More than 400 white papers: Back to Basics on blockchain Technology

A blockchain is essentially a distributed database that records all transactions or digital events. It can also be thought of as a public ledger that can be accessed and recorded by the participating parties. The addition of each transaction to the ledger requires the approval of a majority of participants in the entire trading system and a certain standard. Once recorded on the public ledger, information can never be deleted. The exact information about each transaction is kept on the blockchain and can be verified using certain methods. Bitcoin, a decentralized peer-to-peer digital currency, is the best-known application of blockchain technology. Bitcoin as a digital currency itself is full of controversy, but the blockchain technology behind it is an excellent technology that has been widely used in both financial and non-financial fields.

Blockchain technology is based on the establishment of a distributed consensus in cyberspace, which creates an accurate and untampered record of all events on the public ledger, so that all parties in the blockchain can accurately and reliably understand all events that occur. Blockchain technology can be used to create a democratic, open and scalable digital economy that replaces the current centralized ecosystem. There’s a tremendous amount of opportunity in this disruptive technology, and it’s just beginning to change.

This white paper introduces blockchain technology and some of its notable applications in the financial and non-financial sectors, and then analyzes the future challenges and business opportunities of blockchain technology.

A blockchain is essentially a distributed database that records all transactions or digital events. It can also be thought of as a public ledger that can be accessed and recorded by the participating parties. The addition of each transaction to the ledger requires the approval of a majority of participants in the entire trading system and a certain standard. Once recorded on the public ledger, information can never be deleted. The exact information about each transaction is kept on the blockchain and can be verified using certain methods. A simple analogy of what blockchain means is that it’s much harder to steal a cookie from a hidden candy jar than it is to steal a cookie from a candy jar with thousands of people staring at it all the time.

Bitcoin is the best-known use of blockchain technology, and one of the most controversial, as the technology has helped create a multibillion-dollar anonymous market that is not regulated by national governments and is therefore regulated by many governments and industry associations.

However, blockchain technology itself is an uncontroversial and excellent technology that has been widely used in both financial and non-financial fields. Last year, Silicon Valley chief investor Marc Andreessen listed blockchain’s distributed consistency model as the most important invention of the post-Internet era. Johann Palychata of BNP Paribas wrote in Quintessence Magazine that the blockchain technology behind Bitcoin has the potential to be as epochal an invention as the steam engine and gas engine.

Current digital economy is based on trust in specific authority relies on, the reliability of the current network activity and complete information, mainly by the service provider or other parties to obtain, such as E-mail service provider to tell us that email has been sent, an online certificate authority to tell us which certificate is credible, Social service providers tell us that our sharing will only be seen by friends, banks tell us that money has been sent remotely to loved ones. What these facts show is that we have to be careful how we behave in the digital world, because our privacy and property security depend on third-party entities that can be cracked, tampered with, or misappropriated.

This is where blockchain technology shows its superiority. Blocking technology enables a distributed consensus on all past and current online behavior, including assets, to be verified at any time after recording, without sacrificing the privacy of digital assets or requiring the participation of third parties. Distributed consistency and anonymity are two key characteristics of blockchain technology.

The advantages of blockchain technology far outweigh the regulatory issues and technical difficulties it brings. One recent application of blockchain technology is “smart contracts.” Smart contracts are essentially computer programs that automatically enforce the terms of a smart contract, and when pre-set terms are met, contract participants automatically complete payments.

Smart property is another concept related to smart contracts, which use smart contracts to control the ownership of property or assets. Assets can be real assets such as cars, houses and mobile phones, or virtual assets such as company shares.

Blockchain technology is widely used in both financial and non-financial sectors.

Financial institutions and banks no longer see blockchain technology as a threat to traditional business models. The world’s largest bank is working on a new blockchain technology, hoping to seize opportunities in the sector. In a recent interview, Rain Lohmus of LHV Bank in Estonia said they found blockchain to be the most secure and tested technology in some banking and finance applications.

