Blockchain can have a huge impact on the value chain in our society. Examples are efficiency, transparency, ownership, value (transfer), automation and services. Cm: explains it.
To understand the world of blockchain, you need to understand the innovation of bitcoin currency in 2009 that is built on the underlying technology blockchain. Bitcoin is a combination of four individual elements: cryptography, a peer-to-peer network, an open source protocol and a shared ledger. This makes it a phenomenon that people are excited about.
When talking about bitcoin it is essential to distinguish between the currency bitcoin and the bitcoin network: bitcoin is the digital currency and the network is the underlying infrastructure consisting of the nodes that help track all bitcoin transactions using the blockchain. The bitcoin phenomenon therefore includes both virtual money and infrastructure. It is therefore a sophisticated and revolutionary way to store data in a certain way without the intervention of a third party.
The internet already makes it possible to transfer information quickly and cheaply without paper and without intermediaries. Blockchain offers the same benefits of transferring values. The internet is used to transfer words and images, blockchain for transactions. Blockchain is a combination of two elements: a shared and distributed ledger with synchronized data distributed across multiple sites, countries and / or institutions and a cryptography: digital token with a monetary value.
That’s how a blockchain works
What is the difference between a blockchain and distributed ledger technology? A distributed ledger is a database that exists in multiple locations or between multiple users. Organizations often use a centralized database that is located at a fixed location, so this centralized database has one point of failure. However, a distributed ledger is decentralized to prevent a third trusted intermediary or authority from processing, validating or authenticating transactions. Blockchain is therefore a type of distributed ledger technology.
A blockchain, a chain of blocks, is a system that can be used for recording data. Examples of this are banking matters, deeds of ownership or other data for products, for example. What is special about blockchain is that without a trusted intermediary it has a right to exist without there being one central intermediate point. A blockchain is therefore a chain of blocks where it is important how the different blocks form a chain (figure 1). Each block contains coded data and can be included in the chain, if this data refers to the previous data, and thus forms a chain.
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Bitcoin as a digital currency for transactions – who transfers how much money to whom – is recorded in blocks, similar to journal entries in a ledger. A transaction is therefore a record with different fields and therefore blocks. The account numbers are unique public keys and each transaction also has a fee for the miners.
Bitcoin transaction. Blocks (data / text) form a chain because each piece of data refers to the previous piece of data. This creates a chain. The most special thing about the blockchain is that no trusted third party is required to store, monitor and control the data, as is currently the case with banks or notaries, for example. Anyone can participate in this system and add new transactions (blocks) to the chain. These blocks are stored locally and no one checks the reliability of the transaction, where the challenge is to set up the system in such a way that only valid transactions are added without the person behind the transaction being known and without a central control.
Features of blockchain are: no central storage, not changeable, error correction is impossible, and in addition the energy consumption, the turnover rate, scalability, privacy and the semi-democratic content. If no consensus is reached within a group, separate blockchains can arise with their own rules and currencies, such as that which took place in 2017 with bitcoin, when bitcoin cash was created. Blockchain at its core is therefore an intelligent way to combine cryptographic techniques in a publicly distributed database.
Three commonly used blockchain structures
Various blockchain infrastructures are being developed in the world that may or may not operate publicly or privately in different ways. Differences in the infrastructures are also determined, among other things, by the way in which consensus has been reached to arrive at that infrastructure. At the moment there are three different structures that are widely used: Hyperledger Fabric, Ethereum and Corda.
Hyperledger Fabric focuses on the supply chain of a sector and mainly focuses on streamlining the supply chain, whereby the relevant information is only shared with stakeholders that are not visible to all (involved) parties throughout the chain. An example of this is the recent research by Jansen (2018) on the added value of material certificates, the processing of the material and the final assembly of these steel elements. Both Hyperledger Fabric and Corda have a more sophisticated consensus model that does not rely solely on evidence-based mining. Hyperledger and Corda have already checked the transaction data and the powers therein. Nodes – which validate the reliability and integrity of transactions – perform a different role and tasks within Hyperledger Fabric to achieve consensus than those at Ethereum.
