Blockchain: what it is and how it is used in finance

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If you have been following banking, investing, or cryptocurrency over the last ten years, you may have heard the term “blockchain,” the record-keeping technology behind the Bitcoin network.

KEY TAKEAWAYS:
  • Blockchain is a specific type of database.
  • It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together.
  • As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which makes the data chained together in chronological order.
  • Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions.
  • In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control rather, all users collectively retain control.
  • Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.

What is Blockchain?
Blockchain seems complicated, and it definitely can be, but its core concept is really quite simple. A blockchain is a type of database. To be able to understand blockchain, it helps to first understand what a database actually is.

A database is a collection of information that is stored electronically on a computer system. Information, or data, in databases is typically structured in table format to allow for easier searching and filtering for specific information. What is the difference between someone using a spreadsheet to store information rather than a database?

Spreadsheets are designed for one person, or a small group of people, to store and access limited amounts of information. In contrast, a database is designed to house significantly larger amounts of information that can be accessed, filtered, and manipulated quickly and easily by any number of users at once.

Large databases achieve this by housing data on servers that are made of powerful computers. These servers can sometimes be built using hundreds or thousands of computers in order to have the computational power and storage capacity necessary for many users to access the database simultaneously. While a spreadsheet or database may be accessible to any number of people, it is often owned by a business and managed by an appointed individual that has complete control over how it works and the data within it.

So how does a blockchain differ from a database?

Storage Structure
One key difference between a typical database and a blockchain is the way the data is structured. A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the “blockchain”. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.

A database structures its data into tables whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are chained together. This makes it so that all blockchains are databases but not all databases are blockchains. This system also inherently makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact timestamp when it is added to the chain.

Transaction Process

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Attributes of Cryptocurrency

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Decentralization
For the purpose of understanding blockchain, it is instructive to view it in the context of how it has been implemented by Bitcoin. Like a database, Bitcoin needs a collection of computers to store its blockchain. For Bitcoin, this blockchain is just a specific type of database that stores every Bitcoin transaction ever made. In Bitcoin’s case, and unlike most databases, these computers are not all under one roof, and each computer or group of computers is operated by a unique individual or group of individuals.

Imagine that a company owns a server comprised of 10,000 computers with a database holding all of its client's account information. This company has a warehouse containing all of these computers under one roof and has full control of each of these computers and all the information contained within them. Similarly, Bitcoin consists of thousands of computers, but each computer or group of computers that hold its blockchain is in a different geographic location and they are all operated by separate individuals or groups of people. These computers that makeup Bitcoin’s network are called nodes.

In this model, Bitcoin’s blockchain is used in a decentralized way. However, private, centralized blockchains, where the computers that make up its network are owned and operated by a single entity, do exist.

In a blockchain, each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, the data is the entire history of all Bitcoin transactions. If one node has an error in its data it can use the thousands of other nodes as a reference point to correct itself. This way, no one node within the network can alter information held within it. Because of this, the history of transactions in each block that make up Bitcoin’s blockchain is irreversible.

If one user tampers with Bitcoin’s record of transactions, all other nodes would cross-reference each other and easily pinpoint the node with the incorrect information. This system helps to establish an exact and transparent order of events. For Bitcoin, this information is a list of transactions, but it also is possible for a blockchain to hold a variety of information like legal contracts, state identifications, or a company’s product inventory.

In order to change how that system works, or the information stored within it, a majority of the decentralized network’s computing power would need to agree on said changes. This ensures that whatever changes do occur are in the best interests of the majority.

Transparency
Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes.

For example, exchanges have been hacked in the past where those who held Bitcoin on the exchange lost everything. While the hacker may be entirely anonymous, the Bitcoins that they extracted are easily traceable. If the Bitcoins that were stolen in some of these hacks were to be moved or spent somewhere, it would be known.

Is Blockchain Secure?
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height”. As of November 2020, the block’s height had reached 656,197 blocks so far.

After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block unless the majority reached a consensus to do so. That’s because each block contains its own hash, along with the hash of the block before it, as well as the previously mentioned time stamp. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.

Here’s why that’s important to security. Let’s say a hacker wants to alter the blockchain and steal Bitcoin from everyone else. If they were to alter their own single copy, it would no longer align with everyone else's copy. When everyone else cross-references their copies against each other, they would see this one copy stand out and that hacker's version of the chain would be cast away as illegitimate.

Succeeding with such a hack would require that the hacker simultaneously control and alter 51% of the copies of the blockchain so that their new copy becomes the majority copy and thus, the agreed-upon chain. Such an attack would also require an immense amount of money and resources as they would need to redo all of the blocks because they would now have different timestamps and hash codes.

Due to the size of Bitcoin’s network and how fast it is growing, the cost to pull off such a feat would probably be insurmountable. Not only would this be extremely expensive, but it would also likely be fruitless. Doing such a thing would not go unnoticed, as network members would see such drastic alterations to the blockchain. The network members would then fork off to a new version of the chain that has not been affected.

