Blockchain
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Created by Min Sung Park, Sang Hyun Park, Yigu Zhou, and Ruixuan Wang


What is Blockchain?1

Blockchain is a new application mode of computer technology such as distributed data storage, point-to-point transmission, consensus mechanism, and encryption algorithm.
Blockchain is an important concept of Bitcoin. It is essentially a de-mediated database. At the same time, as the underlying technology of Bitcoin, it is a string of data generated by cryptography. Each data is generated. The block contains information about a Bitcoin network transaction that is used to verify the validity of its information (anti-counterfeiting) and to generate the next block.

  • Blockchain is the technology behind cryptocurrencies like Bitcoin and Ether (the currency of Ethereum).
  • It allows value exchange without the need for trust or a central authority.
  • It is essentially a de-mediated database.
  • It is a string of data generated by cryptography. Each data is generated.
  • The block contains information about a Bitcoin network transaction that is used to verify the validity of its information (anti-counterfeiting) and to generate the next block.

1. How it works

It allows value exchange without the need for trust or a central authority. Imagine you and I bet $50 on tomorrow’s weather in San Francisco. I bet it will be sunny, you that it will rain. Today we have three options to manage this transaction: We can trust each other. Rainy or sunny, the loser will give $50 to the winner. If we are friends, this could be a good way of managing it. However, friends or strangers, one can easily not pay the other.
We can turn the bet into a contract. With a contract in place both parties will be more prone to pay. However, should either of the two decide not to pay, the winner will have to pay additional money to cover legal expenses and the court case might take a long time. Especially for a small amount of cash, this doesn’t seem like the optimal way to manage the transaction. We can involve a neutral third party. Each of us gives $50 to a third party, who will give the total amount to the winner. But hey, she could also run away with all our money. So we end up with one of the first two options: trust or contract. Neither trust nor contract is an optimal solution: We can’t trust strangers, and enforcing a contract requires time and money. The blockchain technology is interesting because it offers us a third option which is secure, quick, and cheap2.

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1.1 Digital Currency

Digital currency is a type of currency available in digital form (in contrast to physical, such as banknotes and coins). It exhibits properties similar to physical currencies, but can allow for instantaneous transactions and borderless transfer-of-ownership.3

1.2 Purpose

It is a decentralized, distributed and public 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 consensus of the network4.

1.3 Advantages and Disadvantages

Advantages5
Greater transparency
Enhanced security
Improved traceability
Increased efficiency and speed
Reduced costs

Disadvantages6
Complexity
Network size
Transaction costs, network speed
Human error
Unavoidable security flaw
Politics


2 History

2.1 Timeline7

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2.11 1991

  • Stuart Haber and W. Scott Stornetta describe the first work on a cryptographically secured chain of blocks.
    • Implement a system where document timestamps could not be tampered with.

2.12 1992

  • Bayer, Haber and Stornetta incorporated Merkle trees to the design, which improved its efficiency by allowing several document certificates to be collected into one block.

2.13 2008

  • Satoshi Nakamoto conceptualize the first blockchain

*Improved the design using a Hashcash-like method to add blocks to the chain without requiring them to be signed by a trusted party.

  • Published a white paper called “Bitcoin: A Peer to Peer Electronic Cash system.
    • Introduces the Bitcoin world, which is the first application of blockchain.

2.14 2009

January 2009

  • The first collection of transactions (the “Genesis” block) is created, or “mined”.
    • Validated a crucial concept of the blockchain.
  • The first Bitcoin transaction takes place between Hai Fineney and Satoshi Nakamoto.
    • Milestone shows that blockchaining idea works.

October 2009

  • #bitcoin-dex is registered as a discussion topic on Freenode IRC
    • IRC: an open source project forum.
  • The conversation grows

October 31 2009

  • “The Bitcoin Market” is established and allows people to exchange paper money for Bitcoin.
    • The public begins to recognize it as a digital currency.

2.15 2011

February 9, 2011

  • BTC continues to increase in value and reaches parity with USD.
    • $1 USD = 1 BTC
    • $31.91 USD = 1 BTC (June)

February 27, 2011

  • Bitcoin Magazine launches.
  • More People started to talk about Bitcoin

2.16 2013

March 28, 2013

  • BTC market cap surpasses $1B USD.

10x growth in less than 3 years!

Blockchain is to Bitcoin, what the Internet is the Email.8

  • As Bitcoin reaches critical mass, companies and technologists realize that the underlying technology, blockchain, has potential far beyond Bitcoin.
  • Since 2013, more people shifted their attention from Bitcoin to blockchain, as industries recognize the boundless other applications of the technology.

