Blockchain. Today Applicability and Implications

Blockchain. Today Applicability and Implications Dominic Bucerzan1, Crina Anina Bejan2 Abstract – Blockchain is an emergent technology with very rapid evolution that seems to radically reshape industry, economy and society [2]. It seems that blockchain technology triggers the beginning of the second era of digital economy. First era of digital economy is the result of the convergence of computing and communications technologies, meanwhile its second era tends to be a combination of computer science, mathematics, cryptography and behavioral economics [10]. It started back in 2008 when it was introduced for the bone structure of cryptocurrencies by a person or a group of people known for the name Satoshi Nakamoto. This paper aims to be an overview of what Blockchain currently involves, also it discusses its potential applications in different industries and its implications for society and economy in the context of next generation of internet. Keywords –Blockchain, consensus model, cryptocurrency, cryptographic hash, distributed ledger, mining. 1 Introduction New technology frontiers had been developed in the last years, which allow a more accurate, less time consuming, more connected and more decentralized world [1]. Blockchain is an emergent technology with very rapid evolution that seems to radically reshape industry, economy and society [2]. It started back in 2008 when it was introduced for the bone structure of cryptocurrencies [3] by a person or a group of people known for the pseudonym Satoshi Nakamoto. Figure 1 shows in brief the history of blockchain. Blockchain combines in a new and original way technologies that existed before. It links cryptography with distributed computers to create a new paradigm the “internet of value, ownership and trust” [5]. Trust and collaboration seems to be the main advantages that this technology offers to our society. Users all over the world can trust each other and transact data (digital money, voting, medical records, property agreements, etc.) using large decentralized peer-to-peer networks without a third party authority involved. Trust is established by protocols, cryptography and computer code [2], strengthening this way, collaboration and cooperation on a global scale. 1Professor at "Aurel Vlaicu" University of Arad , Romania, e-mail: [email protected] 2 Lecturer at "Aurel Vlaicu" University of Arad , Romania, e-mail: [email protected] Blockchain is inspired by accounting procedures, using ledgers to store every transacted data in the network. According to National Institute of Standards and Technology (NIST) [6] blockchains are immutable digital ledgers systems implemented in a distributed environment without a central repository and usually without a central authority. Blockchain technology enables a community of users to record their transactions in a public digital ledger in such a way that no transaction can be modified once published. The ledgers are shared, trusted and public. Every user can inspect them, in the same tine no one controls them. The ledgers are cryptographically secured from tampering and revision [7]. Fig. 1. History of blockchain [4] This structure makes it highly difficult, impossible with today technology to change it rules. A transaction in the ledger is valid when the users from the network “reach a consensus”. There are different models of consensus, each with positive and negative parts for a specific environment. Inspired by the digital currencies, which allows trusted financial tranzactions between two users without the presence of a bank (the authority which validates the transaction), blockchain technology improves the efficiency of different economic, social and industry domains. 2 Blockchain components, actors and principles A macro view perspective of blockchain system can include the fallowing different components (see figure 2) [8]:  Ledger: stores the transactions;  Peer Network: stores and maintains the ledger. Each node from the network keeps its own copy of the ledger. The role of the network as a 3       whole is to reach a consensus on every new transaction from the ledger to ensure that every copy of the ledger is identical with the original one; Membership Services: manages user identity, authorisation and authentication; Smart Contract: protocols in shape of programs and data (sometimes referred to as functions and state) that run on the blockchain; Wallet: stores users' credentials and tracks user associated digital assets. Technically it stores the user private key; Events: notifications of updates and actions on the blockchain. Some examples of events: creation and dispersion of a new transaction on the chained network, addition of a new block, notification from smart contracts; Systems Management: allows blockchain components management (creation, monitoring, modification); Systems Integration: integration of blockchain with external systems. Fig. 2. Blockchain components [8] Blockchain solutions use multiple actors with different roles [8]:  Architect: is a person or a group with background in business analysis, project management and modern programing languages, whom designs the blockchain system;  Operator: have the role to develop and maintain the peer network; they may be considered the keepers of the ledger by storing, maintaining and updating it;  Developer: have the role to create the smart contracts that run on blockchain system and to implement the applications