This would cause the attacked version of Bitcoin to plummet in value, making the attack ultimately pointless as the bad actor has control of a worthless asset. The same would occur if the bad actor were to attack the new fork of Bitcoin. It is built this way so that taking part in the network is far more economically incentivized than attacking it.

Bitcoin vs. Blockchain
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first real-world application.

The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party”.

The key thing to understand here is that Bitcoin merely uses blockchain as a means to transparently record a ledger of payments, but blockchain can, in theory, be used to immutably record any number of data points. As discussed above, this could be in the form of transactions, votes in an election, product inventories, state identifications, deeds to homes, and much more.

Currently, there is a vast variety of blockchain-based projects looking to implement blockchain in ways to help society other than just recording transactions. One good example is that of blockchain being used as a way to vote in democratic elections. The nature of blockchain’s immutability means that fraudulent voting would become far more difficult to occur.

For example, a voting system could work such that each citizen of a country would be issued a single cryptocurrency or token. Each candidate would then be given a specific wallet address, and the voters would send their token or crypto to whichever candidate's address they wish to vote for. The transparent and traceable nature of blockchain would eliminate the need for human vote counting as well as the ability of bad actors to tamper with physical ballots.

Blockchain vs. Banks
Banks and decentralized blockchains are vastly different. To see how a bank differs from blockchain, let’s compare the banking system to Bitcoin’s implementation of blockchain.

Blockchain vs. Banks

Hours open
Banks: Typical brick-and-mortar banks are open from 9:00 am to 5:00 pm on weekdays. Some banks are open on weekends but with limited hours. All banks are closed on banking holidays.
Bitcoin: No set hours; open 24/7, 365 days a year.

Transaction Fees
Banks:
• Card payments: This fee varies based on the card and is not paid by the user directly. Fees are paid to the payment processors by stores and are usually charged per transaction. The effect of this fee can sometimes make the cost of goods and services rise.
• Checks: can cost between $1 and $30 depending on your bank.
• ACH: ACH transfers can cost up to $3 when sending to external accounts.
• Wire: Outgoing domestic wire transfers can cost as much as $25. Outgoing international wire transfers can cost as much as $45.
Bitcoin: Bitcoin has variable transaction fees determined by miners and users. This fee can range between $0 and $50 but users have the ability to determine how much of a fee they are willing to pay. This creates an open marketplace where if the user sets their fee too low their transaction may not be processed.

Transaction Speed
Banks:
• Card payments: 24-48 hours
• Checks: 24-72 hours to clear
• ACH: 24-48 hours
• Wire: Within 24 hours unless international *Bank transfers are typically not processed on weekends or bank holidays
Bitcoin: Bitcoin transactions can take as little as 15 minutes and as much as over an hour depending on network congestion.

Know Your Customer Rules
Banks: Bank accounts and other banking products require "Know Your Customer" (KYC) procedures. This means it is legally required for banks to record a customer's identification prior to opening an account.
Bitcoin: Anyone or anything can participate in Bitcoin’s network with no identification. In theory, even an entity equipped with artificial intelligence could participate.

Ease of Transfers
Banks: Government-issued identification, a bank account, and a mobile phone are the minimum requirements for digital transfers.
Bitcoin: An internet connection and a mobile phone are the minimum requirements.

Privacy
Banks: Bank account information is stored on the bank’s private servers and held by the client. Bank account privacy is limited to how secure the bank's servers are and how well the individual user secures their own information. If the bank’s servers were to be compromised then the individual's account would be as well.
Bitcoin: Bitcoin can be as private as the user wishes. All Bitcoin is traceable but it is impossible to establish who has ownership of Bitcoin if it was purchased anonymously. If Bitcoin is purchased on a KYC exchange then the Bitcoin is directly tied to the holder of the KYC exchange account.

Security
Banks: Assuming the client practices solid internet security measures like using secure passwords and two-factor authentication, a bank account's information is only as secure as the bank's server that contains client account information.
Bitcoin: The larger the Bitcoin network grows the more secure it gets. The level of security a Bitcoin holder has with their own Bitcoin is entirely up to them. For this reason it is recommended that people use cold storage for larger quantities of Bitcoin or any amount that is intended to be held for a long period of time.

Approved Transactions
Banks: Banks reserve the right to deny transactions for a variety of reasons. Banks also reserve the right to freeze accounts. If your bank notices purchases in unusual locations or for unusual items they can be denied.
Bitcoin: The Bitcoin network itself does not dictate how Bitcoin is used in any shape or form. Users can transact Bitcoin how they see fit but should also adhere to the guidelines of their country or region.

Account Seizures
Banks: Due to KYC laws, governments can easily track people's banks accounts and seize the assets within them for a variety of reasons.
Bitcoin: If Bitcoin is used anonymously governments would have a hard time tracking it down to seize it.

How is Blockchain Used?
As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. But it turns out that blockchain is actually a reliable way of storing data about other types of transactions, as well.

Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For example, IBM has created its Food Trust blockchain to trace the journey that food products take to get to its locations.

