Blockchain technology
Introduction
By design, a blockchain is resistant to modification of the data. It is "an open, distributed ledger that can record
transactions between two parties efficiently and in a verifiable and permanent way".
For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively
adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any
given block cannot be altered retroactively without alteration of all subsequent blocks, which requires
consensus of the network majority. Although blockchain records are not unalterable, blockchains may be
considered secure by design and exemplify a distributed computing system with high Byzantine fault
tolerance. Decentralized consensus has therefore been claimed with a blockchain.
(Explaining the picture:
Blockchain formation. The main chain (black) consists of the longest series of blocks from the genesis block (green) to the
current block. Orphan blocks (purple) exist outside of the main chain )
History
The first blockchain was conceptualized by a person (or group of people) known as Satoshi
Nakamoto in 2008. Nakamoto improved the design in an important way using a Hashcash-like
method to add blocks to the chain without requiring them to be signed by a trusted party.
The design was implemented the following year by Nakamoto as a core component of the
cryptocurrency bitcoin, where it serves as the public ledger for all transactions on the network.
The words block and chain were used separately in Satoshi Nakamoto's original paper, but were
eventually popularized as a single word, blockchain, by 2016.
Smart contracts that run on a blockchain, for example ones that "creat[e] invoices that pay themselves
when a shipment arrives or share certificates that automatically send their owners dividends if profits
reach a certain level."[1] require an off-chain oracle to access any "external data or events based on time
or market conditions [that need] to interact with the blockchain." [14]
Structure
A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across
many computers so that any involved record cannot be altered retroactively, without the alteration of all
subsequent blocks.[1][17] This allows the participants to verify and audit transactions independently and relatively
inexpensively.[18] A blockchain database is managed autonomously using a peer-to-peer network and a
distributed timestamping server. They are authenticated by mass collaboration powered by collective self-
interests.[19] Such a design facilitates robust workflow where participants' uncertainty regarding data security is
marginal. The use of a blockchain removes the characteristic of infinite reproducibility from a digital asset. It
confirms that each unit of value was transferred only once, solving the long-standing problem of double
spending. A blockchain has been described as a value-exchange protocol.[20] A blockchain can maintain title
rights because, when properly set up to detail the exchange agreement, it provides a record that compels offer
and acceptance.
Properties of Block chain technology
Block
Blocks hold batches of valid transactions that are hashed and encoded into a Merkle tree.[1] Each block includes
the cryptographic hash of the prior block in the blockchain, linking the two. The linked blocks form a chain.
[1]
This iterative process confirms the integrity of the previous block, all the way back to the original genesis
block.
In addition to a secure hash-based history, any blockchain has a specified algorithm for scoring different
versions of the history so that one with a higher score can be selected over others. Blocks not selected for
inclusion in the chain are called orphan blocks.[21] Peers supporting the database have different versions of the
history from time to time. They keep only the highest-scoring version of the database known to them.
Whenever a peer receives a higher-scoring version (usually the old version with a single new block added)
they extend or overwrite their own database and retransmit the improvement to their peers.
Blockchains are typically built to add the score of new blocks onto old blocks and are given incentives to
extend with new blocks rather than overwrite old blocks. Therefore, the probability of an entry becoming
superseded decreases exponentially[22] as more blocks are built on top of it, eventually becoming very low. [1][23]:ch.
08[24]
For example, bitcoin uses a proof-of-work system, where the chain with the most cumulative proof-of-
work is considered the valid one by the network.
Decentralization
Peer-to-peer blockchain networks lack centralized points of vulnerability that computer crackers can exploit;
likewise, it has no central point of failure. Blockchain security methods include the use of public-key
cryptography.[4]:5 A public key (a long, random-looking string of numbers) is an address on the blockchain.
Value tokens sent across the network are recorded as belonging to that address. A private keyis like a password
that gives its owner access to their digital assets or the means to otherwise interact with the various capabilities
that blockchains now support. Data stored on the blockchain is generally considered incorruptible.
Data quality is maintained by massive database replication[8] and computational trust. No centralized "official"
copy exists and no user is "trusted" more than any other.[4] Transactions are broadcast to the network using
software. Messages are delivered on a best-effort basis. Mining nodes validate transactions,[21] add them to the
block they are building, and then broadcast the completed block to other nodes.
Distributed Ledger Technology
A distributed ledger is a database that is spread across several nodes or
computing devices. Each node replicates and saves an identical copy of
the ledger. Each participant node of the network updates itself
independently.
The groundbreaking feature of distributed ledger technology is that the
ledger is not maintained by any central authority. Updates to the ledger
are independently constructed and recorded by each node. The nodes
then vote on these updates to ensure that the majority agrees with the
conclusion reached. This voting and agreement on one copy of the ledger
is called consensus, and is conducted automatically by a consensus
algorithm. Once consensus has been reached, the distributed ledger
updates itself and the latest, agreed-upon version of the ledger is saved
on each node separately.