that interact with the blockchain system;  Regulator: depending on the rights in the organization, they can have increased visibility over the ledger compared to the rest of the users;  End User: is unlikely that end user interact directly with the blockchain structure. They are the consumers of the services build around blockchain;  Data Storage: represent traditional databases that deposit the data offchain. Usually on-chain is stored only the hash of the data that is cheeped off-chain;  Data Processing: external software and devices used to extend the processing power of the network. Blockchain seems to be the engine of the new digital economy and it also outlines some basic principles for both [10]:  Network integrity: by using cryptography in an original way blockchain technology solves two major problems: user integrity and double spending. User integrity is validated by the network itself by a mathematic algorithm, no other third authority being involved. Blockchain mechanism minimize fraud by making it very costly regarding hardware resources and time. In blockchain there is no need for a third authority to guaranty users transactions, this is done by the system itself and a transaction is made directly between the sender and its intended receiver;  Distributed power: blockchain technology uses distributed networks and no central database or central server. In comparison with traditional databases if a participant leaves the network the system will go on with no loss of information. If more than half of the network tries to highjack it everyone else would know what they are doing. Also energy costs for dominating a blockchain network would exceed its financial advantages, making that goal worthless;  Value as an incentive: blockchain system are design to pay the ones who work for the system and in the same time the system belongs to the ones who own and use its value units. This way both parties will want system reliability;  Security: security measures are embedded in blockchain network itself which apparently has no failure and it guarantees in the same time confidentiality, authenticity, non-repudiation and immutability of a transaction;  Confidentiality: everyone should be able to control their own data. If there is no private life there is no freedom. People should have the right to decide what, when, how and how much of their identities they want to bring to someone’s attention. Eliminating the need to trust in others, blockchain eliminates the need to know the identity of users to interact with them. Blockchain technology is an opensource algorithm that can be used by anyone without having to authenticate. The system itself don’t need to know personal data to work properly; 5  Rights preserved: using proof of work protocol, blockchain technology assures that someone can trade only things (real property, digital property) they own. It is impossible even to trade things for somebody else (eg. A layer to trade something for a client). Using smart contracts blockchain guaranties the write of property;  Inclusion: blockchain technology try to reduce the barriers for everyone who want to use it. It was designed to be used not only for rich people, it should be available for everyone. 3 How blockchain works If user A wants to send some asset to user B, they initiate the transaction which is broadcasted to the network and validated. The transaction is put into a block and executed (asset moves from A to B) and added to the chain. The network approves the block and the transaction is sealed (see figure 3). Fig. 3. Blockchain transaction [4] The NIST describe in [6] how blockchain works. Technically blockchain system keeps track of transactions. A transaction represents a recording of a transfer of assets between users. A collection of transaction is stored in ledgers. Every ledger is copied and distributed to all nodes of the system (see figure 4) [6]. Fig. 4. Blockchain distributed copy of ledgers [6] A new transaction is submitted to a node which will alert the other nods from the network that a new transaction had arrived. Eventually after reaching consensus the transaction will be included by a node in a ledger and distributed to the network as completed. Users may initiate transactions to the ledger by sending them to some nods from the blockchain which will propagate the initiated transaction as padding to the nods from the network. The distributed transactions will wait until will be include in a ledger by mining nods [6]. Mining nods are the ones who maintain the blockchain by publishing new blocks. Blocks contain ledgers with validated transactions. Validity of a transaction is established by checking that the providers of funds engaged in the transaction had digitally signed the transaction. Mining nods will verify the validity of every transaction from a block. The block will be accepted to the blockchain only if the transaction which it contains are all valid. When a block is created a hash value will be generated and stored in the block [6]. Each new block will store two hashes: in the header will keep the hash for the previous block and in the end will keep its own hash. The hashes are the chains between the blocks (see figure 5). All block will store also the nonce [6]. Fig. 5. Chaining process [6] The nonce is used in mining process and represents the value used by mining nods to solve the hash puzzle and give the mining nods which find it the right to publish the block. A block is published when