What is blockchain? A blockchain is a democratized/decentralized database of records or public ledger of all digital events (transactions) that have been executed and shared among participating parties (miners and users). Each transaction in the public ledger is verified through a consensus mechanism by a majority of the participants in the system through a process called mining. And, once entered, information can never be erased nor even modified. The blockchain contains a certain and verifiable record of every single transaction ever made.
What is Blockchaing Technology? The underlying network infrastructure including the consensus algorithm that makes it possible to create a blockchain is referred to as Blockchain Technology.
What is cryptocurrency? A cryptocurrency is a form of digital asset (internet money) that enables secure peer to peer (p2p) transfer and store of values (make payment and store money) without the need for a trusted third party (like banks). Services are provided on the blockchain.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate the currency in question. Users can also buy the currencies from peers or from exchanges, then store and spend it using cryptographic wallets (the equivalent of a bank account).
Cryptocurrency was the first application of blockchain technology and currently enabling a multibillion-dollar global market of anonymous p2p transactions without any governmental control.
What are the most common cryptocurrencies? • Bitcoin: Bitcoin was the first cryptocurrency developed by anonymous Satoshi Nakamoto in 2009. It enables p2p transfer of money globally.
• Ethereum: Developed in 2015 by Vitalik Buterin. The platform enables the development of smart contracts and decentralize applications (dApp). Ether is the currency token used in the ethereum blockchain.
• Ripple: Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It is being used by some banks.
• Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions.
Blockchain technology: Is it a technological a revolution?
At present, digital economy is based on a centralized marketplace comprising of various trusted authorities. Our digital transactions rely heavily on trusting some centralized entities to tell us the truth—it can be a social network such as facebook telling us that our posts regarding our life events have been shared only with our friends, or it can be a bank telling us that our money has been delivered reliably to our dear ones in a remote country . The truth is: our life in the digital world is completely dependent on a third party entity for the security and privacy of our digital assets. Unfortunately, these third-party sources can be compromised, hacked or even manipulated. This is where the blockchain technology becomes a very useful solution. It has the potential to revolutionize the digital world because it uses a democratize/decentralized consensus mechanism where each and every digital event, can be verified at any time in the future without compromising the privacy of the digital assets and parties involved. Decentralization and anonymity are two core philosophies underlying the blockchain technology.
Advantages of blockchain technology
There are enormous and obvious advantages of blockchain technology. One key emerging use case of blockchain technology involves “smart contracts” which are basically computer programs that can automatically execute the terms of a contract when an immutable pre-configured condition in a smart contract among participating entities are met. Smart Property is another related concept which is regarding controlling the ownership of a property or asset via blockchain using Smart Contracts. The property can be physical such as car, house, smartphone etc. or it can be non-physical such as shares of a company.
Blockchain technology is also finding applications in wide range of areas—both financial and non-financial. The world’s biggest banks are looking for opportunities in blockchain to create a better for their customer. Non-Financial applications opportunities are also endless. We can envision putting proof of existence of all legal documents, health records, and loyalty payments in the music industry, notary, private securities and marriage licenses in the blockchain. By storing the fingerprint of the digital asset instead of storing the digital asset itself, the anonymity or privacy objective can be achieved. Blockchain technology has potential to become the new engine of growth in the digital economy where we are increasingly using the Internet to conduct digital transactions and share our personal data and life events.
How does blockchain work?
Internet transactions are exclusively tied to financial institutions serving as a trusted third party who process and mediate on any electronic transaction. The role of trusted third party is to safeguard, validate, and preserve transactions. But blockchain based transactions uses cryptographic proof for secure transactions via the internet instead of the age-long tradition of having to trust in a third party for two willing parties to execute a transaction via the Internet. Each transaction is protected through a digital signature. These transactions need to be verified for validity before it is recorded in the blockchain. Verifying node needs to ensure two things before recording any transaction on the blockchain:
a. Spender owns the cryptocurrency: Digital signature verification on the transaction.
b. Spender has sufficient cryptocurrency in his wallet: Checking every transaction against spender’s account (“public key”) in the ledger to make sure that he/she has sufficient balance in his account. Once these two conditions are verified over the network, transactions become available on the blockchain.
Are there existing markets for blockchain products and services?
Blockchain technology is finding applications in both financial and non-financial areas that traditionally relied on a trusted online entity to validate and safeguard digital database. At present two programs; blockchain and a smart contract can work together to trigger payments when a preprogrammed terms of the agreement is triggered. Smart Contracts are really revolutionizing the cryptocurrency world and will impact greatly on the way the world economy is organized in the coming years.