Why do this? The food industry has seen countless outbreaks of e Coli, salmonella, listeria, as well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to find the source of these outbreaks or the cause of sickness from what people are eating.

Using blockchain gives brands the ability to track a food product’s route from its origin, through each stop it makes, and finally its delivery. If a food is found to be contaminated then it can be traced all the way back through each stop to its origin. Not only that, but these companies can also now see everything else it may have come in contact with, allowing the identification of the problem to occur far sooner, potentially saving lives. This is one example of blockchains in practice, but there are many other forms of blockchain implementation.

Banking and Finance
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, five days a week. That means if you try to deposit a check on Friday at 6 p.m., you will likely have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.

By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 minutes,2 basically the time it takes to add a block to the blockchain, regardless of holidays or the time of day or week. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to three days (or longer, if trading internationally), meaning that the money and shares are frozen for that period of time.

Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks. European bank Santander and its research partners put the potential savings at $15 billion to $20 billion a year. Capgemini, a French consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year4 through blockchain-based applications.

Currency
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is controlled by the Federal Reserve. Under this central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. In 2008, some of the banks that ran out of money were bailed out partially using taxpayer money. These are the worries out of which Bitcoin was first conceived and developed.

By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally.

Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound for those who have no state identification. Some countries may be war-torn or have governments that lack any real infrastructure to provide identification. Citizens of such countries may not have access to savings or brokerage accounts and therefore, no way to safely store wealth.

Healthcare
Health care providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy.

Records of Property
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a government employee at the local recording office, where it is manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.

This process is not just costly and time-consuming it is also riddled with human error, where each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanently recorded.

In war-torn countries or areas that have little to no government or financial infrastructure, and certainly no “Recorder’s Office”, it can be nearly impossible to prove ownership of a property. If a group of people living in such an area is able to leverage blockchain, transparent and clear timelines of property ownership could be established.

Smart Contracts
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.

Say, for example, a potential tenant would like to lease an apartment using a smart contract. The landlord agrees to give the tenant the door code to the apartment as soon as the tenant pays the security deposit. Both the tenant and the landlord would send their respective portions of the deal to the smart contract, which would hold onto and automatically exchange the door code for the security deposit on the date the lease begins. If the landlord doesn’t supply the door code by the lease date, the smart contract refunds the security deposit. This would eliminate the fees and processes typically associated with the use of a notary, third-party mediator, or attornies.

Supply Chains
As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of their products, along with such common labels as “Organic,” “Local,” and “Fair Trade.”

As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the path and safety of food throughout the farm-to-user journey.

Voting
As mentioned, blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the November 2018 midterm elections in West Virginia.Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounts or any real concern that fraud might threaten the election.

Advantages and Disadvantages of Blockchain
For all of its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, blockchain technology may very well see applications beyond those outlined above. But there are also some disadvantages.

Pros
  • Improved accuracy by removing human involvement in verification
  • Cost reductions by eliminating third-party verification
  • Decentralization makes it harder to tamper with
  • Transactions are secure, private, and efficient
  • Transparent technology
  • Provides a banking alternative and way to secure personal information for citizens of countries with unstable or underdeveloped governments

Cons
  • Significant technology cost associated with mining bitcoin
  • Low transactions per second
  • History of use in illicit activities
  • Regulation

Here are the selling points of blockchain for businesses on the market today in more detail.

Advantages of Blockchain

Accuracy of the Chain
Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. In order for that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers a near impossibility for a large and growing network the size of Bitcoin’s.

Cost Reductions
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification and, with it, their associated costs. Business owners incur a small fee whenever they accept payments using credit cards, for example, because banks and payment processing companies have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has limited transaction fees.

Decentralization
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.

Efficient Transactions
Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week, and 365 days a year. Transactions can be completed in as little as ten minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.

Private Transactions
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.

That is, when a user makes public transactions, their unique code called a public key, is recorded on the blockchain, rather than their personal information. If a person has made a Bitcoin purchase on an exchange that requires identification then the person’s identity is still linked to their blockchain address, but a transaction, even when tied to a person’s name, does not reveal any personal information.

Secure Transactions
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hashcode changes however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.

Transparency
Most blockchains are entirely open-source software. This means that anyone and everyone can view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin for security. This also means that there is no real authority on who controls Bitcoin’s code or how it is edited. Because of this, anyone can suggest changes or upgrades to the system. If a majority of the network users agree that the new version of the code with the upgrade is sound and worthwhile then Bitcoin can be updated.

Banking the Unbanked
Perhaps the most profound facet of blockchain and Bitcoin is the ability for anyone, regardless of ethnicity, gender, or cultural background, to use it. According to the world bank there are nearly 2 billion adults that do not have bank accounts or any means of storing their money or wealth.5 Nearly all of these individuals live in developing countries where the economy is in its infancy and entirely dependent on cash.