The opportunities in the non-financial sector are equally huge. We can imagine that all the evidence information such as legal documents, health records, notarial information and marriage records can be put into the blockchain, and the goal of anonymity and privacy can be achieved by preserving the digital fingerprint of the digital asset rather than the digital asset itself.

In this report, we look at the impact blockchain technology is having on various industries. Blockchain technology has the potential to become a new engine of economic growth at a time when we are increasingly accustomed to manipulating our digital assets and other aspects of our lives over the Internet.

The opportunities are enormous and the revolution is just beginning. In the report, we selected several key applications of blockchain technology, including notary, insurance, privacy protection, and several other interesting non-financial applications. Let’s start with a brief introduction to the history of blockchain technology and the technology itself.

1. A brief history of Bitcoin

In 2008, an individual or organization calling itself “Satoshi Nakamoto” published an article entitled “Bitcoin: A peer-to-peer Electronic Cash System”. The article describes a peer-to-peer electronic cash that can be used in transactions from one party to another without the involvement of a third party financial institution. Bitcoin is the first to implement this concept. Today, cryptocurrency is exclusively used to refer to what can be used in transactions that guarantee encryption without the need for a trusted central entity.

The author of this first paper wishes to remain anonymous, so there is no guidance on who Satoshi nakamoto is. A few months later, an open-source software prototype was implemented and the first 50 genesis blocks were released. Anyone can install the open source program and become part of the peer-to-peer Bitcoin network. Since then, bitcoin has become more and more popular.

2008

• The domain name “bitcoin.org” was registered on August 18

• The bitcoin design book was released on October 31

• The Bitcoin project was registered on SourceForge.net on 9 November

2009

• At 18:15:05 on January 3, genesis block was generated

• On January 9, Bitcoin software version V0.1 was released

• The first Bitcoin transaction took place on January 12, with 170 blocks ranging from Satoshi Nakamoto to Hal Finney

Bitcoin’s popularity has been growing, and the technology behind it has gradually found applications beyond finance.

2. Introduction to blockchain technology principle

We explain how blockchain technology works by explaining how bitcoin works, because essentially, blockchain technology is derived from Bitcoin technology, and of course, blockchain technology can be applied to any online asset activity or transaction.

Generally speaking, online business activities must be handled and communicated by a business organization as a trusted third party. The role of trusted third parties is to verify and protect the security of transactions. In addition, a certain proportion of fraudulent transactions will inevitably occur in online transactions, and financial institutions are required to judge and arbitrate, which all lead to high transaction costs.

Bitcoin uses cryptographic proof to help parties complete transactions online instead of trusted third parties. Each transaction is protected by digital signature, which is the public key sent to the recipient after being signed with the sender’s private key. In order to spend the money, the owner of the cryptocurrency needs to prove ownership of the private key, and the party receiving the coin confirms the digital signature.

Each transaction is broadcast to all nodes of the Bitcoin network and, after verification, is recorded in a public ledger, where each transaction needs to be validated before it can be included. The validation node needs to ensure two things before logging any transactions:

• Consumers own cryptocurrencies — digitally signed confirmation of transactions.

• Adequate amount of currency in the consumer’s account: Check the public books for each transaction recorded in the consumer’s account to ensure that there is sufficient currency.

Blockchain principle

However, there is a sequencing problem when these transactions are broadcast to other nodes in the Bitcoin network. These transactions may not be transmitted to a node in the order in which they occurred, so there must be a mechanism to ensure that repeated consumption of money does not occur (if the order is not accounted for, it is possible to assume that the same money has been spent twice). Transactions are peer-to-peer in the Bitcoin network, so it is not possible for a node in the network to dictate or guarantee the order in which it receives transactions.

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That means devising a mechanism that allows the entire Bitcoin network to reach a unique correct consensus on the correct order of transactions, not an easy task for a distributed system.

Bitcoin solves this problem through a mechanism known as blockchain technology. The bitcoin system blocks transactions into groups. Transactions in the same block are considered to be simultaneous, and then the blocks are linked chronologically, like a chain, with each block containing the hash values of the previous and the next block.