reaching a consensus [6]. Figure 6 shows how blickchain flow works. The mining process is based on solving a cryptographic hash puzzle. A block is ready to be chain in the blockchain if miners find a certain value (nonce) that operated with the block data will generate a SHA256 code that respects some targeted criteria that a are changing periodically. For example [6]: SHA256 (“Blockn”+nonce) = HV (1), where n>0 and HV must starts with “000000”. Hash functions are mathematical one way functions. This means that from the obtained hash value is very difficult to generate the components that generated the hash value and the process needs hard computational work. If just one unit in the components of the hash is change the generated value will not be the same. In contrast with the difficulty of factorization of the hash value it is very easy to verify it. 7 Consensus models are programs that enable the users to work together. They define what happens in conflict situations and which mining nod will publish a new block. The method of agreement must work even in the situation of possible attacks from malicious users. There are several models of consensus among which most popular are: poof of work, proof of stake and round robin [6]. Fig. 6. Blockchain flow [8] Proof of work consensus model is based on the “proof” of the nonce. Finding the nonce is the proof for the work engaged in finding it. Some particular aspects of this model are [6]:  past work won’t influence the chance to solve future hash puzzles easily;  users are incentivised to accept new validated blocks, otherwise it is very likely that other nods will accept it and start build of it. If they refuse to build on the new block they will be building a shorter chain of block and the blockchain system will accept only the longest valid chain. The main advantage of proof of work model is that it is proper to a network where little trust or no trust between the users is. Also the main disadvantage is that it is expensive regarding energy consumption in the mining process. Proof of stake consensus model uses for the creation of a new block the amount of stake a user has. There are several methods how the system uses the stakes. Regardless of these aspects, it is certain that users with more stakes will be selected to produce new blocks. This consensus model is not as costly as proof of work because it doesn’t need resource intensive computations. In this model the “rich” can stake more and obviously gain more assets. For all that, it is cost prohibitive to gain control of the system [6]. Round robin consensus model is based on the level of trust between mining nods. This type of consensus is proper for privet blockchain networks and the mining nods take turn in creating blocks. In round robin, there is no need of cryptographic puzzle and it has low resources consumption [6]. In this type of model there is a protocol which involves a degree of randomness which solves the situation in which a nod is not available when it is its turn to create a node, so not to stop the creation of new nods. No node creates the majority of blocks [6]. Updating the technology in a blockchain is called forking and changes to a blockchain software are called forks. These operations are extremely difficult regarding that they are targeting distributed networks, cryptographic functions and user consensus. 4 Applicability and implications Today blockchain technology is considered to be like the internet back in 1992 before World Wide Web. Crypto currency is the first implementation of blockchain like email was the first popular application of internet [9]. Design primarily for bitcoin solution, blockchain system has become the base of several digital currencies, each of them with specific properties and design. Figure 7 shows the main cryptocurrencies that flow on the internet and their evolution in US dollars for the last five years, according to their exchange rate evolution. Fig. 7. Evolution of Cryptocurrencies in USD [11] 9 The most valuable cryptocurrency remains bitcoin. However it can’t be mined on classic computers. This is the main reason for which other cryptocurrencies that can be mined on ordinary home computers wore created [11]. Industry and business had recognize the blockchain potential and between 2013 and 2017, capital has been invested in 120 blockchain start-ups [9]. Like seen in figure 8 blockchain is not proper yet to replaces all existing traditional technology. Figure 8 shows some questions that someone should ask before trying to implement blockchain technology [8]. In many cases because the technology is relatively new and not understood correctly there will be attempt to integrate blockchain technology even if it is unnecessary [6]. Fig. 8. How to determine if blockchain is appropriate [8] Blockchain is a data structure that allows only appending operations: visualising the past history of the blockchain and adding new blocks to the blockchain. Every block keeps the value of previous block. The history of the blockchain is public to all nods of the network [8]. Depending on their permission models blockchains are [8]:  Permissioned type of blockchain system suppose that only particular users can write or read to it (like an intranet); proper for: banking, supply chain, insurance and healthcare;  Permissionless blockchains systems suppose that any user can write and read to it (like the public internet); proper for: trusted timestamping and energy industry. Table 1 