What is Blockchain
A blockchain (originally block chain) – is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block. A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. By design, blockchains are inherently resistant to modification of the data. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. Functionally, a blockchain can serve as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically."
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, identity management, transaction processing, and documenting provenance.
The first blockchain was conceptualised by Satoshi Nakamoto in 2008 and implemented the following year as a core component of the digital currency bitcoin, where it serves as the public ledger for all transactions. The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem, without the use of a trusted authority or central server. The bitcoin design has been the inspiration for other applications.
A blockchain is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.
This allows the participants to verify and audit transactions inexpensively. They are authenticated by mass collaboration powered by collective self-interests. The result is a 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.
Blockchains have been described as a value-exchange protocol. This blockchain-based exchange of value can be completed more quickly, more safely and more cheaply than with traditional systems. A blockchain can assign title rights because it provides a record that compels offer and acceptance.
1.1 Why is Blockchain so Important
Blockchain is growing in importance. Increasingly organisations have to explore what this revolutionary technology will mean for their business. Marc Andreessen from the well-known VC firm Andreessen Horowitz calls it as big an invention as the internet.
The possibilities of the Blockchain are enormous and it seems that almost any industry that deals with some sort of transaction, which would mean any industry, can and will be disrupted by the Blockchain. As a result, it is likely that many of these industries will face job losses since intermediaries will be needed a lot less.
Blockchains can be thought of as an automatically notarised ledger. They alleviate the need for a trust service provider and are predicted to result in less capital being tied up in disputes. Blockchains have the potential to reduce systemic risk and financial fraud. They automate processes that were previously time-consuming and done manually, such as the incorporation of businesses. In theory, it would be possible to collect taxes, conduct conveyancing and provide risk management with blockchains. Each cryptocurrency has its own features and particularities.
Major applications of blockchain include cryptocurrencies—including bitcoin, BlackCoin, Dash, and Nxt—and
Blockchain platforms such as Factom as a distributed registry,
Gems for decentralized messaging, MaidSafe for decentralized applications, Storj for a distributed cloud, and Tezos for decentralized voting.
Frameworks and trials such as the one at the Sweden Land Registry aim to demonstrate the effectiveness of the blockchain at speeding land sale deals.
The Republic of Georgia is piloting a blockchain-based property registry. The Ethical and Fair Creators Association uses blockchain to help startups protect their authentic ideas.
New distribution methods are available for the insurance industry such as peer-to-peer insurance, parametric insurance and microinsurance following the adoption of blockchain.
Banks are interested in this technology because it has potential to speed up back office settlement systems.
The sharing economy and IoT are also set to benefit from blockchains because they involve many collaborating peers.
Online voting is another application of the blockchain.
Blockchains are being used to develop information systems for medical records, which increases interoperability. In theory, legacy disparate systems can be completely replaced by blockchains.
Blockchains are being developed for data storage, publishing texts and identifying the origin of digital art.
1.2 Blockchain v Distributed Ledger systems
Simply put, a blockchain is a peer-to-peer network that timestamps records by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. On the other hand, a distributed ledger is a peer-to-peer network that uses a defined consensus mechanism to prevent modification of an ordered series of time-stamped records. All blockchains are distributed ledgers, but not all distributed ledgers are blockchains.
1.3 Blockchain – The Big Wins
The Big Four
Each of the Big Four accounting firms is testing blockchain technologies in various formats. Ernst and Young has provided digital wallets to all (Swiss) employees, has installed a bitcoin ATM in their office in Switzerland, and accepts bitcoin as payment for all its consulting services. Marcel Stalder, CEO of Ernst and Young Switzerland stated "We don’t only want to talk about digitalization, but also actively drive this process together with our employees and our clients. It is important to us that everybody gets on board and prepares themselves for the revolution set to take place in the business world through blockchains, smart contracts and digital currencies." PwC, Deloitte, and KPMG have taken a different path from Ernst & Young and are all testing private blockchains.
National Currencies
e-Dinar is Tunisia national currency which was the first state currency using blockchain technology in the world.
eCFA is Senegal blockchain-Based National Digital currency.
Non profit organization
Level One Project from the Bill & Melinda Gates Foundation aims to use blockchain technology to help the two billion people worldwide who lack bank accounts.
Building Blocks project from The U.N.'s World Food Program aims to make WFP’s growing cash-based transfer operations faster, cheaper, and more secure. ‘Building Blocks’ commenced field pilots in Pakistan in January 2017 that will continue throughout Spring.
Decentralized networks
Bitnation is the world's first operational Decentralized Borderless Voluntary Nation, a Blockchain Powered Jurisdiction.