The problem remains that any node in the network can collect unconfirmed transactions, create a node, and broadcast this block to other nodes as the next block of the blockchain, so how does the network decide which block of the blockchain is next? New blocks may be generated by multiple different nodes at the same time, and nodes cannot depend on the order in which they receive blocks.

Bitcoin solves this problem by introducing a mathematical conundrum: each block is accepted as part of the blockchain only if it contains a solution to a particular difficult mathematical problem. This is also known as proof of work, which generates a block of nodes that need to prove that the node has invested enough computing resources to solve a mathematical problem. For example, a node may be asked to find a particular solution that, when hashed with the previous block and transaction, yields a solution with the first specified digit of 0. The average time to solve this problem is the NTH power of a single hash (n is the digit of 0).

Suppose that the difficulty of the mathematical problem to be solved can be adjusted so that it takes 10 minutes for each node to get a correct solution and produce a block, so that the probability of multiple nodes producing blocks at any given moment becomes small. The first node to solve the problem broadcasts blocks to the remaining nodes. However, in some cases, more than one block can still be created at the same time, resulting in multiple possible branches of the blockchain. But because of the complexity of the problem, the blockchain is still very stable, meaning that each node is consistent with the structure of the blockchain that reverses several blocks. Nodes that contribute computing resources to solving mathematical problems to generate blocks are called “miner nodes” and are generally rewarded.

Currency network only accept the longest chain as valid the block chain, so, for the attacker, the introduction of a false blocks not only needs to solve a math problem, and need and other normal node competition, generating all subsequent nodes can make other nodes to accept their own block chain as an effective chain, it becomes almost impossible.

Blockchain technology is being used in both the financial and non-financial sectors, where traditionally trusted third parties are required to verify and protect transactions and other activities. The concept of “smart contracts” was first proposed by Nick Szabo in 1994. Autonomous contracts are a very advanced and attractive concept for participants, but it was not until the concept of cryptocurrencies and cryptocurrencies matured that autonomous contracts became practical. Now, two programs, blockchain and smart contracts, can work together to trigger payments when contract conditions are met. Smart contracts are an important development direction in the cryptocurrency field.

Smart contracts are contracts that can be enforced by a computer and can be more easily signed, verified and enforced using blockchain technology. Open source communities like Ethereum and Codius use blockchain technology to build smart contracts. Now many companies that use Bitcoin or blockchain technology are starting to support smart contracts. The most common application scenario is that assets are transferred from one party to another when certain conditions are met. The notarization and security services provided by lawyers or banks can be replaced by blockchain technology.

Ethereum implements a lot of exciting features for its own programmable platform. Ethereum allows anyone to create their own unique cryptocurrency and use it to execute and pay for smart contracts. Ethereum itself has its own cryptocurrency system that can be used to buy the services it provides. Ethereum’s technology already supports a wide range of applications, including government agencies, anonymous banks, keyless systems, crowdfunding, derivatives trading, and more, all of which can be done using smart contracts.

In addition to cryptocurrencies, there are a wide range of other blockchain applications. Currently, the industry has three representative technologies that can support other applications and overcome some of the limitations of bitcoin technology.

• Alternative Blockchains is a technology that uses blockchain algorithm to establish distributed consistency management for specific digital property. It can share miner nodes with superior networks such as the Bitcoin network, known as converged mining, and can be used for applications such as DNS, SSL certificate authentication, and file storage.

• Colored Coins is an open source protocol that describes a set of technologies that can be used to create digital property on top of the Bitcoin blockchain, much more than a digital currency.

• Sidechains is another blockchain technology supported under the Bitcoin system, just as the value of the US dollar and the British pound are backed by gold. There can be thousands of sidechains corresponding to bitcoin. Each sidechains has different characteristics and purposes, and their scarcity and liquidity are guaranteed by the Bitcoin blockchain. Of course, the Bitcoin blockchain can also add new features with the help of Sidechains, and the technology has been tested experimentally.