These people often earn little money that is paid in physical cash. They then need to store this physical cash in hidden locations in their homes or places of living leaving them subject to robbery or unnecessary violence. Keys to a bitcoin wallet can be stored on a piece of paper, a cheap cell phone, or even memorized if necessary. For most people, it is likely that these options are more easily hidden than a small pile of cash under a mattress.

Blockchains of the future are also looking for solutions to not only be a unit of account for wealth storage, but also to store medical records, property rights, and a variety of other legal contracts.

Disadvantages of Blockchain
While there are significant upsides to the blockchain, there are also significant challenges to its adoption. The roadblocks to the application of blockchain technology today are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours (read: money) of custom software design and back-end programming required to integrate blockchain to current business networks. Here are some of the challenges standing in the way of widespread blockchain adoption.

Technology Cost
Although blockchain can save users money on transaction fees, the technology is far from free. The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the bitcoin network is close to what Denmark consumes annually. Assuming electricity costs of $0.03~$0.05 per kilowatt-hour, mining costs exclusive of hardware expenses are about $5,000~$7,000 per coin.10

Despite the costs of mining bitcoin, users continue to drive up their electricity bills in order to validate transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivized to validate transactions.

Some solutions to these issues are beginning to arise. For example, bitcoin mining farms have been set up to use solar power, excess natural gas from fracking sites, or power from wind farms.

Speed Inefficiency
Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second (TPS). Although other cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 24,000 TPS.

Solutions to this issue have been in development for years. There are currently blockchains that are boasting over 30,000 transactions per second.

Illegal Activity
While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably the Silk Road, an online “dark web” drug marketplace operating from February 2011 until October 2013 when it was shut down by the FBI.

The website allowed users to browse the website without being tracked using the Tor browser and make illegal purchases in Bitcoin or other cryptocurrencies. Current U.S. regulations require financial service providers to obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations. This system can be seen as both a pro and a con. It gives anyone access to financial accounts but also allows criminals to more easily transact. Many have argued that the good uses of crypto, like banking the unbanked world, outweigh the bad uses of cryptocurrency, especially when most illegal activity is still accomplished through untraceable cash.

Regulation
Many in the crypto space have expressed concerns about government regulation over cryptocurrencies. While it is getting increasingly difficult and near impossible to end something like Bitcoin as its decentralized network grows, governments could theoretically make it illegal to own cryptocurrencies or participate in their networks.

Over time this concern has grown smaller as large companies like PayPal begin to allow the ownership and use of cryptocurrencies on its platform.

What's Next for Blockchain?
First proposed as a research project in 1991, blockchain is comfortably settling into its late twenties. Like most millennials its age, blockchain has seen its fair share of public scrutiny over the last two decades, with businesses around the world speculating about what the technology is capable of and where it’s headed in the years to come.

With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself at age twenty-seven, in no small part because of bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap with fewer middlemen.

As we prepare to head into the third decade of blockchain, it’s no longer a question of "if" legacy companies will catch on to the technology it's a question of "when".

(c) https://www.investopedia.com/terms/b/blockchain.asp
 
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Why Blockchain is a disruptive technology​

The year is 2035. You get behind the wheel, scan yourself biometrically, and check the status of your project.
It turns out that it's ready to ship, so you send the work to your international client, initiating automatic cross-border payment.
Virtually everything you've just done has been powered by blockchains in some way.
Welcome to the future!
At least, that's what many blockchain proponents think, and they probably aren't wrong.
Blockchain technology is still in its early stages, but combined with a similarly decentralized and disruptive Internet of things (IoT) it's about to become one of the most disruptive technologies in recent history.
In a broad sense, blockchain aims to make the world more straightforward by allowing you to rely on peer-to-peer trust instead of multiple intermediaries to verify the correctness of work.
Almost certainly, some new industries will appear and old ones will be eliminated – this is the essence of destruction.

What makes this technology disruptive?​

The term "Disruptive innovation" was first coined in 1995 by Clayton Christensen, and it is broadly defined as any technology or idea that changes an existing market or process by displacing old products or companies.
Good examples are digital media and streaming content, which has replaced CDs and DVDs; or Wikipedia, which has made encyclopedias largely obsolete.
By this metric, blockchains are extremely disruptive: most modern applications aim to replace some existing technology or process, especially by eliminating the need for trusted third parties.
However, not all new technologies meet the requirements.
As long as they don't trigger a significant change or move, they technically don't break anything.
Wikipedia became disruptive, but only after it became big enough and popular enough to be a viable alternative to encyclopedias.
Blockchains have started to be used in various ways in many industries, but they are not yet as scalable.
It would be more accurate to say that blockchains have a great destructive potential.
There are so many projects and ideas in the blockchain space right now that if even a small part of them is successful, we will see some big changes.

What exactly will the blockchain change?​

Blockchain is an extremely flexible technology, as evidenced by the fact that you can add it to almost anything and someone out there will think it's a good idea.
Selling kitties on the blockchain? Done. Diamonds on the blockchain? Sure. Cryptocurrencies developed around marijuana?
Just try googling "[industry name] blockchain" and you're almost guaranteed to get a hit.
Basically, anything that requires transactions and trust between multiple parties is a candidate for blockchain integration.
When you think about it, most industries pop into your head.

