Report Overview
"Blockchain Consensus: Immutable Agreement for the Internet of Value" is a comprehensive report published by KPMG that analyzes blockchain consensus mechanisms, distributed ledger technology, and their applications in financial services and beyond.
Key Insight: Blockchain represents a fundamental shift in how we establish trust and record transactions. Consensus mechanisms are at the heart of this technology, enabling decentralized networks to agree on the state of a shared ledger without relying on a central authority.
Key Definitions
A type of distributed ledger database that maintains a continuously growing list of transaction records ordered into blocks with various protections against tampering and revision.
A digital record of ownership that differs from traditional database technology, since there is no central administrator or central data storage.
A method of authenticating and validating a value or transaction on a Blockchain or a distributed ledger without the need to trust or rely on a central authority.
Members or systems of a consensus network or a server that holds a replicated copy of the ledger and can have varying roles.
Key Insights Summary
Byzantine Generals' Problem
The basis for modern consensus mechanisms came from the Byzantine Generals' Problem, which outlines the challenge of reliability in a decentralized system where some participants might be malicious.
Proof-of-Work
The first practical solution to the Byzantine Generals' Problem was Proof-of-Work, which requires participants to perform computational work to validate transactions and create new blocks.
Proof-of-Stake
Proof-of-Stake emerged as an alternative to Proof-of-Work, where participants validate transactions based on the amount of cryptocurrency they hold, reducing energy consumption.
Permissioned vs Permissionless
There's a general shift from permissionless systems like Bitcoin to permissioned systems where nodes must be legally known and identified to validate transactions.
Practical Byzantine Fault Tolerance (PBFT)
PBFT can process an enormous number of direct peer-to-peer messages with minimal latency, enabling secure and resilient private distributed networks.
Industry Adoption
Financial institutions are increasingly exploring blockchain technology for applications ranging from digital identities to automating traditionally paper-intensive processes like trade financing.
Content Overview
Document Contents
Seizing Opportunity - Blockchain and Beyond
Blockchain, the underlying technology behind the decentralized cryptocurrency Bitcoin, may have gone largely unnoticed when it was first pioneered, although this is no longer the case. Some of the world's largest banks and technology firms are investing huge amounts of resources into this technology, which they recognize as potentially the most disruptive technological development to emerge since the Internet.
With potential applications from establishing digital identities through to automating traditionally paper intensive processes like trade financing, blockchain technology is to some the panacea for future financial services whilst many others view it with much more caution. One thing is clear, you cannot ignore it.
The Basics Behind Blockchain
Blockchains are a specific type of a distributed ledger and a way of ordering and verifying transactions into blocks with various protections against tampering and revision. A network of computers maintains and validates a record of consensus of those transactions via a cryptographic audit trail.
There's no need for a middleman between the parties in a transaction. There's also no need for trust from one peer to the next, since the technology, running on the participants' nodes, provides all the confidence needed. If a blockchain is well-implemented, the resulting advantages include speed, privacy, reliability, and much lower costs.
How Blockchains Work:
- Multiple parties transact
- Transactions are posted and recorded to the network
- The transaction is added to a network's 'block' and presented
- The 'block' is broadcast to every party and their nodes in the network
- The network validates via consensus and confirms
- The confirmed block is added in chronological order to the chain
- Transaction is completed
Consensus
At the heart of a blockchain is consensus among the participants. Consensus is key, because without a central authority, the participants have to agree on the rules and how to apply them; using these rules, they have to agree to accept and record a proposed transaction.
Byzantine Generals' Problem
The basis for modern consensus mechanisms came in 1962, when an engineer at the RAND Corporation, Paul Baran, came up with the idea for cryptographic signatures. Twenty years later, a trio of scholars published a paper that outlined the problem of reliability in a decentralized system - the Byzantine Generals' Problem.
Proof-of-Work
The first way, developed in 1999, was "proof-of-work." Proof-of-work means that the system's users have to repeatedly run algorithms to validate the transactions of the system's other participants. Today, it's still the most publicly proven method to achieve consensus.
Proof-of-Stake
Proof-of-stake came in 2012. The method here is to create a mechanism that punishes nodes that don't follow the consensus protocol. Participants have to bet a predefined amount of digital assets on a consensus outcome.
Practical Byzantine Fault Tolerance (PBFT)
The solution came in 1999, when Miguel Castro and Barbara Liskov introduced the practical Byzantine fault tolerance (PBFT) algorithm. PBFT can process an enormous number of direct peer-to-peer messages with minimal latency.
Key Observations
Based on research with creators and corporate users of blockchains and consensus mechanisms, the report identifies several key observations:
Overall Consensus Methodology
- Permissioned DLTs are proving popular with financial services institutions
- The number of nodes required to validate a transaction varies based on the distributed ledger technology
- While all providers appear to be fault-tolerant to an extent, a percentage of nodes need to be online to make consensus progress
- We see the emergence of various types of node roles and permissions
Governance, Risks, and Control
- Network participants mostly own their nodes
- The governance model varies across different ledger setups
- Most DLTs intend to continue to rely on existing legal and regulatory frameworks
- Various techniques are utilized to restrict malicious activities
Performance
- Throughput, latency, and number of nodes are general measures for DLT scalability
- Most DLTs now provide transaction finality from milliseconds to seconds
- Volume ranges from 500 to 5,000 final transactions per second
- Scalability is important for financial services operations
Security
- Security aspects of consensus mechanisms are in early stages and evolving
- Various risks and vulnerabilities with regard to attacks continue to remain
- Loss of private keys remains a key risk
- "Double spending" is a well-recognized risk with various prevention mechanisms
Is Blockchain Right for Your Organization?
Many financial institutions are working to take advantage of distributed consensus mechanisms, but there are many challenges. Regulations are heavy, cost is an issue, and the financial services industry as a whole is transforming quickly. Before making a big investment, institutions should consider some key questions:
Key Considerations:
- Scope: Which factors need to be considered?
- Counterparties: Which entities create and post transactions?
- Process: How is the process done today versus a DCL application?
- Data: Which data needs to be shared with whom and when?
- Technology: What does the underlying existing technology landscape look like?
- People: Which skills and organizational changes would be needed?
- Regulatory: Does that solution help to address regulatory requirements more efficiently?
- Business case: What is the overall business case?
- Performance/security: Can the solution scale to my needs?
Maneuvering the Road Ahead
DLTs and their underlying consensus mechanisms are already varied, and they're still changing rapidly as different use cases get mapped out. The most important question is how to best satisfy counterparties who may not trust one another but still want to hold safe transactions without a third party's involvement.
It's important to focus on which consensus mechanisms are most relevant for individual companies, i.e., which can create real and scalable solutions that are also acceptable to regulators. For that, the question is less whether proof-of-work distributed ledgers or permissioned ones are better. It's more about whether or not, or when, consensus is needed for a particular use case.
When Consensus Models and Distributed Ledgers Have Fundamental Advantages:
- When all parties need to know what data was transmitted to whom
- When the relevant parties need to view that information
- When there is a clear and visible value chain that can be permissioned
- When immutable, interorganizational audit trails are needed
- When multiple parties need to directly write to a database without needing to trust each other
Appendices
The report includes comprehensive appendices covering:
- Key terminology definitions
- Consensus mechanism evaluation questionnaire
- Questionnaire response set
- Acknowledgments of contributors
Note: The above is only a summary of the report content. The complete document contains extensive data, charts, and detailed analysis. We recommend downloading the full PDF for in-depth reading.