Introduction Introduction

February 6, 2019

An innovative team at the Boston Fed sought to develop a deep understanding of blockchain technology. This report details our strategies, insights, technical architecture, and ongoing efforts to build a proof of concept on blockchain platforms.

Soap factories in 1960s Liverpool, England, had a problem.1 The process that turned liquid detergent into a powder required a nozzle that shot out boiling hot liquid at great pressure. Unfortunately, these nozzles frequently clogged, were inefficient, and produced granules of different sizes.

Companies hired mathematicians and physicists to try to design the perfect nozzle, but they relied too heavily on theoretical knowledge, and their efforts failed. Then, the companies turned to biologists committed to a different approach, one modeled after nature’s process of trial and error. These experts designed a series of nozzles with slight variations. Next, they tested them, modifying them until, after 45 generations, they had an efficient nozzle. Problem solved.

These companies had to think differently, innovate, and try something new. They learned by doing, which is something the Liverpool soap factories and the Federal Reserve Bank of Boston have in common. Our team at the Boston Fed wanted to develop an understanding of blockchain and distributed ledger technology, but we knew theories weren’t enough. We wanted practical experience—the kind only trial and error can bring. The following pages detail the strategies, insights, technical architecture, and ongoing efforts of the Boston Fed to build a proof of concept on blockchain platforms.

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What Readers Can Expect From This Paper

This paper details why we executed our proofs of concepts, the successes and challenges we experienced, and what we learned along the way. We hope it is beneficial to those seeking to experiment on their own or simply understand the technology at a deeper level.

We assume the reader has a basic working knowledge of blockchain platforms and some key variations, such as public (permissionless) versus private (permissioned) models. However, we include an appendix to help build that foundational knowledge. Additionally, while some use the more general term “distributed ledger technology,” we use the term “blockchain” throughout this paper for simplicity—even though not every distributed ledger technology platform utilizes chained blocks. For the purpose of this paper, “blockchain” refers to a distributed, decentralized database that employs cryptographic algorithms and a consensus mechanism as a platform to execute activities. All these activities are recorded in a single, shared ledger.

Additionally, we provide a timeline of key events, including those relevant to the use cases we describe. The capabilities of these platforms evolve rapidly, and our experiments and decision-making were based on information available at the time. Readers of this paper may find the technology has advanced past the functionality we describe. However, we expect the paper’s insights will remain relevant beyond those changes.

Following this introduction, we will detail two use cases: The first is a technological exploration of how a blockchain platform performs specific functions within a general accounting system. The second represents an evolution in our thinking and details the concept of a supervisory node within a distributed, decentralized network.

As we describe the use cases, we provide:

  • technical descriptions
  • functional diagrams
  • goals for each use case
  • insights
  • lessons learned

Finally, we offer key takeaways and conclusions that business and technology leaders can apply as they explore the options and potential opportunities of blockchain platforms.

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The views expressed in this report are those of the authors and do not necessarily represent positions of the Federal Reserve Bank of Boston or the Federal Reserve System.

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