A blockchain is simply a shared, distributed ledger.

  • The words “block” and “chain” were originally separately used in the white paper but were eventually used as a single word.
  • There are more than one blockchain: the bitcoin blockchain, the ethereum blockchain, and many private blockchains.

December 2013

  • Vitalik Buterin releases a white paper on “Ethereum Project”
    • A blockchain platform with the ability to build decentralized applications:
      • small contracts.
  • Funded by a crowd sale in 2014.
    • Unlock a new level of functionality for blockchains.

2.17 2014

  • Blockchain technology start-ups emerge to introduce blockchain to enterprise companies.
    • Gem
    • R3
      • forms a consortium of over 40 legacy financial groups to explore and implement blockchain technology.

2.18 2015

  • Blythe Masters, previous CFO of JP Morgan joins Digital Asset Holdings.
    • Represents Wall Street’s embrace of blockchain.
  • NASDAQ commits to a blockchain trial.
    • Signals enterprise level validation for the use of blockchains within finance.

2.19 2016

  • Gem launches Gem Health Network with Philips Blockchain Lab in April.
    • Connect the industry using blockchain tech.
  • In October, the world’s first blockchain centric healthcare conference: Distributed Health takes place.
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3 Structure

3.1 Introduction

  • Structurally, a blockchain system is a set of blocks and chains. Specifically, the basic components of this system are interconnected blocks, which contain information, and the chains, the construction of which follows the principle of openness, decentralization, accessibility, and security. Furthermore, three main types of blockchain have their differences and characteristics. Thus, a blockchain system has a structure of a chain of interconnected blocks with information that have own particular system as well as a perspective for the future development and use.

3.2 System: Blocks and Chains

3.21 Blocks

  • The basic component of a blockchain is a block - data (information) connected in a chain. If the blockchain is a single system, its components or parts of this system are the blocks, to which transaction data is recorded, and they are interconnected by means of hashes9. Therefore, the hash code of a previous block is stored in the header of each subsequent block. Moreover, all blocks recorded in the blockchain cannot be changed. According to Laurence, the block includes such components as address, or a public key generated by an asymmetric encryption algorithm (for example, RSA) that is based on a private key invented by a user, and date and time, or the moment when the block is created (the transaction also has the date and time of creation). Finally, information is a message, amount of money (cryptocurrency), documents, program code (smart contracts), and so on.
  • Each block consists of a head, in which service information is stored, and payload, or the actual transaction records. The block header (head) contains such information as block version, date and time of the block creation, block hash cod, and hash code of the previous block. Furthermore, other components of the head are hash code of all transactions in the block and special parameters nonce and bits that are written during mining. To understand the code, it is important to discover hashes. The hash code of the block header connects the previous block followed in the blockchain chain and it is recorded as the hash code of the previous block in the next header.
  • The header also contains the hash code of transactions for the current block. Furthermore, the header is calculated using an algorithm known as a Merkle tree, or a binary hash tree. In addition, payload block transactions are recorded in the bitcoin blockchain. The transaction itself has the form: From <address 1> send <N> bitcoins to <address 2>. In fact, the transaction recorded in the blockchain block is more complicated, since the Bitcoin protocol operates with such concepts as Inputs (In) and Outputs (Out). The former are transactions that replenish a Bitcoin address, while the latter are sums that are transferred to other Bitcoin addresses.

3.22 Chains

  • All blocks are lined up in a chain and interconnected. To create a new block, it is necessary to read out the information from old blocks sequentially. The block chain allows tracking as well as evaluating the path of change information, thus verifying the correctness of data10. All data in the system is protected. The chain in a blockchain is securely encrypted, which opens the way for reliable and open information. However, in order to view the data, one needs to verify ownership of this or that transaction. Therefore, a special key is used to identify the user.
  • The security and reliability of a blockchain are built on the key. This key simplifies the process of verifying the correctness and validity of information11. The cryptographic key itself is a group of letters and numbers, the calculation of which is performed by using a specially created algorithm called a hash function. At the same time, the user has only one key that has two different properties. Thus, having a key, the user is not able to find the primary (source) information, so it is impossible to pick another package of data that allows a person to create the same key. The presence of keys still does not mean anything. A person with a key cannot change the system or influence another user. However, indeed, the key secures both information (blocks and chain) and the user.

