by Logo Technical Blog – Future Processing
Łukasz Korba
29.08.2017
Revolution through technology

Political situation, loss of trust, centralisation and technological advance are some of the many factors which have made Satoshi Nakamoto write down and publish, in 2008, the assumptions for the electronic payments system based on a peer-to-peer network1. The first version of a working code, of his sole authorship, appeared only a year later. The concept presented there mentions for the first time a cryptographic block chain, with an aim of enabling payments between stakeholders bypassing financial institutions and allowing the highest possible level of protection.

Nowadays, almost everyone has heard of Bitcoin, a cryptocurrency, perceived to be the opposite of money we use every day. The reason for this is that its value is set daily by the free market, unlike money, the value of which is the work of central banks in cooperation with governments. Bitcoin exists on the internet and it is recognised as a means of economic exchange, with which the value of products and services is expressed. With support from software, it fulfils the basic functions of money, which is why an increasing number of institutions, and even countries, recognise it officially. The benefits of this cryptocurrency are plenty, the most important of which are the following:

  • anonymity and transaction speed,
  • lack of intermediaries during money transfers,
  • resistance to inflation – no option of additional money printing,
  • it does not come under any entities, does not have an administrator or an owner.

As discussed, the basis for Bitcoin, Litecoin and other cryptocurrencies is blockchain. It represents an innovation in the approach towards the storage and distribution of transaction history, which eliminates the need of a trusted intermediary for a verifiable – when it comes to the means in the wallet – and an authorised – checking whether the user is the owner of the means – transaction.

The blockchain is a distributed database used for the management of the increasingly growing amount of records, known as blocks. This solution has recently been gaining prominence as Distributed Ledger Technology (DLT) which can be understood as a spread and shared register of transactions. It is shared with all those interested via the internet, which is why there are many identical copies of the record. As a result of algorithms and structures, new blocks that are being added to blockchain appear in all copies in very short time. In case of virtual currencies, transactions (transferring currency from address A to address B) are grouped chronologically into blocks, which are then added to the existing chain using cryptographic signatures. Each newly generated block includes reference to a previous block and date added. The register defines the owner of the assets that are the subject of a given transaction without revealing their identity. This happens as a result of using these aspects of cryptography which allow for verification of the owner using signature generated with a private key. Surely not everyone is aware that in case of Bitcoin, the first block saved in blockchain (the genesis block) is not a block which has been generated/mined but hardcoded. It does not contain a reference to a previous block, but instead, it has a coded in title from The Times (3 Jan 2009): ‘Chancellor on brink of second bailout for banks’ pointing to the lack of stability of bank reserves, at the same time revealing a problem with which the world of payments, as we know it, grapples with. A problem which has been solved with the use of the blockchain technology.

The decentralisation of the blockchain network brings a number of benefits. The first one that must be mentioned is security. At the moment, we are going through a revolution, comparable to those that changed not only the approach, but also the entire processes, e.g. the Industrial Revolution – the mechanisation of industry, or the informatisation and telecommunication that had their beginnings in the 1970s. The revolution is characterised by the abundance of information, connectivity of people (universal and general access to the internet), specialisation and globalisation. Considering we base access to our assets on one point in the network that delivers the service not only to us but also other users, we risk losing our privileges in a number of scenarios involving a failure on part of the provider. An optimistic case assumes that we will regain access as soon as possible, but what if the service provider will not be able to rise after the failure? They will lose the status of a trusted supplier and we will lose our resources. In the case of a decentralised network, there is no single access point. Even if one of the nodes fails, the network will function and its responsibilities will be taken over by other network nodes. The entire network is based upon a consensus, that is, the programmatic rules by which transactions are considered correct, and the blockchain itself is current. Thus, the lack of a central trust or failure point works in favour of the system. Additionally, the fact that various entities have an ideal copy of the register means any attack intended to harm users or the system itself is extremely difficult to accomplish, but not impossible. Such an attack would have to be implemented using computing power at more than 51% of the computing power of the network being attacked. Other security factors include confidentiality, integrity and authentication and they are achieved through cryptography and encryption methods that use complex mathematical algorithms to handle, protect, and synchronise data across the network. All transactions are irreversible; this statement is not exaggerated, given that all shares (transactions, mining, etc.) recorded in blockchain create a story that continues to grow, and with each successive new block, the chance of modification decreases. In case of cryptocurrencies, it is accepted that the transactions are considered to be confirmed and fully irreversible after six confirmations, i.e. after the creation and correct addition of six new blocks within the network. The data stored in the register is not affected by any errors. This is a result of the work of nodes which validate the transactions recorded in the blocks and effectively reject the attempts of unauthorised changes. The register is transparent, which means that no one can prevent a transaction from entering the register. User-maintained copies of the register remain integral through the network consensus on blockchain status – they agree in terms of the longest validated block string.

Something that distinguishes blockchain from a regular database is the ability to define transaction rules (business logic). Intelligent contracts, as they are called, in effect appear as contracts written in a programming language. One can assume that these contracts are a self-executable programme that starts automatically when certain conditions are met, and, similarly to typical blockchain transactions, are not subject to censorship or influence by other entities. An example of this is the Ethereum platform, which enables developers to build decentralised applications via Solidity or Dapps.

Blockchain can be public (like Bitcoin, or Litecoin) where there is no owner, it cannot be owned by anyone and where every participant may at any time check its contents or make new transactions. But blockchain can also be private – the so called permissioned ledger (e.g. IBM’s Hyperledger Fabric), in which access to the register is limited (not everyone can become a network participant) and not everyone can take part in checking its consistency or whether the version is up-to-date. Due to limitations, such a register is less resistant to attacks or other hazards resulting from an increased degree of centralization than the public register.

Distributed Ledger Technology offers great opportunities. Paraphrasing the opinion of many experts or enthusiasts – it can be the same as the internet is to an email. The potential that lies in this technology is increasingly evident by the number of start-ups, projects and other initiatives aimed at revolutionising current approaches and processes. Also supporting the idea are large companies such as Microsoft and IBM, as well as governments2 and banks, which place much importance to utilising the opportunities offered by this technology. An example could be the attitude of Estonian authorities where one of the world’s first independent banks has been experimenting with programmatic money, and the country’s government uses blockchain to host citizen information. Other sectors that are interested include for example food, energy, pharmaceutical, transport or agriculture.

[1] Bitcoin: A Peer-to-Peer Electronic Cash System
[2] How are governments using blockchain technology?

Other sources:
www.azure.microsoft.com/en-us/solutions/blockchain/
www.ibm.com/blockchain/
www.hyperledger.org

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