Smart contracts are contracts which are automatically enforced by computer protocols. Using blockchain technology, it has become much easier to register, verify and execute Smart Contracts. Open source companies like Ethereum and Codius are enabling Smart Contracts using blockchain technology. Many companies which operate on bitcoin and blockchain technologies are supporting Smart Contracts. Many cases where assets are transferred only on meeting certain conditions which require Lawyers to create a contract and Banks to provide Escrow service are gradually being replaced by Smart Contracts.
Ethereum has created a lot of excitement for its programmable platform capabilities. Ethereum blockchain gives anyone the ability to develop their own cryptocurrency, and use it to execute Smart Contracts. Ethereum itself has its own native cryptocurrency (ether) which is used to pay for the services on the platform. Ethereum is already powering a wide range of early applications in areas such as Governance, autonomous banks, keyless access, crowdfunding, financial derivatives trading, voting and settlement using smart contracts.
Furthermore, there are a number of blockchain projects currently in development to support a wide range of use cases outside cryptocurrency. Currently, there are three approaches in Industry to support other applications and also to overcome perceived limitations of Bitcoin blockchain:
Alternative Blockchains is a system of using blockchain algorithm to achieve distributed consensus on a particular digital event. They may share miners with a parent network such as Bitcoin’s (this is called merged mining). They have been suggested to implement applications such as DNS, SSL certification authority, file storage and voting.
Colored Coins is an open-source protocol that describes the class of methods for programmers to develop digital assets on top of Bitcoin blockchain by using its functionalities beyond digital currency.
Sidechains, on the other hand, are alternative blockchains which are backed by Bitcoins via Bitcoin contract–just the same way dollars and pounds used to be backed by Gold. One can possibly have thousands of sidechains “pegged” to Bitcoin, all with different characteristics and purposes–all of them taking advantage of scarcity and resilience guaranteed by the Bitcoin blockchain. The Bitcoin blockchain can in turn iterate to support additional features for the experimental sidechains–once they have been tried and tested.
Companies such as Amazon, Samsung, Overstock, UBS, Citi, IBM, and a host of other traditional tech giants are all venturing into alternative and novel uses of the blockchain for their own applications. Nine of the world’s biggest banks including Goldman Sachs Barclays and have recently joined forces with the New York based financial technology firm R3 to create a framework for using the blockchain technology in the financial market. This is the first time banks have come to work together to find applications of blockchain technology. Leading banks like JPMorgan, Bank Of Scotland, State Street, UBS, Royal Credit Suisse, and Commonwealth Bank of Australia have joined this initiative.
Blockchain as a disruptive technology
Private Securities: At present, it is very expensive to take a company public through initial public offering (IPO). A syndicate of banks must work to underwrite the deal in other to attract investors. The stock exchanges list company shares for the secondary market to function securely with trades settling and clearing in a timely manner. It is now becoming possible for companies to issue their shares (token) via the blockchain. These shares can then be purchased and sold in a secondary market hosted entirely on the blockchain.
Medici is being developed as a securities exchange that uses the Counterparty implementations of Bitcoin 2.0. The goal here is to create a cutting edge stock market. Counterparty is a protocol that implements traditional financial instruments as the self-executing smart contracts. These smart contracts facilitate, verify or enforce the negotiation of contract and eliminate the need for a physical document. This makes it unnecessary to use an intermediary, such as broker, exchange or bank.
Blockstream is an open source project with focus on sidechains (interoperable blockchains) to prevent fragmentation, security and other issues associated with alternative crypto-currencies (altcoins). Applications can range from registering securities, such as stocks, bonds and derivatives, to securing bank balances and mortgages.
Coinsetter is a New York based bitcoin exchange. It is working on a Project Highline, a method of using the blockchain to settle and clear financial transactions in T+ 10 minutes rather than the customary T+3 or T+2 days.
Augur is a decentralized prediction market that will allow users to buy and sell shares in anticipation of an event with the probability that a specific outcomes will occur. This can also be used to make financial and economic forecasts based on the “wisdom of crowds”.
Bitshares are digital tokens that reside on the blockchain and reference specific assets such as currencies or commodities. Bitshares token holders may have the unique feature of earning interest on commodities, such as gold, and oil, as well as dollars, euros and currency instruments.
Insurance Assets which can be uniquely identified by one or more identifiers which are difficult to destroy or replicate can be registered in blockchain. This can be used to verify ownership of an asset and also trace the transaction history. Any property (physical or digital such as real estate, automobiles, physical assets, or other valuables) can potentially be registered on the blockchain and the ownership and transaction history can be validated by anyone, especially insurers.
