Corporate Finance, DeFi, Blockchain, Web3 News
Corporate Finance, DeFi, Blockchain News

Blockchain, distributed ledgers and the Paxos protocol

In his book The Fourth Industrial Revolution executive chairman of the World Economic Forum Klaus Schwab wrote [1]: “The digital revolution is creating radically new approaches that revolutionize the way in which individuals and institutions engage and collaborate. For example, the blockchain, often described as a distributed ledger, is a secure protocol where a network of computers collectively verifies a transaction before it can be recorded and approved”. In Schwab‘s view this blockchain is, in essence: “a shared, programmable, cryptographically secure and therefore trusted ledger which no single user controls and which can be inspected by everyone.”

Ben van Lier
Ben van Lier
Distributed ledgers

This view of the blockchain as a distributed and, at the same time, shared (public) form of data and information storage can also be seen in the recently published report of the UK Government Chief Scientific Adviser [2]. This report states that the blockchain is, in essence, a type of distributed database: “...that takes a number of records and puts them in a block. Each block is then chained to the next block, using a cryptographic signature. This allows block chains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions.”

In order to ensure the accuracy (consistency) of the transactions recorded in the distributed ledgers, consensus between the various components of these transactions is required (in network connected devices for example). Through consensus on, and distributed recording of the jointly made decisions concerning transactions, each component involved always has the information about its share in the decision-making for a particular transaction readily available. Every decision or group of decisions (transaction) recorded in a distributed ledger can be viewed as a “block” and any subsequent transaction linked to this block forms a “blockchain” of decisions, linked by means of a protocol, in the form of distributed and stored data and information.

Izabela Moise [3] describes reaching consensus between the components of a system as follows: “Consensus encapsulates the inherent problems of building fault tolerant distributed systems. Consensus represents the greatest common denominator of the so-called class of Agreement problems such as data consistency, group membership, consistent global states, distributed consensus, atomic broadcast and many others”. In the view of the UK Government Chief Scientific Advisor, the blockchain (distributed computing principles combined with an overlapping protocol) is truly innovative because of the new possibilities it creates to set rules for a particular transaction and ensure these rules remain associated with the transaction itself. This is in contrast to the set-up of a conventional database where rules for recording the data or information are set at the level of the database. When every part serves as an autonomous unit and, at the same time, as a part of the whole system, that system no longer has a central point of failure that can take down the entire system. In a blockchain, the distributed character of recording data and information in distributed ledgers using an encryption-based protocol can also provide a greater degree of privacy and security for the transactions than considered possible using current technological solutions. The UK Government Chief Scientific Advisor states: “Such ledgers use cryptographic techniques to ensure that anyone can check if a particular record is within the ledger, as long as they possess a small amount of crucial information. At the same time, complex consensus protocols are employed to ensure that everyone in the system gets a consistent view of the ledger (2016:47).”

The PAXOS protocol

In 1990, Dr Leslie Lamport submitted a research article to the Association for Computing Machinery (ACM) [4]. The article The Part-Time Parliament sat there for eight years before finally being approved for publication. The article centres around what is considered one of the more obscure algorithms in distributed computing. In his writing, Lamport uses the fictional parliament of the ancient civilisation of Paxos as a metaphor to illustrate his algorithm. This parliament operates with part-time legislators who are not always able to be in the parliamentary chamber at the same time when decrees need to be passed. This ancient parliament is a metaphor for consensus and decision-making via random technical units in a system. Lamport goes into considerable detail when describing how such a protocol for reaching consensus and decisions should be given form. In describing this protocol, he works out a detailed algorithm, with which consensus, decision-making and recording of transactions to be carried out can be realised between the entities. The key requirements behind this algorithm are, firstly, fundamental trust between the entities involved and, secondly, consistency where “...each Paxon legislator maintained a ledger in which he recorded the numbered sequence of decrees that were passed.”

An important condition for the individual technical entity (legislator) using the ledger is that, according to the protocol, every decree must be recorded in indelible ink in order to ensure that the decrees cannot be changed once recorded. The main aim of the protocol is to ensure consistency in the recording of the decrees in all the distributed ledgers, meaning, by extension, that no two ledgers can contain contradictory information. The elaborated protocol also contains, among other things, rules to ensure that decision-making procedures are initiated and ballots are conducted, rules on quorums, and how to reach consensus on decrees to be passed. Furthermore, the protocol contains rules on the manner in which the passed decree is to be recorded in the respective ledgers. Because the legislators are required to carry their ledgers with them at all times, they are assured that they will always have the information on the ballots in which they participated. They can also see at what time and in which order these decrees were passed and which legislator took part in a ballot. The ballots are conducted using messengers who distribute messages between the legislators present during the ballot.

This “Paxos protocol” appears to have all the characteristics needed for a fault-tolerant and distributed system that operates using a common protocol. In this system, decisions on transactions can be made in consensus and securely recorded in distributed ledgers, which, taken all together, offer at all times and for each component an up-to-date picture of all decisions made.


It is clear that the ideas of Schwab, the UK Government Office for Science and Lamport centre on autonomous entities linked through networks that, with the help of a protocol, make decisions about transactions and how these are to be recorded. This protocol enables the entities to reach consensus and, on the basis of this consensus, make autonomous decisions on transactions, record these transactions in distributed ledgers and learn from previously made decisions. The movement towards transactions that are mutually arranged through technical entities could pose a threat to the role of today’s “trusted third parties” such as banks, public notaries, government authorities, insurance companies or any other form of physical or technical intermediary. Or, as phrased in the report of the UK Government Office for Science: “[distributed ledger technologies] have the potential to disrupt the whole economy, and society. Understanding this can help to frame the opportunities and threats afforded by distributed ledger technologies - and how they can inform changes in the role of the government, and the services it delivers.” In addition to praising the unprecedented opportunities afforded by blockchain technology, there is also an urgent need to create a new body of general and technical knowledge, knowledge which, on the one hand, is needed in the short and medium term to build secure and, accordingly, future-proof blockchains and, on the other hand, which can help to make realistic assessments of what is and is not possible the long term.

(1) Schwab (2016) The Fourth Industrial Revolution. World Economic Forum ISBN 9781944835002
(2) Government Office for Science. (2016) Distributed Ledger Technology: beyond block chain
(3) Moise I. (2011) Efficient Agreement Protocols for Asynchronous Distributed Systems. Distributed, Parallel and Cluster Computing, Université de Rennes
(4) Lamport L. (1998) The Part-Time Parliament. This article appeared in ACM Transactions on Computer Systems 16, 2 (May 1998)

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