Distributed ledger technologies drastically reduce the cost of trust. The
architectures and structures of distributed ledgers can help us mitigate
our dependence on banks, governments, lawyers, notaries and regulatory
compliance officers. R3’s Corda is an example of a distributed ledger.
Distributed ledgers present a new paradigm for how information is
collected and communicated, and are poised to revolutionize the way
individuals, enterprises and governments transact.
Blockchain Technology
Blockchains are one form of distributed ledger technology. Not all
distributed ledgers employ a chain of blocks to provide a secure and
valid distributed consensus.
A blockchain is distributed across and managed by peer-to-peer
networks. Since it is a distributed ledger, it can exist without a
centralized authority or server managing it, and its data quality can be
maintained by database replication and computational trust.
However, the structure of the blockchain makes it distinct from other
kinds of distributed ledgers. Data on a blockchain is grouped together
and organized in blocks. The blocks are then linked to one another and
secured using cryptography.
A blockchain is essentially a continuously growing list of records. Its
append-only structure only allows data to be added to the database:
altering or deleting previously entered data on earlier blocks is
impossible. Blockchain technology is therefore well-suited for recording
events, managing records, processing transactions, tracing assets, and
voting.
Cryptocurrencies, such as Bitcoin, pioneered blockchain technology.
Bitcoin’s big rally in late 2017, and the ensuing media frenzy, brought
cryptocurrencies into the mainstream public imagination. Governments,
businesses, economists and enthusiasts are now considering ways to
apply blockchain technology to other uses.
Every blockchain is a distributed ledger, but not every distributed ledger
is a blockchain. Each of these concepts requires decentralization and
consensus among nodes. However, the blockchain organizes data in
blocks, and updates the entries using an append-only
structure. Distributed ledgers broadly, and blockchains specifically, are
conceptual breakthroughs in managing information and can be expected
to find application in every economic sector.
THE BIGGEST ADVANTAGE:
DISINTERMEDIATION
The core value of a blockchain is that it enables a database to be directly shared without a central
administrator. Rather than having some centralized application logic, blockchain transactions
have their own proof of validity and authorization to enforce the constraints. Hence, with the
blockchain acting as a consensus mechanism to ensure the nodes stay in sync, transactions can be
verified and processed independently.
But why is disintermediation good for us? Because a database is still a tangible thing even
though is just bits and bytes. If the contents of a database are stored in the memory and disk of a
particular computer system run by a third party even if it is a trusted organization like banks and
governments, anyone who somehow got access to that system can easily corrupt the data within.
Thus the third-party organizations especially those who control important databases need to hire
many people and design many processes to prevent that database being tampered with.
Unavoidably, all this takes a great amount of time and money.
However, with blockchains, we can now replace these third-party organizations with a
distributed database, locked down by clever cryptography. “Like so much that has come before,
they leverage the ever-increasing capacity of computer systems to provide a new way of
replacing humans with code. And once it’s been written and debugged, code tends to be an awful
lot cheaper” (Gideon Greenspan).
OTHER ADVANTAGES ARE :
THE BIGGEST DISADVANTAGE:
PERFORMANCE
Because of the nature of blockchains, it will always be slower than centralized databases. When
a transaction is being processed, a blockchain has to do all the same things just like a regular
database does, but it carries three additional burdens as well:
1. Signature verification. Every blockchain transaction must be digitally signed using a public-
private cryptography scheme such as ECDSA. This is necessary because transactions propagate between
nodes in a peer-to-peer fashion, so their source cannot otherwise be proven. The generation and
verification of these signatures is computationally complex, and constitutes the primary bottleneck in
products like ours. By contrast, in centralized databases, once a connection has been established, there is
no need to individually verify every request that comes over it.
1. Consensus mechanisms. In a distributed database such as a blockchain, effort must be expended
in ensuring that nodes in the network reach consensus. Depending on the consensus mechanism used, this
might involve significant back-and-forth communication and/or dealing with forks and their consequent
rollbacks. While it’s true that centralized databases must also contend with conflicting and aborted
transactions, these are far less likely where transactions are queued and processed in a single location.
1. Redundancy. This isn’t about the performance of an individual node, but the total amount of
computation that a blockchain requires. Whereas centralized databases process transactions once (or
twice), in a blockchain they must be processed independently by every node in the network. So lots more
work is being done for the same end result.