The DAO (organization) was a digital decentralized autonomous organization and a form of investor-directed venture capital fund.
Backfeed project develops a distributed governance system for blockchain-based applications allowing for the collaborative creation and distribution of value in spontaneously emerging networks of peers.
The Alexandria project is a blockchain-based Decentralized Library.
Tezos is a blockchain project that governs itself by voting of its token holders.
Bitcoin blockchain performs as a cryptocurrency and payment system. Ethereum blockchain added smart contract system on top of the bitcoin blockchain.
Tezos blockchain will add an autonomy system - a decentralized code Development function on top of both Bitcoin and Ethereum blockchains.
Commercial offerings
Distributed ledgers and other blockchain-inspired software are being developed by commercial organizations for various applications:
Deloitte and ConsenSys announced plans in 2016 to create a digital bank called Project ConsenSys.
R3 connects 42 banks to distributed ledgers built by Ethereum, Chain.com, Intel, IBM and Monax.
Microsoft Visual Studio is making the Ethereum Solidity language available to application developers.
SafeShare Insurance offers blockchain-based insurance for the sharing economy, underwritten by Lloyd's of London.
A Swiss industry consortium, including Swisscom, the Zurich Cantonal Bank and the Swiss stock exchange, is prototyping over-the-counter asset trading on a blockchain-based Ethereum technology.
Context Labs, a company developing blockchain enabled platforms
Digital Asset Holdings, led by CEO Blythe Masters
IBM blockchain offering announced March 20, 2017
1.5 How Does the Blockchain Work?
Simply put, the Blockchain is a shared single version of the truth of anything digital. It is a database technology, a distributed ledger that maintains and ever growing list of data records, which are decentralised and impossible to tamper with. The data records, which can be a Bitcoin transaction or a smart contract or anything else for that matter, are combined in so-called blocks. In order to add these blocks to the distributed ledger, the data needs to be validated by 51% of all the computers within the network that have access to the Blockchain.
The validation is done via cryptography, which means that a mathematical equation has to be solved. Solving the mathematical equation is difficult and requires a lot of computing power. However, once it is solved it is immediately clear that the answer is correct. This can be compared to a crossword puzzle, which can be very difficult to solve, but once completed you immediately know that it is done correctly.
Once the validation is done, the Block will receive a timestamp and a so-called hash. This hash is then used to create the next block in the chain. If even one bit in the block changes, the hash will change completely and as a result, all subsequent blocks in the chain will change. Such a change has to be validated again by 51% of all the nodes in the network, which will not happen because they don’t have an incentive to work on ‘old’ blocks in the chain. Not only that, the blockchain keeps on growing, so you would require a tremendous amount of computing power to achieve that, which is extremely expensive. So it is simply not worth it to change any data. As a result, it is nearly impossible to change data that has been recorded on the Blockchain.
The result is that peer-to-peer transactions become possible, without the need for a centralised certifying authority, such as a bank, which usually takes a small commission to carry out the work. If third parties are no longer necessary and organisations or consumers can do transactions peer-to-peer, which are also processed nearly instantly, that is a paradigm shift and that’s why the Blockchain is so important.
Of course, there is a lot more to the Blockchain than the brief description I have provided here. There are public and private Blockchains or Permissioned or Permissionless Blockchains. There are a wide variety of applications possible on the Blockchain, ranging from shopping, voting or renting out your house/boat/car/office to reputation systems.
There are many different Blockchains (Bitcoin Blockchain, Ehtereum, Hyperledger, etc.) or cryptocurrencies (Bitcoin, Ether, Steem Dollars, etc.) and marketplaces to trade these cryptocurrencies. I’ll leave that for another blog post.
For now, the below infographic made by PWC, gives a good visual overview of what the Blockchain is and what the benefits are:
1.6 Adoption by Governments
The blockchain has started to receive favourable attention and application across the global, here are some government that have started to initiate Blockchain powered solution (I have gather this list from wikipedia):
Canada
• The Bank of Canada have explored the possibility of creating a version of its currency on the blockchain.
• The Bank of Canada teamed up with the nation’s five largest banks — and the blockchain consulting firm R3 — for what was known as Project Jasper. In a simulation run in 2016, the central bank issued CAD-Coins onto a blockchain similar Ethereum. The banks used the CAD-Coins to exchange money the way they do at the end of each day to settle their master accounts.
China
• A deputy governor at the central bank of China, Fan Yifei, wrote that "the conditions are ripe for digital currencies, which can reduce operating costs, increase efficiency and enable a wide range of new applications." According to Fan Yifei, the best way to take advantage of the situation is for central banks to take the lead, both in supervising private digital currencies and in developing digital legal tender of their own.