Companies including IBM, Samsung, Overstock, Amazon, UBS, Citi, Ebay, Verizon and others have all developed blockchain-based applications for their own applications, Nine of the world’s largest banks, including Barclays and Goldman Sachs, have recently joined a group led by New York firm R3 in an effort to open up a blockchain framework for financial markets. This is the first time that banks have worked together to develop a blockchain application. World-leading banks such as JPMorgan, State Street, UBS, Royal Bank of Scotland, Credit Suisse, BBVA and Commonwealth Bank of Australia are among the pioneers.

A brief introduction to the representative applications and programs, as well as the enterprise, is provided below.

1. Financial applications

1.1 Private securities transactions

A company will pay a huge price if all its transactions, transactions, etc. are made public. So generally speaking, there must be institutions, such as banks, to guarantee the corresponding transaction, in order to attract investors. In the stock market, the stock exchange is required to list issued shares for the secondary market to trade or clear at a rapid pace. With the advent of blockchain technology, companies can directly use blockchain to issue their own private shares. Here are some examples:

• NASDAQ Private Equity began its Private Equity trading business in 2014, providing basic functions such as Equity structure trading and investor relations management for both prospective and Private companies. Equity trading in this market is inefficient and slow because third parties must be brought in to complete the transaction. To address the issue, Nasdaq used technology from SAN Francisco-based OnePlus startup Chain.com to enable private fund transactions based on blockchain technology. Chain.com uses blockchain technology to build smart contracts for equity transactions, which is supposed to be fast, traceable and efficient.

• Medici is a stock exchange built on Counterparty, a protocol based on Bitcoin 2.0 technology, and aims to be the cutting edge stock market. Counterparty is a protocol that implements traditional financial instruments using self-executing smart contracts. You don’t need physical contracts to sign, verify and execute contracts using blockchain technology. The process does not require lawyers, exchanges or banks to act as intermediaries.

• Blockstream is an open source project dedicated to sidechain, a collaborative blockchain that can solve the problems of fragmentation and security in cryptocurrency systems. Applications include securities registration, such as stocks, bonds and other derivatives, to secure deposits and loans.

• Coinsetter, a New York-based bitcoin exchange, uses Project Highline and blockchain technology to sign and close financial transactions in T+10 minutes, compared to T+3 or T+2 days for traditional transactions.

• Augur is a decentralized prediction market that allows users to predict various outcomes of events and buy or sell stocks.

  
  

• Bitshares are digital tokens that use blockchain technology and are referenced to specific assets, such as cash or commodities. The holders of these tokens can profit from changes in the corresponding commodities, such as gold, oil, and the DOLLAR.

1.2 the insurance industry

Non-vulnerable, difficult-to-copy assets that can mark identity attributes with one or more unique tokens can be registered on the blockchain. Once registered, it can be used to confirm ownership of assets and to trace transaction history. Any asset, real or virtual, such as valuable assets such as real estate or cars, can take advantage of these technologies, while insurance companies, or insurers, can use blockchain to determine who owns the asset.

• Everledger uses blockchain technology to create a permanent ledger of the authentication and transaction records of diamonds. The unique characteristics of each diamond, such as length, width, height, depth and color, are encrypted and stored in the ledger. Verification of diamonds can be done by insurance companies, legal agencies, owners, etc. Everledger provides a responsive web page for insurance companies to view diamonds, create/read/update claims of ownership, and publish and read updated diamond theft reports.

  
  

2. Non-financial applications

2.1 Notary Service

Blockchain technology can be used to determine the authenticity of documents without the need for a corresponding authoritative notary or notary. Document authentication services can help prove ownership, existence and completeness of documents. Falsified certificates can be verified by an independent third party and found to result in legal penalties. Use block chain technology notary protect the privacy of the document and the identity of the user needs to be notarized, the files of the notarial certificate and publish the encrypted file itself to the blocks in the chain, safety and reliability than traditional notarization timestamp recording, and do not require expensive cost and avoid the transfer of a paper document.

