Blockchain – an overview

Oct 16, 2017 · Guest post from Lawson Emanuel, Partnerships Director at VegaOne (formerly NFC Ring)

Screen shot 2017 10 16 at 10.28.46

Introduction

If you haven’t heard of ‘The Blockchain’ yet, you’re not alone, but this innovative way of structuring and storing data is, in my opinion, the next ‘internet revolution’. It’s a move towards greater transparency and clarity in transactional and data storage processes, and though there is some resistance associated with its increased use, it is likely that this technology will become widespread in our lives, affecting everything from voting to personal digital security, as well as financial transactions and widespread record keeping.

So what is ‘The Blockchain’?

The Blockchain is a database or ledger that stores records in such a way that they cannot be falsified, even if they are held on a ‘public’ ledger with no single or centralised authority to monitor and process the information. Melanie Swan, in her book ‘Blockchain: Blueprint for a New Economy’ describes it as a ‘giant spreadsheet for registering all assets, and an accounting system for transacting them on a global scale that can include all forms of assets held by parties worldwide’. The data is secured via cryptography, making it extremely difficult for the information to be manipulated by anyone, even if they have access to the data.

A ‘Block’ is formed of a series of transactions, or bundle of records, and blocks are added to the Blockchain in a linear and chronological process. The first block in a Blockchain is known as the ‘Genesis block’ (or ‘Block 0’), and when new transactions or records are posted on the network and the database is updated (updates are made by any market participant in a public ledger – there is no central authority), the records cannot be altered because they are linked to every transactional record that came before them in the chain.

Blocks in the Blockchain are linked by cryptography that transfers data into a hexadecimal code that cannot be inverted to recover the original input. This means that users who have access to the Blockchain don’t necessarily need to trust each other – the legitimacy of the data is protected by algorithmic self-policing 6 in the form of the ‘hash function’. The ‘header’ of a block contains the hash function that reflects the contents of the previous block, which in turn has a header that contains a hash function reflecting the contents of the block before it, and so on. It is because of this connectivity that it is impossible to manipulate or forge an earlier block in the Blockchain since this would cause changes in the hashes of all subsequent blocks and would be clearly noticeable by the other Blockchain participants. Someone wishing to forge old transactions would have to find valid hashes for all subsequent block headers – an intensive and time consuming process that becomes even more difficult with every new block added to the system.

In order to create a new block in the Blockchain, a participant of an open Blockchain must:

1.) Bundle data from new transactions - the transactions that are not included in any prior blocks;

2.) Add the hash code of the previous block;

3.) Timestamp

4.) Add a ‘nonce’ (a ‘nonce’ is a random number which, combined with the other information in a block, generates a new hash. To be valid. The hash must be below a certain critical value, i.e. have a certain number of zero’s in front of it. Participants search, by trial and error, for a nonce that will generate the required hash for the new block.)

5.) Once the first participant trying to do this has succeeded, other members verify and acknowledge that the new block is complete and people start working on the next block.

Advantages of using Blockchain technology

There are a number of benefits associated with using Blockchain technology. One significant positive is that it can help to reduce business and administrative costs, most noticeably, perhaps, in financial transactions; When ‘Satoshi Nakamato’ – the illusive figure(s) who penned the 2008 paper "Bitcoin: A Peer-to-Peer Electronic Cash System" – first proposed the idea of using Blockchain technology in cryptocurrency transactions, one of the reasons they gave was that it would help to reduce the high transaction fees associated with electronic commerce transactions, and bring them in line with the simplicity of cash transactions:

"What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers"

By removing the need for a trusted third party to ‘check’ whether or not a transaction has a risk of fraud associated with it, the costs associated with an electronic transaction can be reduced or removed entirely.

Another business area that could see administrative costs reduced significantly via the adoption of Blockchain technology is Land Registry, or Land Titling. Indeed, Sweden is currently trialling this technology and early research suggests that they could save more than $100 million dollars per year as a result of reduced paperwork and fraud and faster transactions by adopting this approach to data handling, updating and storage.

A further positive of ‘The Blockchain’ is associated with the advanced cryptographic security measures adopted to protect the data contained within it. Given that it is extremely difficult for an individual to gain access to the data within the Blockchain and edit or falsify it without being noticed by other participants, the perceived trust associated with this kind of data storage or transaction is likely to be the same, if not higher, than more traditional record keeping and transaction processes - particularly after the global financial crisis of 2007/08, when widespread public attitude towards the whole banking sector was negatively affected. A similar positive comes from the fact that the adoption of public Blockchain technology means that there is no one single individual or business holding and processing the data, or updating the code within the Blockchain without first advising the rest of the network, an idea that works to ‘spread the risk’ and give greater responsibility to a larger number of individuals, rather than an anonymous or elite few.

Another benefit associated with Blockchain technology is the speed at which information can be processed or updated; the administrative paper-trail is significantly reduced given that a much wider number of people can log in and make the required changes. However, the speed at which data can be processed is still a work in process and is likely to improve in Blockchain technology over the coming years:

"In the blockchain world, every computer in the network processes every transaction. This is slow. A scaled blockchain accelerates the process, without sacrificing security, by figuring out how many computers are necessary to validate each transaction and dividing up the work efficiently. To manage this without compromising the legendary security and robustness of blockchain is a difficult problem, but not an intractable one. A scaled blockchain is expected to be fast enough to power the internet of things and go head-to- head with the major payment middlemen (VISA and SWIFT) of the banking world."

In order to protect the data held within the Blockchain and ensure its longevity, occasional updates to the code (either for technical reasons or to change critical constraints or assumptions) may need to be made. If this is the case, the code update information has to be shared across all participants to ensure that the blockchain continues to work effectively. However, in a public and open blockchain, where participants can remain anonymous if they wish, there is the risk of participants that are intent on crashing the network or diverting assets to themselves proposing software changes that appear benign and are widely adopted, or alternatively, tempting others to adopt them using strategies based on the exploitation of collective action problems. As a result, it is important that efforts are focused on overcoming these vulnerabilities remain a priority for promoters of public Blockchain technology in its open source form.

Although the ideal of a Public Blockchain - a public ledger with no single or centralised authority – is popular with many individuals who find the transparency and accessibility of the technology appealing, it is not the only way that blockchain technology can be utilised. Private blockchains, centrally administered and maintained by a single organisation and/or authorised participants are also a possibility and may appear attractive to some industries for security reasons.

A ‘permissioned’ Blockchain is a potential half-way house between a public and a private blockchain, as it restricts updating privileges to a select group of authorised users. These users negotiate governance and control rights among themselves. This process is like a partnership agreement. Permissioned Blockchains offer clear advantages in security and privacy, however, a Blockchain controlled by a private gatekeeper authority concentrates operational risk into a single point of failure and might charge a monopolistic rent to network users or fail to treat them fairly.

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Lawson Emanuel, Partnerships Director at VegaOne, (formerly NFC Ring).

The VegaOne ring is a smart ring which facilitates more natural secure access control, contactless payments, information sharing and ticketing services. VegaOne combines fashion and technology into one smart wearable which doesn’t look out of place in the office or at home. Best of all, the VegaOne Ring glides right onto your finger - no updates, no charging and no fuss. Lawson previously worked in finance at Investec and Schroders and has also spent time in Hong Kong and China developing a blockchain solution for the luxury Swiss watch market.

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