Blockchain + IoT: the double divide​

These may be the two biggest trends of the 2010s, and they're not really that different: blockchain is like IoT software and hardware.
IoT systems are usually decentralized, process a lot of data, and require shared trust between nodes.
Blockchains are largely designed for this type of environment: they are decentralized in nature, write data in a mathematically secure format, and require consensus between nodes to implement changes.
Public-key encryption helps you move data securely between nodes, and the transaction log tracks where each piece of data comes from, where it goes, when it's updated, and who updated it, ensuring scalability and security.
Smart contracts are also important in the IoT, as they can be used to automate transactions between systems.
A building automation system can automatically purchase additional energy from solar panels, for example, in a neighboring building, or a network of sensors embedded in cars and roads can send accident data to a blockchain-based insurance database, which can then initiate appropriate payments and account updates.
Such applications are definitely considered disruptive, as they involve quite a few intermediate steps.

So ... buy bitcoin?​

Money is just one area that blockchain has the potential to disrupt, and frankly, it's not as soon as you think.
We've had a long time to build relatively seamless Fiat currency transaction systems, and buying coffee with bitcoin still requires more effort than cash or a card.
At a deeper system level, however, blockchain creates a wave – it's just that its most practical applications tend to be the least likely to attract attention.
However, the more widely it is implemented, tested and designed, the more you will interact with them on a daily basis, regardless of whether you know something about it or not.
However, if you work as an intermediary of any kind, you can update your resume – or better yet, learn some blockchain skills – because your job may no longer exist for several years.
 

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Blockchain is the latest technology, the interest in which has grown along with the popularity of cryptocurrencies. Today it is widely discussed not only in the world of finance. They are already trying to use blockchain for storing and processing personal data and identification, in marketing and computer games. But what is blockchain? We parse it by letter.
Literally translated, a blockchain is a continuous chain of blocks. It contains all the records of transactions - even with tulip bulbs in the botanical garden. Unlike regular databases, you cannot change or delete these records, you can only add new ones.
If there are fewer tulips (they froze or were eaten by rodents), then the information in the ledger stores how many there were before. It is not edited or deleted, but a new record appears that there are fewer tulips and where they disappeared.
Blockchain is also called the technology of distributed ledgers, because the entire chain of transactions and the current list of owners are stored on their computers by many independent users. Even if one or more computers fail, the information will not be lost.
We have collected concepts that are often used when discussing blockchain. They will help you understand how distributed ledger technology works.

A - asset
Something of value: for example, money, property, securities, information. Assets can exist in the real world, such as an apartment or a car, or they can be completely digital.

T - transaction
When people transfer assets to each other, it is called a transaction.
Suppose John raised an unusually valuable tulip and decided to give (or sell) it to Anna. This will be the transaction.
Not only the asset itself can be transferred, but also the ownership rights to it from one owner to another. For example, John's tulip remained to grow in the botanical garden, but he decided to transfer the ownership rights to it to Anna. This is also a transaction.
And the main thing here is transaction accounting.

U - transaction accounting
Transaction accounting is the recording of all transfers of an asset or rights to it from one person to another. And here a key question arises: how reliable and confidential is the mechanism for confirming the transfer of rights?
John can solemnly present his friend with a postcard confirming that the tulip now belongs to her. Can send this postcard by mail or pass it on with a gardener. And most importantly, John must inform the botanical garden itself that Anna is now the new owner of the flower. And the corresponding record should appear in the botanical garden database.
Imagine now that a large book of flower owners in a botanical garden is hit by a flood. All records have disappeared. And the post office or the gardener lost the postcard. How can Masha now prove her property rights?
Unfortunately, this sometimes happens not only with flowers. Suppose you decide to transfer a hundred euros to a friend who has found himself without money abroad. Problems with bank systems, hacker attacks, fraud or employee errors can cause failure at any of these stages. This, of course, rarely happens, but it does happen. And then transaction records can disappear or change, and transactions can be suspended.
These operational risks are unavoidable if specific organizations maintain records and transaction records are kept in only one place. Blockchain technology mitigates such risks because it offers a distributed ledger-based accounting system.

R - distributed ledgers
In the blockchain, the owner register is not stored on the server of one organization. Its copies are simultaneously updated on many independent computers connected via the Internet.
In the case of John and Anna, it could be presented as follows: a dozen gardeners noted in their lists that the ownership of the tulip passed to Anna. Even if one or two of them lose or soil their notebooks, everyone else will have their notes.
As a result, in the blockchain, registries with data on asset owners cannot be forged. After all, this data is stored on the computers of a huge number of network participants. And so that the information for all users was absolutely complete and correct, the concept of consensus was introduced in the blockchain.

