2016 the year of BlockChain

Blockchain: various flavours of this with many proprietary implementations (actual and mooted), and may best be considered as a methodology rather than specifically a technology a permissioned or permissionless distributed database based on a protocol that maintains a continuously growing list of transactional data records hardened against tampering and revision, even by operators of the data store’s nodes.

Bitcoin a Blockchain implementation: characterised as an unregulated crypto-currency (non-centrally controlled virtual currency with cryptographic basis) but generally best considered as a digital commodity (as considered by US Fed Reserve and ATO).Uses bitcoin blockchain (a specific decentralised consensus protocol voting for legitimacy of a block) to manage transactions.

Distributed decentalised open Ledger a base of BlockChain:
A blockchain based upon a distributed database that maintains a continuously growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block.By design, blockchains are inherently resistant to modification of the data — once recorded, the data in a block cannot be altered retroactively. Through the use of a peer-to-peer network and a distributed timestamping server, a blockchain database is managed autonomously. Blockchains are “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.

The block – base container of a set of transaction data:
The block’s hash value is sensitive to a single bit change (integrity control)
The Blockchain Protocol rules (per blockchain) determine when a new block has been successfully created (mined)
Any miner (network based block processor) is allowed to create a new block, other miners can easily validate a successful new block and agree on acceptance (consensus processing). All miners want the current agreed chain to allow opportunity to calculate the next block.

 

Linking blocks into the BlockChain:
Blockchain protocol rules define when a successful block is generated and the mechanism for network peer consensus to agree that a new block has been created
Blocks are sequentially built upon each other reflecting the order of transactions.
Each new block carries the unique hash value of the previous block to ensure integrity linkage of the chain and that each block of transaction remains unchanged.
The first block laid down has no prior linkage hash value.

Blockchain fundamentals – miners in the network compete to create a block:
Transaction submitted to the Network. Miners collect transactions to make a Block.Miners all ensure they have the current agreed chain of blocks so they can try to make the next one.The first miner to successfully create the block (based on the chain’s rules), has it validated by other miners, and gets to add the block and claim reward to block and the fees for the transactions. The new block carries the unique hash value of the previous block to ensure integrity linkage of the chain

Trust Boundary, Authorisation, Permissions and Double Spend:
Blockchains typically operate outside of traditional trust boundaries that are owned and managed by a central intermediary (the authority owner of the database).
Public blockchain protocols typically assume all processing nodes are untrusted and take a consensus vote to agree on a new block.

Characteristics of a public blockchain:

  • Any participating processing node (miner) is allowed to create a block
  • Consensus vote from a subset of peer miners, based on blockchain protocol rules, agrees on a successful new block creation.
  • Each agreed block carries the hash value of the previous block and is recorded in sequential order that facilitates integrity both within the blocks and in the sequence of transactions
  • To (corruptly) alter an existing blockchain transaction requires full recalculation from the original genesis block and is generally considered too computationally intensive to be successfully achieved.
  • Miners continued participation in the blockchain is motivated by
  • Reward from successfully creating a block
  • Obtaining transaction fees from the contents of the block
  • Desire to have latest agreed sequence of blocks in order to attempt to calculate the next block.

Some complications of BlockChain:

  1. Block creation time (mining & including aggregation of transactions) across distributed network causes latency of transaction confirmation
  2. Open (visible) vs private data in the block
  3. What legal jurisdiction does blockchain execute in?
  4. Sanctions, Fraud & AML management
  5. Regulation can only be achieved on the edge of the network
  6. For fiat currencies central bank settlement in addition to existing clearing process is non-trivial (two ledgers)
  7. How to manage value in escrow during DVP while a block is created?
  8. What happens if keys are lost to transactions in the chain
  9. Computational overhead to sustain a blockchain is high
  10. Can you control smart contracts (who owns them)

R3 CEV and participants:
Since its September launch, the R3 company (www.r3cev.com) has seen a groundswell of interest in the consortium from financial services companies around the world. R3’s objective is to define, design and build architecture, standards and prototypes for an open source distributed ledger architecture that leverages blockchain technologies for financial institutions.
The R3 team is made up of financial industry veterans, technologists, and new tech entrepreneurs, bringing together expertise from electronic financial markets, cryptography and digital currencies. R3 operates in New York, London and San Francisco and with its partners to define, design and deliver the next generation of financial technology. The next phase of engagement started in January 2016 and focus on non-bank institutions.

Bitcoin: Currency or Commodity?
Bitcoin is a peer-to-peer, network-based virtual currency introduced as open source software in 2009 classified as an unregulated cryptocurrency and unlike traditional fiat currencies issued by central banks, Bitcoin has no central monetary authority. While used as a money, generally bitcoin is dealt with as a digital commodity (hence acquiring bitcoins is a process known as mining).

Bitcoin blockchain shortcomings:

  • Bitcoin is an unstable commodity as it’s price is very volatile and particularly sensitive to market sentiment
  • The bitcoin blockchain is extremely processor intensive to sustain
  • Supports about 3 transactions per second (some argue 7tps) (VISA processes 1700+ tps)
  • Does not acknowledge back that a transaction was successful (you need to go back and look if your transaction worked)
  • Single currency in the blockchain
  • 80 bytes per transaction
  • 1 MB per block (larger blocks would take longer to proliferate on network)
  • Political infighting between larger players with their own vested interests (especially miners) has crippled any further development or improvement of the source code

BlockChain has very huge potential which will definitely drive complete paradigm shift in traditional banking and E-Commerce.

Bitcoin – widespread emergent ecosystem of participants:

Where to use Blockchain:

  • Cryptocurrencies;
  • Digital identities;
  • Distributed ledgers;
  • Digital passports and birth certificates;
  • Certifying precious metals and gems;
  • Copyright identification and registration;
  • Health services, data and the patient pathway;
  • Many more….

In nutshell, Blockchain has very big potential for many use cases, and not just in Finance Industry and already has many entities actively engaged:

Read blogs on ThinkPro website regularly to get BlockChain Industry updates.

Contact Thinkpro for commercial blockchain offerings. We are proudly BlockChain Implementation company !

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