• Stampery is a company that uses blockchain technology to add an electronic stamp to emails and any document.

  
  

• Block Notary is an iOS application that uses TestNet3 or the Bitcoin network to create proof of existence for any electronic content such as photos or documents.

  
  

• Crypto Public Notary uses Bitcoin’s blockchain technology to notarize documents. It uses a small amount of Bitcoin to record the checksum of documents on the Public blockchain.

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• Another service that uses Bitcoin blockchain technology is Proof of Existence, which uses blockchain to record SHA256 values of files.

  
  

• Ascribe is a company that uses blockchain technology to authenticate Copyrights and also provides ownership change services for original authors.

2.2 Music Industry

With the continuous development of online streaming services on the Internet, the music industry has undergone a tremendous transformation in the past decade, which has caused a great impact on all practitioners of the music industry, including artists, publishers, songwriters, streaming providers, etc. How to determine the royalty of a piece of work has always been an extremely complex process, and it has become even more complicated in the Internet age, where artists and songwriters need more transparent methods of royalty payment.

Blockchain technology can build and maintain a broad, accurate, distributed database of music ownership information in a public ledger. In addition to ownership information, each royalty share can be added to the database through a smart contract that specifies and automates stakeholder share.

2.3 Distributed Storage

Cloud storage services such as Dropbox, Google Drive, and One Drive are becoming increasingly popular in the file storage space. Although these services are very popular, they all have various hidden dangers and challenges in terms of security, privacy and data control. The biggest problem is that users must trust a third party to take care of their confidential files.

• Storj is a peer-to-peer storage platform based on blockchain technology that allows users to transfer and share files without the involvement of a third party. Users can share spare storage space and network bandwidth on their PCS for other users to store files in return for bitcoin.

Decentralized storage control can avoid most traditional data disasters and failures, and significantly improve data security, privacy, and controllability. The Storj platform relies on a decentralized algorithm to reward users who contribute to the network, periodically check the integrity of files, and reward users who maintain file integrity. The platform uses a separate blockchain to store file metadata, and uses bitcoin to reward users.

2.4 Distributed IoT

In the industry and consumer, the Internet of things (IOT) is becoming more popular, most of the Internet of things platform based on centralized control model, the interactions between equipment need to pass intermediary or node exchange equipment to control, however, when the interaction between a large number of devices need to automatically, this way will become unreliable, need to implement decentralized distributed Internet platform.

Blockchain technology can be used to implement a distributed Internet of Things platform that enables secure and reliable data exchange and recording. In the Internet of Things, the blockchain can serve as a universal log book of trusted interactions between all devices.

• IBM is working with Samsung on a platform called ADEPT (Autonomous Decentralized Peer To Peer Telmetry) To implement the distributed Internet of Things with bitcoin-related technologies. ADEPT uses three protocols: BitTorrent(file sharing), Ehereum(smart contract), and TeleHash(peer-to-peer communication).

• Filament is a startup that provides a distributed Internet of things service that uses bitcoin blockchain technology, and each device has a unique ID in a public log book.

2.5 Anti-counterfeiting technology based on block chain

Anti-counterfeiting is one of the most challenging issues in modern business activities, especially in the context of the popularity of e-commerce today, where existing schemes rely on the credibility of third parties selling goods, sometimes causing misunderstandings and friction between consumers and producers.

Distributed blockchain technology provides another solution for the existing anti-counterfeiting mechanism. It can be imagined that if the manufacturer and seller are all a node in the blockchain network and keep the authentication information of the goods, each participant does not need other third parties to prove the authenticity of the goods.

• BlockVerify uses blockchain technology to create an anti-counterfeiting mechanism and ensure transparency in supply chains. It is used in the supply of pharmaceuticals, luxury goods, diamonds and electronics.