Ethereum aims to innovate in multiple sectors worldwide with distributed distributed systems on which governments can operate, as well as the financial sector, logistics systems and the (supply) chain, the energy market, music and gaming industry, healthcare including the pharmaceutical market, etcetera. Ethereum is a platform for developing decentralized applications for various industries. Within Ethereum, all users must reach consensus on all transactions within the network, the order of transactions being essential for consistency across this network. Consensus is reached on the basis of mining, a proof of work mechanism, whereby common ledger is reached in the general ledger and all users give permission to all transaction data in this blockchain.
Corda for the financial sector
The Corda blockchain is the result of intensive cooperation between banks and has therefore also been specially developed for this sector. This consortium collaboration is known as R3CEV and its main purpose is to manage, synchronize and distribute financial applications. The consortium is convinced that not all blockchain data lends itself to publicly accessible blockchain infrastructure in terms of financial transactions. Privacy and scalability are the most important principles for the development of an infrastructure such as Corda for the consortium. Corda and Hyperledger have already checked the transaction data and the powers therein. At Corda, consensus is achieved in a similar way to Hyperledger Fabric, because for both the consensus is determined by transaction validity and transaction identity by an automatic check whether all signatures are correct.
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Reaching consensus is an important factor in enabling a distributed network to function optimally, and this can be done in a permissionless way – which everyone can use – or in a permissioned – limited-access way. Ethereum is permissionless, Hyperledger and Corda are a permissioned blockchain. Corda and Hyperledger Fabric do not necessarily have a built-in cryptocurrency. Fabric does offer this option. Ethereum lends itself well to decentralized applications, smart contracts and digital payment units. More transparent Ethereum could compromise privacy and scalability. Hyperledger Fabric does not know these problems due to the use of the Byzantine fault algorithm and the limited accessibility and is therefore suitable for various applications.
Blockchain in practice
In business practice, blockchain is already widely used. In addition to use for, for example, smart contracts, maternity care, the ticket and music industry, tax authorities, banks and notaries, there are a number of areas where it also affects the controller:
- Trade finance. International trade is a very complex process. A bank provides a letter of credit to cover credit risks for companies that want to trade internationally. Sometimes it takes weeks. Documents have to be sent back and forth countless times and everything has to be administered. Because trust is the problem here, blockchain offers the ideal solution. Using smart contracts, securities can be provided to companies in a much more efficient way than is currently the case. Rabobank launched a trade finance platform We.trade last year.
- Supply chain management. Supply chain management is an area where many applications with blockchain are already embedded. The Port of Rotterdam Authority is a good example of this with the shipping of containers.
- Accounting. Blockchain is a ledger with transactions that you can (selectively) share with other parties. This makes triple entry accounting possible. In addition to registering a transaction on two sides of the own balance sheet, it will also be possible to register this in a blockchain. If you do that, you will have a closed system and there will no longer be any coordination between the parties. Crypto currency is already regulated within the Tax Authorities and the DNB is now also taking a leading role in this.
- Factoring. A problem with factoring is that you can claim that you have a claim on a company. But how does the factoring party know that it is correct? When a triple entry accounting has been set up, other parties can also be given access to the shared ledger in which the claims are recorded irrefutably and verified. This allows them to immediately see that the claim is correct.
Creation of blockchain
Blockchain is a decentralized transaction and data management technology initially developed for bitcoin’s cryptocurrency. Interest in blockchain technology has risen sharply since the idea was introduced in 2008. In his white paper, creator Nakamoto argues for an electronic payment system in which unknown parties can directly and without the intervention of a third party, such as a bank, realize transactions. The payment method of this system is bitcoin. Nakamoto then improves his system on a number of points, such as combating double spending and entering a timestamp. In this way he creates a system in which trust is embedded in the technology, so that a trusted third party, to which Nakamoto has basic objections, is no longer necessary. The recipient can be sure that the previous owner has not made a previous transaction and that the first (money) transaction is the only valid one.
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Milton Friedman and bitcoin
Nobel laureate in economics in 1976 Milton Friedman already saw in 1999 that the internet would play a major role in reducing the role of government in our economic and social life. According to Friedman, only a reliable electronic money system with which people can mutate money without knowledge of the mutants was missing. Such a system then resembles cash transactions with anonymity. According to many, bitcoin has fulfilled this promise.
Author: Dr. ing. Jan Veuger MRE FRICS, lecturer Blockchain Saxion University of Applied Sciences
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