C - consensus
If some network participants turn off their computers and some of the transactions are not reflected or their records turn out to be incorrect, this will not affect the operation of the network. The consensus procedure, that is, reaching an agreement, will restore the correct information.
What if one of the gardeners deliberately or accidentally enters the wrong entry in his notebook? For example, that John gave his flower not to Anna, but to Irina? It's simple: before writing the next line, all gardeners check their notebooks. The option that is recorded by the majority is recognized as correct.
In real blockchain networks, several transactions occur over a certain period of time. And transaction records are included in one block.

B - block
A block is a distributed ledger record of multiple transactions. It reflects who transferred to whom and when what amount of assets.
All blocks are connected in series into one serial circuit.

C - chain
The blockchain is inseparable because each block contains a link to the previous one. Blocks cannot be changed or deleted, only new ones can be added. Thus, you can always restore the history of transfers of a particular asset from hand to hand and find out its current owner.
Gardeners in the blockchain garden have a strict rule: they cannot correct or cross out anything in their notebooks. Transactions cannot be canceled. If John gave Anna a tulip, he can no longer change his mind, play everything back and give the flower to Inna. Only Anna can now do something with this flower.
New blocks are added to the chain by miners.

M - miners
Miners perform several functions in the blockchain:
  • store copies of the blockchain and thereby protect information from loss or forgery;
  • confirm transactions;
  • verifies transactions that have been registered by other miners.
As a rule, the number of miners is not limited. The more, the better - such a network is more reliable. Anyone can become a miner. To do this, they need specialized computers and software.
What if John decided to play Don Juan and donate the rights to his unique tulip not only to Anna, but also to Irina, Maria and Inna? In a blockchain garden, this is not possible. Only one gardener can register a transaction at a time. The rest of the gardeners check in their records that John really has one tulip, confirm the transaction and copy this record into their notebooks.
But what motivates miners to register new transactions? For maintaining the network, miners receive a reward.

R - reward
As a rule, these are commissions from all participants in transactions recorded in a block, and a reward from the network itself. The network generates this reward according to a specific algorithm.
Why should gardeners keep order in their blockchain garden? The answer is simple: the gardener who registers the transaction receives a reward for it. For example, new tulip bulbs. They are given to him by a botanical garden interested in tulip fever.
This is what usually happens with cryptocurrencies: the reward is a certain amount of the cryptocoins themselves. They arise literally out of thin air and end up on the miner's account. This is how new units of virtual money are released, and the total amount of virtual currency increases. But at the same time, most often there is a limitation: when the amount of coins reaches a certain maximum, their release stops. Further, miners can work only for remuneration from participants.

This is an example of a blockchain chain: each block contains the time and result of all previous transactions. The algorithm is set up so that every 10 minutes a miner adds a new block to the chain and mines 5 new units of cryptocurrency.
But which of the multitude of miners will win the right to add a block and receive a reward for it? For this, most blockchain networks generate special tasks.

T - tasks
Suppose John announces a competition among gardeners. He comes up with a math problem for them - and whoever finds a solution first will add the next entry to his notebook. John promises to present the onion to the lucky one who knows how to count better than anyone else. And the botanical garden will give him another one as a payment for his work.
The likelihood of success for a miner - that it is he who will solve the mathematical problem proposed by the network first, attach a block and receive a reward for this - most often depends on the power of his equipment. The more productive his computers are, the more chances he will make money.
Where and how exactly do miners and transaction participants receive transfers? To do this, they use anonymous digital wallets.

W - wallet
A wallet is a special identifier. It stores a record of the member's account status (and this is not necessarily money, but any assets). The wallet also allows you to find out the entire history of transactions of a particular participant.
Most often, such wallets are anonymous - they do not allow you to find out exactly who accepts or sends assets from him.
In most blockchain gardens, both gardeners and flower owners play a masquerade. Their true names are unknown. That is, no one knows that it is John who is hiding under the lion's mask, and Masha under the butterfly costume.
There is also a danger in this. If the owner of the wallet, for example, forgets his number, then he will in no way be able to prove that the account belongs to him. Everything that was stored in the wallet will be lost forever.
E-wallet data and blockchain transactions are protected by encryption.

E - encryption
How to ensure that transaction and wallet status information is correct, complete and confidential? How to get access to your assets in anonymity? There is a whole science of how to solve these problems - cryptography. Encryption is one of its methods.
In blockchain networks, the buyer and seller of an asset confirm the transaction using cryptographic keys - special unique digital codes.
"Lion" John, transferring the rights to tulips to "butterfly" Anna, tells the gardeners how many of his flowers he gives Anna, and Anna the address where these tulips need to be delivered - in the blockchain this is called the "public key". And Anna gets a "private key" generated by the botanical garden: it only allows her to open the vault with her now her tulips.
It is almost impossible to guess the sequence of characters in the digital code of cryptographic keys. This makes blockchain technology one of the best for financial transactions. But at the same time, there have already been cases of hacking wallets, so it is better to connect them to the network only for the duration of transactions, and store them offline the rest of the time.

