The global blockchain market is experiencing exponential growth: market predictions show that by 2024 it is predicted to be worth US$20 billion compared to US$ 315.9 million in 2015. For those who are unfamiliar with it or just want to learn more René Bader, Manager of Critical Business Applications & Big Data at NTT Security provide some explanation on what it is and how it works.
Blockchain allows the validation of peer-to-peer network transactions without the need for an intermediary providing traceability and transparency. The “crypto-currency” Bitcoin is one of the driving forces of Blockchain but beyond this there are numerous application possibilities as I’ll go on to explain.
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I’ll use Bitcoin as an example, Bitcoin permits value transfers between unknown parties without the need for a financial service provider as a central agent. These transactions must be secured seamlessly, verifiably and transparently and it is the peer-to-peer architecture of the blockchain technology, described in more detail below, that allows this to happen.
The role of the blockchain is to act as a public ledger for Bitcoin for all network participants. It is not an absolute account, but it does record all transactions that have ever been executed and validated, which can be used to calculate the current account balance. Even though the information on the transactions is public, the parties involved remain anonymous because the addresses of the transactions only show as anonymous codes.
Bitcoin vs traditional payment systems
The Bitcoin approach is different because it documents transactions solely in the Blockchain as opposed to traditional payment systems such as banks who are responsible for monitoring incoming and outgoing transactions, controlling the account balance and storing them centrally in their systems. Bitcoin uses what’s known as a decentralised database because the information on the transactions is distributed and stored fully on all computers that are participating in Bitcoin. This means that the complete blockchain is not owned by anyone and is public. The current size of the blockchain of the Bitcoin network is around 80 gigabytes, but with the continual formation of new blocks, it is constantly growing.
Blockchain takes its name from the fact that transactions are collected and stored in consecutive blocks about every ten minutes. The maximum size of a block is one megabyte and contains several hundred transactions. Each new block is joined to the previous block in chronological order and builds a new chain link in the Blockchain which over the course of time the chain continues to expand. The very first block is aptly called the genesis block.
In addition to a time stamp and the actual transaction data, Each block contains a time stamp, the actual transaction data as well as two hash values based on the cryptographic hash function SHA-256:
- a hash value over all the transactions collected in the new block,
- the hash value of the previous block.
Key in the chain
Private and public keys must be created before a block is formed and integrated into the Blockchain; these are generated by the wallet software as a key pair on the client computer, a participant of the Bitcoin network and based on asymmetric encryption. Visible to all, the public key is used to create a 34-character string to act as a Bitcoin destination address for any additional transactions. This is important for the anonymity of the transaction as the address cannot be returned to the public key.
The private key signs a transaction, and without it, the transaction would be deemed invalid. The public key attached to the transaction proves the sender of a transaction has the appropriate private key and is the originator. The signed transaction is sent to all nodes in the Bitcoin network and as soon as a certain number of nodes confirm the receipt it is confirmed as “shipped”.
Validity is the next phase of the transaction process and this is checked before blocking to prevent any tampering and to ensure the correct amount is credited to the recipient and debited from the sender. Without validation, an amount could be sent several times, or Bitcoins could be output which is not present at all.
Validation by Mining
In blockchain technology, there is no central location for transaction validation instead there is the “Miner” in the Bitcoin blockchain. These are computers or pools of computers that provide their computing capacity to the system for the validation of transactions and the formation of the blocks.
Miners must prove their trustworthiness and ability to qualify for the task of mining and this a “proof-of-work” process is used. Miners must solve a computer-intensive cryptographic task – the creation of the hash value – which can only be processed by trial and error. These tasks are hugely difficult, so the frequency of the block formation is controlled and held for about ten minutes. The calculation effort ensures that subsequent modifications of the blockchain are excluded, and the blockchain cannot be scaled at will.
Mining is complex and time-consuming, and by way of motivation, miners receive a certain number of Bitcoins as a “reward” when the cryptographic task has been solved. Conversely, the attempts of the slower miners, which processed the same transaction at the same time, are thus automatically invalid and are cancelled. Having built a valid block, the miner sends it to the network where each participant can control the block’s validity and attach the block to the local copy of the blockchain. The miner validates the Blockchain which is deemed a trustworthy process in the peer-to-peer architecture where there is no central control instance making the transaction ready and irrevocably documented for all blockchain participants.
Mining acts as the validation and “money creation” in the Bitcoin system. To start with 50 Bitcoins could be recreated per block, a figure which has now been halved to every 210,000 blocks, so it is now only 12.5 Bitcoins per block. Consequently, only 21 million Bitcoins can ever be generated, if the limit is reached, which will likely be around 2140, no new hashes or new Bitcoins can be generated.
Bitcoin is probably the most widely known application area of blockchain technology, but there are many other areas in which it could be used including:
Blockchain is a technology currently undergoing careful consideration for use in the banking sector where its use in billing and transferring assets by documenting transactions without validation from a central office could significantly reduce costs and speed up processes.
- Smart Contracts
Blockchain technology can be used to process more complex contracts. For example, map the conditions of a contract can be mapped in the form of an executable program code ensuring automated compliance with the contract determining which condition leads to which decision. The speed at which ownership transfers or leasing could be increased and can be carried out without value. Once the buyer or tenant has paid the vendor seller or landlord, it would be transferred to him/her, or alternatively, access could be given to the digital key.
Blockchain could be used to dynamically adapt insurance conditions based on the policyholder’s habits and the premium payment adjusted accordingly; For example, in motor insurance, this could depend on the driving performance.
- Music industry
. For this purpose, Blockchain offers the ideal solution in the music industry, where many artists want direct responsibility for their music sales, music rights and the conditions of use as it can directly link the use and payment to algorithms embedded in a blockchain.
- Dialling systems
In the use of digital voting systems, blockchain can protect against tampering while also ensuring the anonymity of the.
- Patent registration
In the Blockchain patents for the relevant administrative offices along with the documents for proof of intellectual property could be filed de-centrally, permanently and without an intermediary. To have certificates guaranteed by mathematical encryption would regulate the possession, existence, and integrity of these documents on a global scale.
To conclude blockchain is a new and innovative technology that is gathering pace but for many, there are a lot of questions that remain unanswered, and many of the answers currently available will not be final. However, such is its traceability and transparency for any transactions signal its importance and potential to be used in wide range of innovative scenarios.