show a comparison between specific attributes of public and private blockchain structure. Table 1. Comparison between private and public blockchain [7] PUBLIC PRIVATE ACCESS Open read/write Permissioned read and/or write SPEED Slower Faster SECURITY Proof of Work Proof of Stake Other consensus Mechanisms Pre-approved participants IDENTITY Anonymous Pseudonymous Know identities ASSET Native Asset Any Asset Until today blockchain proved that is suitable to be used in Business to Consumer (B2C) and Business to Business (B2B) transactions [8]. Table 2 shows some characteristics that blockchain improve this types of businesses. Table 2. Blockchain – B2C and Blockchain – B2B [8] Advantages Business to Consumer (B2C) Areas of focus Transparency to the Food supply consummer Traceability Responsibility from the Procurement supplier Labour Labor verification Logistcs Immutable shared view Compliance Business to Business (B2B) Challenges Advanntages Repetition of procces Heavy dependence on paper Heavy dependence on people Excesive fees and charges Efficaciness of process Encreased security of documents Reduce dependence on people Areas looking for transparency Financial Logistic Charity Funding Agriculture Precious Metals Tracking Immediate implementation Financial Global trade & commerce Verification of ownership 11 Digital cash (cryptocurrencies) was the first implementation for blockchain technology. Beside it there are some domains that could adopt blockchain easily: finance, business and economy. Some particular areas we can mention are [2][12]:  Context globalization: although computers and telecommunications had expand our way of doing business the globalization economy process still exclude some of potential users. Blockchain is a solution that may finalize this cycle and offer business opportunities at a global scale minimizing cost and enhancing collaboration and trust in a trustless environment;  Property rights: property is more easily to track in a decentralized system where everyone can see the trail of an assest. Blockchain offers solutions in this direction;  Supply chain: supply chains involves collaboration between many organizations, this is why blockchain technology found in this environment a primer area of implementation. Embedding blockchain technology in supply chain systems improves them with several advantages like: it can reduce fraud and corruption, it offers control of authentication and trust, it can increase the transparency and visibility to the end user of the finalized product;  Commerce: blockchain technology streamline the whole process of commerce, bringing closely sellers and buyers, by excluding the middle authority, minimizing costs, enhancing trust and transparency in distributed and decentralized networks;  Finance: blockchain may revolutionize payments system making them more clear, transparent and chipper by using digital money;  Elections: blockchain offers an open voting system that exclude a central authority that counts the votes. Also by using smart contracts somehow it coud engage politicians to their governance program, making it not only a promise but also a fact;  Public administration and government: blockchain offers the possibility of a governance with seamless and efficient interactions. Govenament transactions and services may be conducted in a paperless and cashless manner without the need of visiting government offices;  Education: blockchain technology may be integrated in many institutional research programs that tat can include: the proof of learning, management of credential and transcripts, management of student’s records, management of reputation and payments [3]. Some interesting national projects regarding the implementation of blockchain technology are:  Smart Dubai 2021: a project that aims to make Dubai a smart city with a greater impact on costumers, financial environment, resource and infrastructure having like objective the full change of areas like: living, economy, people, mobility, environment and governance [13];  Estcoin: is the project of Estonian government to lunch government-backed cryptocurrency called estcoin. Although the project was launched in 2017 it seems that if faces national and international obstacles from institution that will accept very difficult the change namely local and international banking authorities. Maybe Estonia will not fulfill its plan of issuing digital national money yet, still it was an example for other countries which take seriously into consideration the opportunity of their state-backed digital currency [14]. Blockchain technology is at its beginnings. With today diversity of smart mobile devices and with the variety of the applications[] distributed on them [16], blockchain technology will be shortly adopted by this environment. With every future implementation it shows its potential and applicability that waits to be revealed. In time, the performances of smart devices increases constantly [17] and they will include blockchain technology making an optimized smart blockchain things environment. Blockchain technology creates a “trust issues” free environment, where business tranzactions are guaranteed by blockchain itself replacing other existing mechanism that signal or convey trust [18]. 5 Conclusions and future works Blockchain technology evolved very fast in a relatively short period of time. Its advantages and implications are obvious to technical progress. 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