Features of distributed ledger technology
  • An asset can be anything: for example, stocks, digital tokens, real estate rights, gold, or books.
  • Transactions are almost instantaneous, but they can take time to confirm. Which one - determines the consensus algorithm of a specific blockchain network.
  • Transactions are confidential and anonymous: the buyer indicates only the number of his crypto wallet.
  • Commissions are minimal because miners register transactions instead of centralized intermediaries. Commissions are their reward for supporting the operation of the blockchain network. But there are usually a lot of miners and competition between them is high - this allows us to keep fees low.
  • Buyers' rights are reliably protected: it is impossible to cancel or change already concluded transactions. If you actually bought something - like tulip bulbs or an apartment - no scammer can prove that they belong to him. All transactions are recorded in the blockchain.
  • The information is securely stored, since the history of all operations is recorded in the blockchain and distributed across all network participants. Each block contains information about all previous operations "from the beginning of time".
 

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What is blockchain: explaining in simple words​

How to understand what blockchain technology is and why everyone is talking about it?
What is blockchain: we explain it in simple words.
Regardless of whether you use the Internet, watch TV, or read newspapers, chances are you have heard about blockchain technology at least once.
Despite the controversy surrounding cryptocurrencies and their prospects, most experts agree that the blockchain technology on which they are built is revolutionary in itself.

PaySpace Magazine tried to explain in simple language what blockchain is, how the technology works, what role it plays in cryptocurrencies, as well as in what other areas the blockchain can be used and how it will affect them.

What is blockchain​

Most often, blockchain is remembered in the context of cryptocurrencies, including Bitcoin and Ethereum. But in reality, this view of technology is too narrow.
Already from the name you can understand the basic tasks and goals set for the technology. Translated from English "Block" means blocks, and "chain" is translated as "chain". From which it follows that a blockchain is a chain of blocks, and a chain in which there is a strict sequence.
Now about each part in more detail. Blocks are information, data about transactions, deals and contacts within the system, which are presented in cryptographic form. All these blocks are lined up, that is, they have a connection with each other. To write a new block, you need to sequentially read data from all previous ones.
All collected information cannot be deleted, replaced or altered. Data is accumulated and a supplemented database is formed from it.
The main feature of blockchain is decentralization. There is no main server on which all information is held. All members of the blockchain network simultaneously own the data. That is, absolutely all participants have equal rights, therefore, transactions are carried out between them directly.
The main feature of the blockchain is decentralization. Photo: cryptoiscoming.com
The technology was originally developed at the same time as bitcoin appeared in 2009. The creator of blockchain and cryptocurrency is considered to be Satoshi Nakamoto, whose personality has become a myth. It is unknown how many people are hiding behind Nakamoto's mask, but the obvious fact is that the creation of such a technology required more than one week of hard work.

Blockchain is divided into two main types:
  1. Public is an open database that is continuously updated. A striking example is the virtual currency Bitcoin, where any participant has the right to write and read data.
  2. Private(also known as private) - it has restrictions on writing and reading information. In it, some nodes may have higher priority.
    • Exclusive - a subspecies of private blockchain. Its peculiarity is that a certain group of people is involved in processing transactions in such a chain.

To consolidate, let us once again recall the key characteristics and features of the technology:
  • Decentralization. There is not one server, all the participating entities are servers that keep the entire blockchain running.
  • Transparency. The data is publicly available, and its deletion or modification is excluded.
  • Unlimitedness. [In theory] new blockchain chains can be supplemented indefinitely.
  • Reliability. The need to check the operation by the system participants makes it possible to "skip" only legitimate transactions.

How blockchain works​


The basic principle of blockchain operation​

Let's try to explain how the technology works , taking a monetary transaction as an example:
  1. Imagine that participant 1 wants to transfer money to participant 2
  2. Transactions are sent to the network and formed into "blocks". It is important that each block has a number and a hash of the previous "block".
  3. Further, all these "blocks" are sent to the participants of the system for verification.
  4. If there are no errors, each participant writes a "block" to his own database instance
  5. After that, the "block" can already be added to the "block" chain containing information about all previous transactions
  6. Money from participant 1 goes to participant 2

Forming and closing blocks​

This is one of the main technical aspects of the technology. A key is stored in each link in the chain, and it will be possible to close the link only when this key is decrypted.
For example, in digital currencies, mining is used for decryption . In order to extract virtual currency, manners use the power of processors and video cards, which perform certain computational operations in order to pick up a cryptographic signature for the "block". Only after this signature is selected can the block be closed, and the miner, in turn, will be rewarded with digital currency.

What are nodes​

Nodes or nodes are persons participating in the blockchain (including miners). It is they who ensure the stable operation and security of the blockchain.
What are nodes (nodes). Photo: cryptoconsulting.info
Among them, full nodes can be distinguished - these are those participants whose device contains the full version of the blockchain. Now the number of such participants is gradually decreasing, which is associated with the growth of the blockchain volume. For example, the volume of the full Bitcoin blockchain in 2015 was 35 gigabytes, and after 2 years - more than 100.
It is worth noting that the number of full nodes plays an important role in the speed of processing transactional data. More full nodes - higher speed.