2.6 Internet Applications

Namecoin is another blockchain technology used to implement a distributed domain name server (DNS) that avoids network censorship. Current DNS servers receive control from governments and large corporations and may be censored, injected or monitored for user behavior. The use of blockchain technology means that DNS records can be kept in a decentralized way, with a reliable list of DNS services stored on every user’s computer.

Public Key Infrastructure(PKI) technology is widely used in the distribution and management of digital certificates, each device needs to have a certificate authority (CA) root certificate to verify the digital signature, PKI has been widely used and achieved great success. However, it relies on the central organization to issue the root certificate and faces huge scalability challenges.

Keyless Security Infrastructure(KSI) using block chain technology can solve the limitation of PKI technology, KSI can use block chain signature authentication function to realize certificate verification.

Blockchain technology is a ground-breaking revolutionary technology. As previously described, there are many applications and problems that can be solved by adopting blockchain technology, including all kinds of financial and non-financial applications. Most of the applications bring revolutionary innovation, but at the same time, the application of blockchain technology also brings risks of response.

Change in behavior patterns: This change happens all the time, but many people resist change. Blockchain technology creates a system that does not require an authoritative third party. Users must adapt and trust that their electronic transactions are secure, private, and complete. When payment intermediaries such as Visa and Master emerged, consumers also experienced a shift in roles and responsibilities.

Scaling up: Some of the existing initial blockchain-based services are challenging to scale up. Assuming you’re running a blockchain service for the first time, you have to go through the process of downloading the entire existing blockchain and verifying it, which can take hours, with the time increasing dramatically as the number of blocks grows.

Startup issues: Migrating existing contracts, business documents, etc., to the blockchain takes a lot of work and can take a lot of time and cost.

Government regulation: Government agencies such as the FTC and SEC may issue new laws to prevent the rapid adoption of blockchain technology.

Illegal activities: Due to the anonymity of blockchain transactions and the rapid transfer of assets, some illegal elements may use blockchain to carry out illegal activities, such as underground transactions. But with adequate technology and regulatory tools, law enforcement agencies can monitor and crack down on these activities.

Quantum computing: The basis of blockchain technology is that it is impossible for a single node or a single party to compete with the whole system due to the limitation of computing resources. However, if a quantum computer is implemented, the key may be cracked by brute force in a short period of time, leading to the collapse of the whole system. The key could then be encrypted in a stronger way, making it harder to crack.

In 2015, bitcoin circulation and prices peaked in September and October. In the consumer market, the use of bitcoin in transactions has been rising, and it’s not just bitcoin enthusiasts who are bullish about bitcoin’s prospects. Asset research firms like Wedbush expect bitcoin to reach $600 per bitcoin.

Part of the enthusiasm for bitcoin is because more and more money is entering the space. At the end of 2015, bitcoin and blockchain-related companies received a record-breaking $1 billion in investment. American Express, Bain Capital, Deloitte, Goldman Sachs, mastercard, New York Life, and the New York Stock Exchange have all recently invested tens of millions of dollars into blockchain.

Corporate investment in bitcoin and blockchain technology is growing on multiple fronts. Nasdaq hopes to use blockchain technology to create a more secure and efficient stock trading system, while DocuSign and Visa are both preparing to use blockchain technology in the vehicle rental industry. Microsoft has unveiled its blockchain-based smart contract product. Many companies create a small blockchain system within themselves, called “private Blockchains”. They use BlockCypher’s blockchain technology to help improve their business capabilities.

VC funding in Sept/Oct 2015

In general, blockchain technology is the backbone of bitcoin technology. Its ability to safely implement distributed public ledgers and implement various functions makes it attractive in all areas of the financial and non-financial sectors.

There is a lot of interest in blockchain-based business applications, so there are a lot of startups working on it, and blockchain technology is also facing the challenges described above. Many large financial institutions, such as VISA, mastercard and NASDAQ, are investing in research on the application of blockchain in their own businesses, and hope to discover new business models based on blockchain, hoping to achieve some results before the regulatory environment of blockchain changes.