Ecuador
• A law passed by the National Assembly of Ecuador gives the government permission to make payments in electronic currency and proposes the creation of a national digital currency. "Electronic money will stimulate the economy; it will be possible to attract more Ecuadorian citizens, especially those who do not have checking or savings accounts and credit cards alone. The electronic currency will be backed by the assets of the Central Bank of Ecuador," the National Assembly said in a statement. In December 2015, Sistema DE Dinero Electrónico ("electronic money system") was launched, making Ecuador the first country with a state-run electronic payment system.
Germany
• The German central bank is testing a functional prototype for the blockchain technology-based settlement of securities and transfer of centrally-issued digital coins.
Netherlands
• The Dutch central bank is experimenting with a bitcoin-based virtual currency called “DNBCoin”.
Russia
• Government-controlled Sberbank of Russia owns Yandex.Money - electronic payment service and digital currency of the same name.
South Korea
• South Korea plans national digital currency using a Blockchain. The chairman of South Korea’s Financial Services Commission (FSC), Yim Jong-yong, announced that his department will "Lay the systemic groundwork for the spread of digital currency." South Korea has already announced plans to discontinue coins by the year 2020.
Sweden
• Sweden is in the process of replacing all of its physical banknotes, and most of its coins by mid 2017. However the new banknotes and coins of the Swedish krona will probably be circulating at about half the 2007 peak of 12,494 kronor per capita. The Riksbank is planning to begin discussions of an electronic currency issued by the central bank to which "is not to replace cash, but to act as complement to it." Deputy Governor Cecilia Skingsley states that cash will continue to spiral out of use in Sweden, and while it is currently fairly easy to get cash in Sweden, it is often very difficult to deposit it into bank accounts, especially in rural areas. No decision has been currently made about the decision to create "e-krona". In her speech Skingsley states: "The first question is whether e-krona should be booked in accounts or whether the ekrona should be some form of digitally transferable unit that does not need an underlying account structure, roughly like cash." Skingsley also states that: "Another important question is whether the Riksbank should issue e-krona directly to the general public or go via the banks, as we do now with banknotes and coins." Other questions will be addressed like interest rates, should they be positive, negative, or zero?
Switzerland
• In 2016, a city government first accepted digital currency in payment of city fees. Zug, Switzerland added bitcoin as a means of paying small amounts, up to 200 SFr. , in a test and an attempt to advance Zug as a region that is advancing future technologies. In order to reduce risk, Zug immediately converts any bitcoin received into the Swiss currency.
• Swiss Federal Railways, government-owned railway company of Switzerland, sells bitcoins at its ticket machines.
UK
• The Chief Scientific Adviser to the UK government advised his Prime Minister and Parliament to consider using a blockchain-based digital currency.
• The chief economist of Bank of England, the central bank of the United Kingdom, proposed abolition of paper currency. The Bank has also taken an interest in bitcoin. 2016 it has embarked on a multi-year research programme to explore the implications of a central bank issued digital currency. The Bank of England has produced several research papers on the topic. One suggests that the economic benefits of issuing a digital currency on a distributed ledger could add as much as 3 percent to a country’s economic output.The Bank said that it wanted the next version of the bank’s basic software infrastructure to be compatible with distributed ledgers.
Ukraine
• The National Bank of Ukraine is considering a creation of its own issuance / turnover /servicing system for a blockchain-based national cryptocurrency. The regulator also announced that blockchain could be a part of a national project called "Cashless Economy".
1.7 Some Early Cryptocurrencies
Cryptocurrencies allow electronic money systems to be decentralized. There were more than 900 cryptocurrencies available over the internet as of 25 June 2017 and growing. New cryptocurrency can be created any time. By market capitalization, Bitcoin is currently the largest blockchain network, followed by Ethereum, Ripple and Litecoin. These include:
i. Bitcoin (2009), a peer-to-peer electronic monetary system based on cryptography.
ii. Litecoin (2011), originally based on the bitcoin protocol, intended to improve upon its alleged inefficiencies.
iii. Ripple (2013), a monetary system based on trust networks.
iv. Dogecoin (2013), a Litecoin-derived system meant by its author to reach broader demographics.
v. Nxt (2014), conceived as flexible platform to build applications and financial services around.
vi. Monero (2014), an open source cryptocurrency created in April 2014 that focuses on privacy, decentralisation and scalability
vii. Ethereum (2015) Supports Turing-complete smart contracts.
viii. Zcash (ZEC) - The first open, permissionless financial system employing zero-knowledge security.Follow @akibu77
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