Where blockchain is applied​

Now let's talk about where blockchain can be applied. In fact, the number of areas in which the technology can be introduced is enormous. We will try to select the most popular ones and those where the blockchain has already been implemented or its implementation is planned in the near future.
Cryptocurrencies. Blockchain appeared along with bitcoin, so it is logical that the technology is used in a huge number of new virtual currencies, the number of which is growing every day.
Internal communication. For example, PayPal has started using blockchain in its own internal platform. Company employees are awarded tokens for good work. The employee can subsequently exchange the received tokens for some of the activities together with the top managers of PayPal.
Elections. The state of West Virginia in the United States pioneered this use of technology. 140 voters who were outside the United States were able to vote through a blockchain platform that was available in 22 out of 44 constituencies. The pilot platform combined facial recognition and blockchain capabilities.
Where blockchain is applied.
Banking sector. By the way, it is in this area that huge bets are being made on blockchain technology. Since its implementation in banking services can speed up transactions, as well as enhance their security. Banks have already begun to gradually use the technology in completely different aspects:
  • Loans. In Spain, they were the first to take such a step. The Spanish bank BBVA used a private blockchain to negotiate and complete the loan disbursement process. At the end of the operation, the registration of the contract took place on the Blockchain Ethereum platform.
  • Alternative financial and banking infrastructure. Papersoft Africa, iVEDiX and a group of bankers are planning to jointly launch a blockchain-based solution that will enable African entrepreneurs and individuals to better access banking services. Going forward, this solution will help millions of African entrepreneurs and individuals gain better access to banking services by enabling anyone with a smartphone to access e-money and e-banking.
  • Fighting non-bank competitors. Financial holding JPMorgan has created its own interbank information network (IIN), built on the basis of blockchain technology. In addition to, in fact, the fight against non-banking competitors, IIN allows you to reduce delays in cross-border payments. To date, more than a hundred banks have joined the network.
  • Cash handling. Bank of America is about to patent a blockchain-based system to improve cash handling. The bank's representatives believe that there are still difficulties in the process of cash processing due to the lack of communication between the different departments of the bank, since the amount of cash is very large. They plan to fix this by introducing blockchain technology into the processes.
  • New opportunities. Mastercard, for example, has received a patent for a system that will be able to support various types of blockchains and carry out transactions in several cryptocurrencies. Mastercard plans to keep information on different types of transactions with virtual currencies on one blockchain platform. To do this, the company created its own block diagram, in which different blocks of the network can accommodate different types of data. Also, the blockchain will be divided in such a way as to receive data on operations from different computing devices.
Education. Oxford researcher Joshua Broggie has announced plans to create his own university in Malta, which will be built on blockchain technology. Thus, he plans to significantly reduce operating costs by automating administrative procedures. In addition, it will give confidence in the reality of the student's education.
The use of blockchain will give confidence in the reality of the education received.
Cellular. At the XBlockchain Summit in Bali, the first call was made using blockchain technology. This is made possible by the XPhone device, a blockchain smartphone that does not require the services of mobile operators. Instead, it uses its own blockchain.
Taxi. A secure blockchain taxi service has been launched in China . The new Chinese platform VV Go is designed to solve the security challenges of taxi passengers. The blockchain platform will be able to timely and transparently share information about drivers and trips with all users. If a passenger makes an emergency call, for example, the network will allow other drivers and even the police to react quickly.
Driving a car. German manufacturer Infineon and XAIN are working to integrate blockchain technology into automotive electronics to improve cybersecurity systems. In general, blockchain technology should provide the car owner with the ability to manage access rights to certain data about the car. In addition, the car owner will be able to delegate access rights over the blockchain network through a mobile application.
And this is not the whole list of use cases for blockchain technology.

Advantages and disadvantages​

Advantages and disadvantages of blockchain technology.

Despite all its advantages, blockchain technology also has a number of disadvantages. We tried to highlight the main ones in the table:
Advantagesdisadvantages
Decentralization - all participants have equal rightsScalability - the total size of the blockchain will grow with the growth in the number of transactions
Transparency - the data is publicly available, and its deletion or modification is excluded.Attackers - if you commit a transaction by mistake, it will be impossible to reverse it
Versatility - the ability to use in completely different areas of lifePotential violation of integrity if 51% of the computing power is located on one device
Reliability - the need to verify the operation by all system participants makes it possible to "skip" only legitimate transactions.

The use of blockchain becomes more and more accessible every day. Today, companies such as Amazon and Huawei provide the ability to create their own blockchains. This will allow people who want to create their own blockchain networks to save an impressive amount of money that they would need to start the network from scratch.
In addition, universities could not fail to respond to the need for blockchain specialists in the labor market. Therefore, the American Leonard N. Stern School of Business has already announced that it will create a course for training professionals in this field who can easily solve problems and tasks in the blockchain field.
 
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