|Key People||Satoshi Nakamoto, inventor|
Blockchain is a type of database for recording transactions such that each participant within a defined network receives a copy of the complete transaction log, in what is known as a distributed ledger.
Blockchain consists of a series of blocks, or time-stamped clusters of data that can be viewed publicly. It provides a totally transparent way to write and store information that can be viewed by anyone with an Internet connection.
Blockchain is a relatively new technology that stores and verifies information, such as information related to transactions made with cryptocurrency. Unlike fiat currency, which uses centralized authorities such as banks or government organizations to verify the passage of different amounts of currency between individual accounts, blockchain is decentralized. There exists not a single entity or person who holds total power over editing the blockchain. Instead, it relies on a massive, digital, worldwide community of individual computers, or "nodes", to verify and maintain records of transactions.
It is often reported that a mysterious programmer or group of programmers, known only by the pseudonym Satoshi Nakamoto, created blockchain in 2008, as the underpinning for bitcoin, a digital currency. But blockchain-esque technologies existed before then, most notably Surety, launched in 1995 for timestamping records, and was still in use as of June 2019. It was created by cryptographer Stuart Haber, whose white papers on timestamping were cited in the Satoshi white paper.
Unlike a simple password-protected centralized system, the blockchain stores only enough information to verify the cryptographically-generated code, or hash, of the transaction's genesis and destination. This does not include the identity of the person who manipulated the transaction's source or destination, or where the computers used to do so are located - only a hash that is not tied to any kind of personal identifier. This information is distributed across millions of individual nodes worldwide. It does not include enough information that, if hackers accessed the database containing the data for stored past transactions, the user accounts on that database would be immediately compromised, because there is no easy way to pinpoint the identity of the people involved in the transaction from these data alone. This allows users to remain totally anonymous - in theory, at least.
Blockchain rose to prominence in the financial sector in 2015, as having the potential to replace traditional ledger-based systems, including bank payment and settlement systems, clearing, reporting, reconciliation and other post-trade functions, and even voting systems, vehicle registrations, wire fees, gun checks, trade settlements and cataloguing ownership of art works.
In November of 2017, Goldman Sachs and JPMorgan Chase completed a successful six-month test program - managed by the blockchain startup Axoni - on blockchain technology in the $2.8 trillion equity swaps market, giving the new technology the stamp of legitimacy for use in transforming financial services to reduce back office and clearing costs.
At its most fundamental level a blockchain is a cryptographically secure distributed ledger system. For example, a bank keeps a ledger of its transactions. Customers deposit money, take out money, or get a loan, and it all gets recorded in the ledger. Each part of the ledger depends on what goes before it. So if someone wants to take out money the ledger needs to show that he or she already has that money in the bank and then the new balance is recorded after the withdrawal.
In order to know that the ledger is correct and that no one has written down the wrong amount or moved a decimal place, whether accidentally or fraudulently, we have to have faith in the business or the people we are transacting with. It is for this reason that banks (as one example) have extensive procedures in place to make sure everything is recorded as it should be. It is also why there are delays in the system. The delays allow more time to be certain all is as it should be. Even with all that, mistakes and fraud can still occur.
This is where cryptography comes in. While we usually think of cryptography as a means to hide secrets, in this case cryptography is a means to ensure that each entry into a ledger cannot be changed once it has been recorded.
The math used to calculate a block can only be done in one direction. You can get an answer but you cannot discern the previous pieces that got you to that answer. So the secret number you used to encrypt the data cannot be guessed by looking at the result it produced.
In a blockchain, each block incorporates the cryptographic hash of the previous block. That makes it nearly impossible (or at least exceptionally difficult) to go back in the chain and change something. All the blocks are dependent on the ones that came before. Change even one, no matter how long the chain, and everything after that change will have incorrect values, making it immediately apparent something was altered.
That alone, though, does not make the system secure. If only one person has the ledger, he could change something in the chain and recalculate the whole chain after that so that it looked perfectly fine. The "distributed" part of the "distributed ledger" is designed to stop this from happening. Instead of one ledger there are many, many copies distributed among a large group of people. Since they all have a copy of the ledger, they all have to agree on what the correct ledger looks like. As transactions occur the whole network agrees on what are legitimate transactions and everyone has a record of that transaction (and if there is a conflict the whole network votes on which transaction is the right one).
Now, putting it all together you can see the blockchain in action. Everyone has a copy of the ledger, each entry in the ledger is a "block," everyone agrees that each transaction is legitimate, and if one person tries to change the ledger fraudulently, the rest of the network will disagree because the cryptographic hashes will be wrong compared to the rest of the network. Each transaction depends on the block before it and thus, by extension, the entire chain all the way back to the beginning.
It is important to distinguish between blockchain and Bitcoin. Bitcoin is a cryptocurrency that uses blockchain technology to work. Bitcoin is often accused of being a means for drug dealers to do business. Whether or not that is true, that does not make the blockchain technology it uses "bad." That would be akin to saying cars are bad because moonshiners used them to smuggle alcohol during prohibition. While blockchain technology underlies cryptocurrencies, blockchain is not itself a cryptocurrency.
