, effort, resources, commitment, and perseverance before we
successful deploy blockchain technology.
Any conclusion made about blockchain would be incomplete without reference to Bitcoin. The Bitcoin
craze increased the public’s awareness of the technology, which led to an expanded Bitcoin ecosystem,
other blockchains, and additional forms of decentralized ledgers. The Bitcoin cryptocurrency has had a
wild run, and its future remains uncertain. Blockchain, however, has catalyzed a quest to discover and
realize its potential as a transformative technology.

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Communications of the Association for Information Systems 487

About the Authors

Meg Coffin Murray is a Professor of Information Systems in the Coles College of Business at Kennesaw
State University. She holds a PhD in Information Systems, an MBA in Finance, and a MS in Computer
Science and has over forty years of experience in academe and industry. She specializes in developing
and implementing emerging technologies to meet educational, business, and societal needs. Her work
involves devising strategies to assess, remediate, and amplify skills needed to leverage IT in innovation, a
primary driver of economic growth. Her current focus is on the emerging role of blockchain technology,
machine learning, and artificial intelligence. She is a contributing member of industry blockchain working
groups, holds a certificate in the study of cryptocurrencies, and frequent presents on bitcoin and the
blockchain.

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Volume 45 10.17705/1CAIS.04525 Paper 25