Everledger is a company which creates permanent ledger of diamond certification and the transaction history of the diamond using blockchain. The characteristics which uniquely identify the diamond such as height, width, weight, depth, color etc are hashed and registered in the ledger. The verification of diamonds can be done by insurance companies, law enforcement agencies, owners and claimants. Everledger provides a simple to use web service API for looking at a diamond, create/read/update claims (by insurance companies) and create/read/update police reports on diamonds.
What other areas outside financial sector can Blockchain Technology applicable?
Notary services: Verifying authenticity of the document can be done using blockchain and this usually eliminates the need for a centralized authority. The document certification service helps in Proof of Ownership (who authored it), Proof of Existence (at a certain time) and Proof of Integrity (not tampered) of the documents. Since it is counterfeit-proof and can be verified by independent third parties these services are legally binding. Using blockchain for notarization secures the privacy of the document and those who seek certification. By publishing proof of publication using cryptographic hashes of files into blockchain takes the notary timestamping to new level. It also eliminates the need for expensive notarization fees and ineffective ways of transferring documents.
Stampery is a company which can stamp email or any files using blockchain. It simplifies certifying of emails by just emailing them to an email specifically created for each customer. Law firms are using Stampery’s technology for a very cost effective way to certify documents.
Viacoin is the one of the companies which uses clearinghouse protocol for notary service .
Ascribe is another company which does authorship certification using blockchain. It also offers transfer of ownership service with attribution to the original author.
Blockchain in the Music Industry: The music industry has undergone a big change in last decade due to the growth of Internet and availability of a number of streaming services over the Internet. It is impacting everyone in the music industry-artists, record labels, publishers, songwriters and streaming service providers. The process by which music royalties are determined has always been a convoluted one, but the rise of the Internet has made it even more complex giving rise to the demand for transparency in the royalty payments by artists and songwriters.
This is where the blockchain can play a role by maintaining a comprehensive, immutable and distributed database of music rights ownership information in a public ledger. In addition to rights ownership information, the royalty split for each work, as determined by “smart contracts” could be added to the database. The “smart contracts” would define relationships between different stakeholders (addresses) and automate their interactions (see Appendix for more details).
Decentralized proof of existence of documents: Validating the existence or the possession of signed documents is very important in any legal solution. The traditional document validation models rely on central authorities for storing and validating the documents, which present some obvious security challenges. These models become even more difficult as the documents become older. The blockchain technology provides an alternative model to proof-of-existence and possession of legal documents. By taking advantage of the blockchain, a user can simply store the signature and timestamp associated with a legal document on the blockchain and validate same anytime using traditional blockchain mechanisms.
Proof of Existence is a simple service that allows anyone to anonymously and securely store online proof of existence of any document. This service simply stores the cryptographic digest of the file, linked to the time in which a user submits his/her document. It is to be noted here that cryptographic digest or fingerprint–not the actual document- is stored in blockchain, so user need not be worried about the privacy aspect. This allows a user to later certify the existence of a document that existed at a certain time. The major advantage of this service is security and privacy that allows a user to give decentralized proof of the document that can’t be modified by a third party. The existence of the document is validated using blockchain that does not depend on a single centralized entity. Proof of Existence webservice is available at https://proofofexistence.com/
Decentralized Storage Cloud file storage solutions such as Dropbox, Google Drive or One Drive are growing in popularity as a new way to store documents, photos, video and music files. Despite their popularity, cloud file storage solutions typically face challenges in areas such as security, privacy and data control. The major issue is that one has to trust a third party with one’s confidential files. Storj provides a blockchain based peer-to-peer distributed cloud storage platform that allows users to transfer and share data without relying on a third-party data provider. This allows people to share unused internet bandwidth and spare disk space in their personal computing devices to those looking to store large files in return for bitcoin based micropayments. Absence of a central control eliminates most traditional data failures and outages, as well as significantly increasing security, privacy and data control. Storj platform depends upon a challenge algorithm to offer incentives for users to properly participate in this network. In this way, Storj platform can periodically cryptographically check the integrity and availability of a file, and offer direct rewards to those maintaining the file.
Decentralized IoT: The IOT is increasingly becoming popular technology in both the consumer and the enterprise space. A vast majority of IOT platforms are based on a centralized model in which a hub controls the interaction between devices. However, this approach has become impractical for many scenarios in which devices need to exchange data between themselves autonomously. This specific requirement has lead to efforts towards decentralized IoT platforms. The blockchain technology facilitates the implementation of decentralized IoT platforms such as secured and trusted data exchange as well as record keeping. In such an architecture, the blockchain serves as the general ledger, keeping a trusted record of all the messages exchanged between smart devices in a decentralized IoT topology. IBM in partnership with Samsung has developed a platform ADEPT (Autonomous Decentralized Peer To Peer Telemetry) that uses elements of the bitcoin’s underlying design to build a distributed network of devices-a decentralized Internet of Things (IOT). ADEPT uses three protocols-BitTorrent ( file sharing), Ethereum ( Smart Contracts) and TeleHash ( Peer-To-Peer Messaging)-in the platform.