Projects such as Hyperledger, Bakkt, and GMEX represent efforts by enterprise-level businesses, traditional financial institutions, and governments to investigate and experiment with blockchain adoption. While these projects are significant, many who are not already blockchain developers, promoters, or enthusiasts still lack confidence in the technology. A survey conducted by PricewaterhouseCoopers (PwC) in April and May 2018 revealed that, according to its responders (mostly business executives with roles relating to technology), the biggest barriers to adoption are regulatory uncertainty, lack of trust among users (ironically this is what blockchain was built to achieve), and the ability to bring networks together. According to a Barclays analysis conducted around the same time, some technology analysts believe blockchain in its current form is incapable of living up to the capabilities its proponents insist it can. This analysis primarily focused on bitcoin's blockchain.
In August 2018, former employees of Project Infinity, a blockchain project launched in May 2017 by NEX Group, reported that the project had seen "significant" layoffs, including the project's entire London team. One former staffer even said the project, which had cost about $31.7 million, had been "canned." Despite such disheartening news, there have been signs of increased institutional adoption in some blockchain-based projects. Ripple reported in Q2 of 2018 that, although XRP sales and XRP's overall market cap had seen a sharp decrease, its customer base increased during the same period. According to employees at Ripple, the increase of customers represented a positive turn for XRP in terms of adoption, because the decrease in price can be attributed to existing investors holding on to the XRP they have already purchased, expecting its value to increase.
According to a research report from Forrester published in November 2018, many companies have begun substituting the word "blockchain" for "DLT" (distributed ledger technology). The study said this was due to the over-hyping of blockchain technology, as well the fact that many projects touting their use of "blockchain technology" actually lack key characteristics of a blockchain.
In May 2019, the Régie de l’énergie (Hydro Quebec) announced that it would allocate 300 MW of electricity to blockchain companies operating in the province. To qualify, companies engaging in cryptocurrency mining would have to show that they are creating jobs, paying their employees fairly, investing in the province and offsetting heat. The same month, PepsiCo released the results of a blockchain trial called "Project Proton," which sought to test the applicability of blockchain technology to the company's supply chain reconciliation efficiency, or its ability to verify the validity of information from two different sources. The trial saw a 28 percent efficiency increase.
Later that month, Germany's central bank, Deutsche Bundesbank, announced the results of a trial project it had run using blockchain technology with Deutsche Boerse to settle securities and cash. According to the president of the Bundesbank, the settlements took longer and were more expensive compared to traditional settlement processes. The project was launched in 2016 and concluded in late 2018.
The blockchain is a public, distributed, decentralized string of interconnected data clusters, called "blocks", tied to a single, original "genesis block." The "genesis block" is a cluster of data built to attach information such as cryptocurrency transactions to itself. Figuratively speaking, the genesis block is like the anchor for the rest of the blockchain. Each block contains data as well as two computer-generated, cryptographic codes, or hashes: its own hash, and the hash of the block that came before it. Functionally, a hash is like a digital fingerprint - it is unique, and is used to identify a specific block.
Each time a new block is made through the transaction of a specific cryptocurrency, the data from that transaction - including the amount transferred from one node, or user, to another; the digital identification information of both nodes, and other cryptographically-generated data - are encoded into a new "block," or timestamped bundle of digital records. This block is the product of multiple computers/nodes calculating complex mathematical formulae of varying size, solving them, verifying the results with the other nodes, and encoding the results in a fixed size. Each node receives a copy of the block, so the entire network can verify that the transaction happened (a block may contain data for more than one transaction, so one block does not necessarily equate to one transaction). Each block contains data that is used to keep track of how much digital currency users have stored on multiple computers in a closed network, hence the term "distributed ledger." This is the proof-of-work function that allows cryptocurrency to function as a medium of trade, despite having no tangible form.
Each block contains the hash pertaining to the one that came before it, which creates a chain of blocks, or "blockchain." This process - the process of "solving" blocks, verifying the solutions and adding them to the blockchain - is referred to as "mining" cryptocurrency.
Though it was originally developed to serve as a distributed ledger for bitcoin, blockchain technology may have other applications as well. It is, theoretically, a widely-adaptable concept; experimental startup companies all over the world have begun utilizing it for everything from supply chain management to ride sharing to birth and death certificate archiving and real estate registry.
Blockchain Articles in John Lothian News
- John Lothian News Special Report: Unchained: How Blockchain And Bitcoin Are Going Mainstream, June 2015
- ICAP’s blockchain initiative would slim down middle and back office processes, April 2016
- CFTC Tackles the What Ifs of Blockchain, February 2016
MarketsWiki Education Video, London 2015
"There is this big debate as to whether bitcoin is a currency or a commodity. I would argue that it is its own category."
Sandra Ro is a veteran in the world of bitcoin and blockchain, which simply means that she has been following the cryptocurrency and its underlying technology for over two years. In this MarketsWiki Education talk, Ro takes us through the nascent world of digital currencies, from the volatility of bitcoin, to the rise of blockchain technology and massive investments being made by venture capitalists, banks and other strategic investors. According to Ro, the next few decades are going to be exciting.
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