3.3 Principles: Network, Decentralization and Openness

3.31 Network

  • The blockchain structure uses a peer-to-peer network (P2P) that is based on the equality of its participants. Often, there are no dedicated servers in such a network, and each node is a client and a server at the same time. Unlike the client-server architecture, such an organization of work allows the network to be maintained at any number and any combination of available nodes. Network members are called peers. The founder of the Bitcoin as well as Blockchain technologies Satoshi Nakamoto describes the main moments of its network:
  • New transactions are broadcast to all nodes and when a node finds a proof-of-work, it broadcasts the block to all nodes; nodes accept the block only if all transactions in it are valid and not already spent; nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash12.

Moreover, when connecting, a new client contacts the tracker that contains lists of connected nodes. Further, peer networks are used for distributed computing. In this case, the complex task is divided into many small ones that are solved by the network participants and then the results are connected into a single whole.

3.32 Decentralization

  • Block information is stored on all nodes in the network, which eliminates the need for a single centralized transaction management. Any transaction information can be verified by anyone as there are no commercial secrets and all transactions are visible to everyone, so checking the sending of funds is not a problem13. Decentralization also means that network members are equal and they can exchange data directly. Network decentralization allows data transfer between entities from different countries, without any intermediaries or regulators. Therefore, decentralization allows each user to feel independent.

3.33 Openness

  • Although the blockchain offers its users the highest level of anonymity, this structure remains open and transparent. Absolutely all data on the blockchain is publicly available, and everyone can learn about the basic information of a particular block, for example, that a certain amount of money has been transferred through the system14. This information is necessary for analysis, statistics, and observations of the system. However, only people who directly participate in it can see detailed information about a transaction.

3.4 Types of Blockchain: Public, Consortium and Private

  • Blockchain is divided into three main types such as public blockchain network, or Bitcoin, consortium blockchain, such as Quorum, and private blockchain such as the Hijro global trading platform. Each type of blockchain has its features as well as strengths and weaknesses.

3.41 Public

  • Public networks are usually rather large and decentralized. Anyone can participate in their work at any level, which implies that users can maintain the work of a complete node, mine cryptocurrency, trade tokens, or record new data15. These networks usually provide better protection and immutability than private or exclusive ones. However, public networks work, as a rule, more slowly, and their operation is more expensive. They also have strict limits on the size of data stored in the records.

3.42 Consortium

  • This type of blockchain is open to the general public, but not anyone can have access to its network. Therefore, the participation in this type of blockchain is controlled. The procedure of access is controlled by selected nodes. This approach simplifies project scaling and increases transaction volume. Consortium networks can work rather quickly with a short transaction confirmation time, and usually, they allow storing a larger amount of data in the recording in comparison with public networks.

3.43 Private

  • These networks are used by trusted parties, and they can be completely invisible to the general public. Most private networks do not use cryptocurrency and do not provide immutability and security unlike decentralized networks do16. The amount of data stored in a recording can be unlimited. However, there are also hybrids of these three main types of blockchain networks. Therefore, each user finds the necessary balance between security, controllability, scalability, and data storage, so anyone can choose the appropriate type of blockchain.

4 Blockchain Problems

4.1 Environmental Cost

Blockchain relies on encryption which requires a large amount of computing power. In 2017, Bitcoin network required as much energy as what was used by 159 countries. Despite the environmental cost, blockchain can significantly increase transparency, efficiency, and accountability of environmental projects17.

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4.11 Foodtrax

An application used to make the supply chain more transparent

4.12 Peer to Peer Blockchain

Peer to peer blockchain based energy system can be used to solve inefficiency in energy distribution.

4.13 Carbon Footprint

Products using blockchain can measure carbon footprint. This way the exact amount can be calcuated to be taxed (carbon tax). This will encourage people to buy products that are more environmentally friendly.

4.2 Lack of Regulation

There are several problems with value-based blockchain networks such as bitcoin.

1. It has an unstable environment. We are not able to figure out the exact owner of a specific Bitcoin address. Unlike banks, it does not require a 3rd party to set up the address. It becomes even more difficult to track down the ownership of bitcoin if a person performs several exchanges. For example, if a person buys ripple coin using the bitcoin, then buys ethereum coin using those ripple coin then buys back bitcoin with those ethereum coin, it because too complicating and difficult to track down the ownership of the bitcoin used first to make the purchase18.

2. Scams and market manipulations are common
Refer to this external link to learn about common scams

3) Online wallet can be hacked.

4.21 In the United States

The states remain free to introduce their own rules and regulations. New York was the first state to regulate virtual currency companies through state agency rulemaking. Several Open Blockchain Centers are open to promote public awareness about blockchain technology.

4.211 Tax

This is the most difficult matter. Tax implications of cryptocurrency are yet to be revised. People are not sure about how to tax tokens received via airdrops.