Filament is a startup that provides a decentralized IoT software stack that uses the bitcoin blockchain to enable devices to hold unique identities on a public ledger.
BlockChain based Anti-Counterfeit Solutions Counterfeiting is one of the biggest challenges in modern commerce. Existing solutions are rely on trusting on a third party who introduces a logical friction between merchants and consumers. The blockchain technology with its decentralized implementation and security capabilities provide an better alternative. One can envision a scenario, in which brands, merchants and marketplaces are part of a blockchain network with nodes storing information to validate the authenticity of products. With the use of this technology, stakeholders in the supply chain need not rely on a centralized entity for authenticity of the branded products.
BlockVerify provides blockchain based anti-counterfeit solutions that introduces transparency to supply chains. It is finding applications in pharmaceutical, luxury items, diamonds and electronics industries.
Blockchain and the Internet Namecoin is an alternative blockchain technology (with small variations) that is used to implement decentralized version of Domain Name Server (DNS) that is resilient to censorship. Current DNS servers are controlled by governments and large corporations, and could abuse their power to censor, hijack, or spy on your Internet usage. Using blockchain technology means DNS or phonebook of the Internet is maintained in a decentralized manner and every user can have the same phone book data on their computer.
Public Key Infrastructure (PKI) technology is widely used for centralized distribution and management of digital certificates. Every device needs to have root certificate of the Certification Authority (CA) to verify digital signature. While PKI have been widely deployed and incredibly successful, dependence on a CA makes scalability an issue.
The characteristics of the BlockChain can help address some of the limitations of the PKI by using Keyless Security Infrastructure (KSI). KSI uses cryptographic hash function, allowing verification to rely only on the security of hash functions and the availability of a blockchain.
Are there any risk associated with the adoption of blockchain technology?
BlockChain is a revolutionary breakthrough technology. As we described before, there are vast array of applications or problems that can be solved using BlockChain based technology. That spans from Financial (remittance to investment banking) to non-financial applications like Notary services. Most of these are radical innovations. As it happens with adoption with radical innovations, there are significant risks of adoption.
Behavior change: Change is constant, but there is always resistance to change. In the world of a non-tangible trusted third party, that BlockChain presents, customers need to get used to the fact that there electronic transactions are safe, secured and complete. The present day intermediaries like Visa or Mastercard ( in case of a credit cards ) will also go through change roles and responsibility. We envision that they will also invest and move their platforms to be BlockChain-based. They will continue to provide the customer relationship kind of services.
Scaling: Scaling of the current nascent services based on BlockChain presents a challenge.
Bootstrapping: Moving the existing contracts or business documents/frameworks to the new BlockChain based methodology presents a significant set of migration tasks that need to be executed. For example in case of Real Estate ownerships, the existing documents lying in County or Escrow companies need to be migrated to its equivalent BlockChain form. This may involve time and cost.
Government Regulations: In the new world of BlockChain-based transactions, Government may slow down the adoption by introducing new laws to monitor and regulate the industry for compliance.
Fraudulent Activities: Given the pseudonymous nature of BlockChain transactions, coupled with ease of moving valuables, bad actors may misuse this for fraudulent activities like money laundering and terrorism financing. That said, with enough regulations and technology support, law enforcement agencies will be able to monitor and prosecute them.
Quantum Computing : The basis of BlockChain technology relies on the very fact that it is mathematically impossible for a single party to game the system due to lack of needed compute power. But with the advent of Quantum Computers ( in future ), the cryptographic keys may be easy enough to crack through sheer brute force approach within a reasonable time. This will bring the whole system to its knee. The counter-argument would be for keys to become even stronger so that they may not be easy to crack.
To conclude, Blockchain is the technology backbone of Bitcoin. The decentralized ledger functionality coupled with security of BlockChain, makes it a very attractive technology to solve the current financial as well as non-financial business problems.
At present there are enormous interest in BlockChain based business applications and hence numerous Start-ups working on them. We see a future where there no monopoly in the transfer of value and where citizens of world are completely free economically and where businesses and governtments sit on top of the blockchain and that future has already started with blockchain revolution.
Israel Martins is a cryptocurrency researcher and trader since 2016, passionate about blockchain and other emerging technologies.