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Blockchain

Blockchain

"Is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. Is basically a public registry of who owns what and who transacts what. The transactions are secured by cryptography, and over time, that transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable, unforgeable record of all the transactions across this network. This record is replicated on every computer that uses the network."

--Bettina Warburg¹

Blockchain is often associated with Bitcoin and other cryptocurrencies, but they are not the same thing. Bitcoin was the first to implement the concept of the Blockchain. The structure of a blockchain, a growing list of records, can be applied to many other fields such as digital identity, supply chain and even democracy.

A blockchain is built out of a combination of two different “hash-based data structures” (Narayanan, Bonneau, Felten, Miller, & Goldfeder, 2016, p. 64), a hash chain of blocks and a Merkle tree. “In short, the blockchain is a network and a database; it has rules and built-in security; and it maintains internal integrity and its own history” (Depository Trust and Clearing Corporation, 2016, p. 7). In the chain, each block has a pointer to the previous block as well as a pointer to its Merkle tree of transactions. A Merkle tree, sometimes called a hash tree, is a type of tree where each node that has at least one child is marked with a hash of its own children.

Even though blockchain can be applied to a big range of problems, it is not the solution to everything. This technology is usually used to solve problems where the parties don't trust each other.

A third party is usually needed to validate trust relationships. In the most common example, which is the banking system, a trusted authority is needed, such as a bank, to intermediate transactions, manage accounts, verify balances, and validate transfers. Blockchain then, comes in this case to replace the regulatory authority. In the case of cryptocurrencies, it replaces the figure of the bank, doing all the validations and guaranteeing the security and veracity of the transactions.

For this reason Blockchain is also known as "The Trust Protocol".

History

The first work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta. They wanted to implement a system where documents' timestamps could not be tampered with or backdated. In 1992, Bayer, Haber and Stornetta incorporated Merkle trees to the design, which improved its efficiency by allowing several documents to be collated into one block.

The first blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008. It was implemented in the following year by Nakamoto as a core component of the cryptocurrency, bitcoin, where it serves as the public ledger for all transactions on the network.

In August 2014, the bitcoin blockchain file size, containing records of all transactions that have occurred on the network, reached 20 GB (gigabytes). In January 2015, the size had grown to almost 30 GB, and from January 2016 to January 2017, the bitcoin blockchain grew from 50 GB to 100 GB in size. Furthermore, Nakamoto introduced the concept of proof of work to ensure a more decentralised trust in the records' security.

The words block and chain were used separately in Satoshi Nakamoto's original paper, but were eventually popularized as a single word, blockchain, by 2016. The term blockchain 2.0 refers to new applications of the distributed blockchain database, first emerging in 2014. The Economist described one implementation of this second-generation programmable blockchain as coming with "a programming language that allows users to write more sophisticated smart contracts, thus creating invoices that pay themselves when a shipment arrives or share certificates which automatically send their owners dividends if profits reach a certain level."

As of 2016, blockchain 2.0 implementations continue to require an off-chain oracle to access any "external data or events based on time or market conditions to interact with the blockchain."

Types of Blockchains

Blockchains can be broadly classified into two categories -

Permissionless, public blockchains - these are not controlled by any single company or person. The blockchain is accessible to anyone to participate in. Bitcoin and Ethereum are examples of permissionless blockchains. Consensus is arrived at by participating miner nodes in the network, who perform certain actions (Proof-of-Work) and are rewarded for helping to maintain the state of the distributed ledger. Anyone interested can become a miner and participate in the consensus building process.
Permissioned blockchain - these are typically owned by a single party, or by a consortium of organizations. The participants in the network, along with their roles in the network, are pre-determined. These kinds of blockchains are implemented by enterprises who are looking to improve efficiencies across business processes that span multiple parties. Examples of permissioned blockchain platforms would be Ripple, Corda, Quorum and Hyperledger. Hyperledger is an open source project run by The Linux Foundation, and is a set of frameworks and tools which can be used to build permissioned blockchain networks. Of the frameworks available, Hyperledge Fabric has gained a level of maturity required for production level blockchains.

Bitcoin

Bitcoin’s main problem to solve was to achieve distributed consensus while remaining a decentralized system. Distributed consensus is essentially the idea that all the nodes that make up the network must come to a collective agreement without the use of a centralized control. In Bitcoin, the nodes are agreeing on exactly which transactions present on the network are valid. This is difficult in many ways, one of which is the potential for n number of nodes to be malicious and not want to follow the consensus of the other nodes. Bitcoin has the benefit of being able to incentivize its nodes to “follow the rules” through rewards and transaction fees because it is a currency system.

Sources

Bettina Warburg, "How the blockchain will radically transform the economy", TED Talks, December 8, 2016
[Depository Trust and Clearing Corporation, "Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape", DTCC, 2016] (https://hub.digitalasset.com/hubfs/Industry%20Reports/dtcc-embracing-disruption.pdf?t=1539879453546)

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