4.22 Things to Consider

1) Clarify how crypto exchanges and initial coin offering should be handled.
2) Regulations in the case of exchanges will help decrease vulnerability in using private keys (bitcoin addresses)
3) Emphasises and regulations that focus on the increase in accountability over hacks and breaches
4) Security measurements should be utilized to create standards of safety19

4.3Complexity

Blockchain technology is complex. People are not able to appreciate the benefits due to its complexity. One of the biggest benefits is that blockchain can .replace the middlemen facilities that provide financial services and it can clear payments and also prevent fraud. However, people don’t put in the effort to understand this technology partially because banks already provide that service at a low cost. There is a lack of trust among users because blockchain is still in the process of improving and developing20.


5 Cases involving Blockchain Technology

5.1 Healthcare

Medical records are disorganized, scattered around and at time incorrect. This being the case, hospitals often work with this inconsistent data and the database can be hacked easily. One of the best solutions to this is to use blockchain technology. Projects such as MedRec are using blockchain as a way to facilitate data sharing while providing authentication and maintaining confidentiality. Blockchain technology system can be used to store clinically relevant patient data which can be accessed whenever but access is only granted to those who are medically authorized and only for a short duration. Additionally, its convenient as when patients move between healthcare providers, their data won’t be scattered across all different places21.

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5.2 Railway

Blockchain technology is used to improve the speed of operation. In Russia, rail operator Novotrans is using blockchain to record data pertaining to repair request, inventory and other matters pertaining to their operations. This will help to keep records of accurate data, avoid data corruption and tampering. Overall, implementing blockchain technology will cut down processing time while sharing reliable information22.
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5.3 Supply Chain

Blockchain technology is used to improve food tracking and safety. It makes the process easier to verify that food is safe to consume. Implementing blockchain technology will help retailers and distributors see and validate with the certainty of where the food was grown, handled, stored and inspected, and the route it took to be put in the store for customers. It will help to avoid any misunderstanding or doubts from the customers23.
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5.31 China

Companies such as IBM, Walmart, and JB.com are launching a Blockchain Food Safety Alliance in China to help customers know what product they are consuming24.

5.32 Fishing

Blockchain is also used to support sustainable fishing. It provides “traceability.” The blockchain technology will help to tell that fish sold at the market is caught legally and sustainably. It will further show us whether safe labor conditions are met throughout the supply chain. Importantly, consumers, as well as the providers, are able to know the source of their food and products25.

5.4 Tourism

Blockchain technology is used to remove the middlemen.

5.41 Hawaii

Hawaii is attracting tourists by offering them the opportunity to pay for local goods and services using bitcoin and other cryptocurrencies. This would bring benefits to the tourists as commission fees are removed in the process26.

5.42 Beenest

Homesharing platform which directly connects users and home sharers.
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Direct link to Beenest Website

5.43 Locktrip

Direct marketplace for hotels. It is cheaper for customers to use this website to make reservations as they do not have to pay the commission fees.
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Direct link to Locktrip Website


6 Links to other interesting pages and a short explanation of what blockchain can do

6.1 How blockchain can improve web analytics

1) Lead to regulatory and operational analytics opportunities such as customer verification and fraud detection.
- Blockchain generated data is secure and cannot be forged.
- It is valuable as it is well structured, abundant and complete.
2) Using blockchain can help lower the cost to store huge data.
3) Can enable risk-free transaction at a very low cost. It can significantly decrease the time it takes to process a transaction.

Web Analytics

6.2 How blockchain can improve augmented reality

- Blockchain ensures data security.
- AR users are put on a secure platform to perform transactions that keep safe from fraud in the blockchain system.
- Help AR users create, exchange, and distribute 3D objects, environments, and experiences in the platform.

Augmented Reality

6.3 How blockchain can improve virtual world

- Facilitate the transparent and traceable exchange of value.
- Blockchain data can store VR data (cause a shift from DVDs, USB to a completely different new data storage system)
- Protection of copyrighted materials would be much easier.
- Remove third party: profits go directly to its creators.

Virtual World

6.4 How blockchain can improve virtual payments

- Improve security, speed and lower the cost.
- Banks can use blockchain to create efficient cash transfers.
- Send payments without having bank accounts
- Can speed up transactions for companies that have several invoices to proceed.

Virtual Payments

6.5 How blockchain can improve lifelogging

- Can capture and safely encode all mental performance, emotions, and subjective experiences onto the blockchain at a minimum for backup and this can be passed onto the next generation as a historical record.

Life-logging

6.6 Link to Mirror Worlds

Mirror Worlds

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