Other disadvantages are:
Blockchain technology can be integrated into multiple areas. The primary use of blockchains today is as
a distributed ledger for cryptocurrencies, most notably bitcoin. There are a few operational products maturing
from proof of concept by late 2016.[37] Businesses have been thus far reluctant to place blockchain at the core of
the business structure.[50]
Cryptocurrencies
Main article: Cryptocurrency
Most cryptocurrencies use blockchain technology to record transactions. For example, the bitcoin
network and Ethereum network are both based on blockchain. On 8 May 2018 Facebook confirmed that it is
opening a new blockchain group[51] which will be headed by David Marcus who previously was in charge
of Messenger. According to The Verge Facebook is planning to launch its own cryptocurrency for facilitating
payments on the platform.[52]
Smart contracts
Main article: Smart contract
Blockchain-based smart contracts are proposed contracts that could be partially or fully executed or enforced
without human interaction.[53] One of the main objectives of a smart contract is automatedescrow. An IMF staff
discussion reported that smart contracts based on blockchain technology might reduce moral hazards and
optimize the use of contracts in general. But "no viable smart contract systems have yet emerged." Due to the
lack of widespread use their legal status is unclear.[54][55]
Financial services
Major portions of the financial industry are implementing distributed ledgers for use in banking,[56][57][58] and
according to a September 2016 IBM study, this is occurring faster than expected.[59]
Banks are interested in this technology because it has potential to speed up back office settlement systems.[60]
Banks such as UBS are opening new research labs dedicated to blockchain technology in order to explore how
blockchain can be used in financial services to increase efficiency and reduce costs. [61][62]
Berenberg, a German bank, believes that blockchain is an "overhyped technology" that has had a large number
of "proofs of concept", but still has major challenges, and very few success stories. [63]
Video games
A blockchain game CryptoKitties, launched in November 2017.[64] The game made headlines in December
2017 when a cryptokitty character - an in-game virtual pet - was sold for more than US$100,000.
[65]
CryptoKitties illustrated scalability problems for games on Ethereum when it created significant congestion
on the Ethereum network with about 30% of all Ethereum transactions being for the game.[66]
Cryptokitties also demonstrated how blockchains can be used to catalog game assets (digital assets).[67]
Supply chain
There are a number of efforts and industry organizations working to employ blockchains in supply
chain logistics and supply chain management.
The Blockchain in Transport Alliance (BiTA) works to develop open standards for supply chains. [citation needed]
Everledger is one of the inaugural clients of IBM's blockchain-based tracking service. [68]
Walmart and IBM are running a trial to use a blockchain-backed system for supply chain monitoring — all
nodes of the blockchain are administered by Walmart and are located on the IBM cloud.[69]
Hyperledger Grid develops open components for blockchain supply chain solutions. [70][71]
Other uses
Blockchain technology can be used to create a permanent, public, transparent ledger system for compiling data
on sales, tracking digital use and payments to content creators, such as wireless users [72] or musicians.[73] In
2017, IBM partnered with ASCAP and PRS for Music to adopt blockchain technology in music distribution.
[74]
Imogen Heap's Mycelia service has also been proposed as blockchain-based alternative "that gives artists
more control over how their songs and associated data circulate among fans and other musicians." [75][76]
New distribution methods are available for the insurance industry such as peer-to-peer insurance, parametric
insurance and microinsurance following the adoption of blockchain.[77][78] The sharing economyand IoT are also
set to benefit from blockchains because they involve many collaborating peers.[79] Online voting is another
application of the blockchain.
Types
Currently, there are at least four types of blockchain networks — public blockchains, private
blockchains, consortium blockchains and hybrid blockchains.
Public blockchains
A public blockchain has absolutely no access restrictions. Anyone with an Internet connection can
send transactions to it as well as become a validator (i.e., participate in the execution of a consensus protocol).
[85][self-published source?]
Usually, such networks offer economic incentives for those who secure them and utilize some
type of a Proof of Stake or Proof of Work algorithm.
Some of the largest, most known public blockchains are the bitcoin blockchain and the Ethereum blockchain.
Private blockchains
A private blockchain is permissioned.[38] One cannot join it unless invited by the network administrators.
Participant and validator access is restricted.
This type of blockchains can be considered a middle-ground for companies that are interested in the
blockchain technology in general but are not comfortable with a level of control offered by public networks.
Typically, they seek to incorporate blockchain into their accounting and record-keeping procedures without
sacrificing autonomy and running the risk of exposing sensitive data to the public internet. [citation needed]
Hybrid blockchains
A hybrid blockchain[86] simply explained is a combination between different characteristics both public and
private blockchains have by design. It allows to determine what information stays private and what
information is made public. Further decentralization in relation to primarily centralized private blockchains can
be achieved in various ways. Instead of keeping transactions inside their own network of community run or
private nodes, the hash (with or without payload) can be posted on completely decentralized blockchains such
as bitcoin. Dragonchain uses Interchain[87] to host transactions on other blockchains. This allows users to
operate on different blockchains, where they can selectively share data or business logic. Other blockchains
like Wanchain use interoperability mechanisms such as bridges.[88][89] By submitting the hash of a transaction
(with or without the sensitive business logic) on public blockchains like bitcoin or Ethereum, some of
the privacy and blockchain concerns are resolved, as no personal identifiable information is stored on a public
blockchain. Depending on the hybrid blockchain its architecture, multicloud solutions allow to store data in
compliance with General Data Protection Regulation and other geographical limitations while also leveraging
bitcoin's global hashpower to decentralize transactions.
