Blockchain

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Blockchain is a type of distributed ledger. It 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.[1][2]

Overview

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.[3][4]

Blockchain was originally developed by Satoshi Nakamoto and a team of developers in order to create a peer-to-peer system of managing and verifying all transactions made with bitcoin. This technology uses complex mathematical algorithms in place of third-party financial institutions like banks or government agencies to verify possession of, and transactions made with, cryptocurrencies such as bitcoin.[5][6]

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 or IP address. 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.[7]

Because the blockchain does not exist in any centralized entity or authority, "hacking" the blockchain means figuring out how to do so retroactively, which means cracking an extremely difficult cryptographic math problem for each block one wishes to alter. Even then, by changing the data in a blockchain, one invariably changes the hash on that block, making it immediately apparent to the entire network that this block has been changed, as the hash on that block no longer resembles the hash on the millions of copies of that block stored on nodes across the globe. In order to circumvent this, a hacker would have to somehow alter the block in the same exact way on every single node in the network. While technically not impossible, it is extremely unlikely that any individual or group would be able to accomplish this; the computational power alone that would be required to do so is immense, and the anonymity of users makes locating and hijacking a sufficient number of nodes highly unlikely to succeed with current technology. Researchers have speculated that the technology to do this may be possible, but will not be developed for around another ten years.[8] In other words, it's easy to go from the data contained in a block to its hash - it's nearly impossible to go from a hash to the block's data. This "consensus mechanism" creates an entirely new way of managing data - because blocks are cryptographically secure, third parties are not required to verify the data contained therein.[9]

Adoption

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.[10][11][12] 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.[13] 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.[14]

The state of some existing, enterprise-level blockchain projects have likely not positively impacted such a widespread lack of confidence among potential institutional investors. 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." To date, this is the most expensive distributed ledger project to have ended in such a way.[15] 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 represents 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.[16][17]

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.[18][19]

Architecture

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.[20] 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.[21]

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).[22] 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."[23] This is the proof-of-work function that allows cryptocurrency to function as a medium of trade, despite having no tangible form.[24]

Each block contains the hash pertaining to the one that came before it, which creates a chain of blocks, or "blockchain."[25] This process - the process of "solving" blocks, verifying the solutions and adding them to the blockchain - is referred to as "mining" cryptocurrency.

Editing the Blockchain

The method by which the blockchain is edited depends on the data contained in the block. In the case of bitcoin, for example, the editing process begins with a transaction. If Person X wishes to transfer, for example, one half-share of a bitcoin, or 50,000,000 Satoshi (the smallest unit of measurement for shares of a bitcoin)[26][27] to Person Y, first they both have to have bitcoin wallets, or software that accesses the blockchain without identifying the user to the system (such as GDAX). The transaction begins with Person X requesting that the blockchain be edited to reflect a decrease in their wallet by 50,000,000 Satoshi, and an increase by 50,000,000 Satoshi in the wallet of Person Y. Next, this change is examined by various computers, or "nodes" in the network, to make sure that Person X actually has that much cryptocurrency to transfer to Person Y, that the request to transfer did indeed occur, and that the rest of the network agrees.[28]

Because the data in each block is distributed, as opposed to being tied to a central source, data in each block cannot be altered retroactively unless the entire network does so cooperatively.[29]

Mining

Mining cryptocurrency is the process by which nodes within a blockchain network calculate the validity of cryptocurrency transactions and, upon verifying their validity, add another block to the blockchain. Each time a new block is generated, it includes the solution to the mathematical function generated using the cryptocurrency transaction. This works similar to a password, securing the block from outside attempts to alter the data contained within it.[30] This process can take a tremendous amount of processing power, even with the effort of doing so being distributed across a huge network of computers.[31]

Other Applications

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.[32][33][34][35]

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