Blockchain technology explained
10:12, 2 May 2018
Blockchain is one of those words you hear all the time but not always entirely sure what it is. We all want blockchain technology explained. So here goes:
In simple terms Blockchain is a digital ledger that can be programmed to record not just financial transactions but virtually everything of value.
How blockchain works: the technology explained
Imagine a spreadsheet that is duplicated millions of times across a network of computers. The network of computers continually and speedily update this spreadsheet.
The blockchain exists as a shared database. This means the blockchain database isn’t stored in any one location. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible and can be shared safely.
Safety and transparency
The blockchain network automatically checks every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a “block”. There are two distinct benefits from this. Firstly, transparency data is embedded within the network as a whole – it is totally public.
The second point is that blockchain it is not only transparent, it cannot be corrupted. Doctoring any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.
Cryptocurrencies rely on blockchain technology to work. Credit:PAhttps://capital.com/ltc-usd-chart
Cryptos
Blockchain technology is most notably associated with cryptocurrencies – though it has plenty of other uses (which we will come to in a minute). Cryptocurrencies (which are digital currencies that are immune to Central Bank interference) rely on blockchain technology to work.
Cryptocurrencies run on a distributed public ledger (blockchain), a record of all transactions that is continuously updated and held by currency holders.
There are a vast number of cryptocurrencies in existence now but the most well-known include:
- Bitcoin: was the first and is the most commonly traded cryptocurrency to date. The technical system on which all cryptocurrencies are based on was created by Satoshi Nakamoto. He said to be the man who invented blockchain.
- Ethereum. Developed in 2015, ethereum is the currency token used in the ethereum blockchain. It has not always been a smooth ride for this crypto as it suffered a serious hack in 2016. While its value has recovered significantly since then, initially, following the hack, its value crashed as low as 10 cents.
- ripple">Ripple: ripple is another distributed ledger system that was founded in 2012. ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It has been used by banks including Santander and UBS and has a market capitalisation of around $6.3bn.
- Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all litecoin is around $2.1bn.
- Dash: Originally called XCoin and then Darkcoin, a rebranding in 2015 saw the name change to Dash – an amalgamation of ‘digital’ and ‘cash’. Two days following launch, 1.9 million coins were mined, representing 10% of the total supply that will ever be issued
- Monero is a privacy-focused cryptocurrency that unlike many cryptocurrencies is not based on bitcoin's code. Monero is based on the CryptoNote protocol. In January 2017, Monero’s credentials as an untraceable medium of exchange were further strengthened by the adoption of bitcoin Core developer Gregory Maxwell's algorithm Confidential Transactions.
- Cardano is home to the Ada cryptocurrency, which can be used to send and receive digital funds. It was created by blockchain development firm Input Output Hong Kong (IOHK) and led by Charles Hoskinson, former co-founder of BitShares and ethereum
- Stellar is a cryptocurrency which uses Lumens as its units. It was founded in early 2014 by Jed McCaleb and Joyce Kim
- EOS was started in 2017 by Dan Larimer the founder and creator of Bitshares as well as Steem. EOS cryptocurrency is a quicker platform for Dapps (decentralised applications) that has the ability to process transactions in over 50,000 transfers per second.
Units of cryptocurrency are created through a process called mining. Miners build the public ledger (which is blockchain) and enable the whole cryptocurrency system to work.
Miners are members of the public that have set up application-specific integrated circuit (ASIC) machines to take part in the validation and processing of transactions.
They use their computer to create new blocks and are rewarded with new crypto coins.
As more miners are incentivised by the rewards on offer, the crypto currency community expands.
Crypto exchanges and hacking concerns
So where do you trade cryptocurrencies? The answer is a crypto exchange. Cryptocurrency exchanges allow customers to trade digital currencies for other assets, such as conventional fiat money, or different digital currencies. The exchange will usually apply bid/ask spreads as transaction commissions.
Whether you use a credit card or e-bank transfer to buy digital currency, or one form of cryptocurrency for another, the exchange sends cryptocurrency to your personal cryptocurrency wallet where it is stored.
Confidence in crypto currency exchanges has taken a few blows over the past year with security the main concern. Earlier this year, hackers stole around $532.6m from Tokyo-based cryptocurrency exchange Coincheck. The theft inevitably raised questions about security and regulatory protection in the digital assets market.
Coincheck is not alone in being hit by hackers. In 2017, almost $64m in bitcoin was stolen by hackers who broke into Slovenian-based exchange NiceHash.
And as long ago as 2014, Japanese-based exchange Mt.Gox filed for bankruptcy in Japan after collapse of its bitcoin exchange. Mt.Gox was the victim of a massive hack, it lost about 740,000 bitcoins valued at €460m at the time – but worth a lot more in today’ prices.
Despite these headline-grabbing news stories, the interest in trading cryptocurrency continues to grow as – despite volatility – cryptos have provided stellar returns, for some at least.
There are numerous crypto exchanges spread out across the world – they include:
- Bitfinex: owned and operated by iFinex since 2014, Bitfinex has been the largest bitcoin exchange platform, with over 10% of the exchanges' trading
- Kraken: was one of the first major platforms to come to market, and the company has attracted its fair share of funding along the way. Its goal is to provide fiat currency gateways for as many “worthy” cryptocurrencies as humanly possible.
- Coinbase: In June of 2012, Coinbase was a small start-up which had raised slightly over $160,000 in funding. It was designed to make it easy for non-technical people to use bitcoin. Less than one year later, Armstrong’s Coinbase was selling over $1m of bitcoins per month
- Bitstamp: is a bitcoin exchange based in Luxembourg. It allows trading between USD currency and bitcoin cryptocurrency. It allows USD, EUR, bitcoin, litecoin, ethereum, ripple or bitcoin cash deposits and withdrawals.
- Coinone: is a South Korea-based exchange platform that allows users to buy, sell and store bitcoin, ether and ether classic
- HitBTC: launched in 2014, in early 2015, HitBTC was hacked. HitBTC did not disclose how many coins were stolen and commented that no user funds were affected.
- Gemini: Gemini is the digital currency exchange launched by the Winklevoss twins in 2015
- Bithumb: is a cryptocurrency exchange based in Seoul, South Korea. Founded in 2013, it allows for the buying, selling, and storing of bitcoin as well as a range of other cryptocurrencies
- Quoine: founded by CEO Mike Kayamori, the Singapore-based exchange, now has annual transactions of over $12bn.
Nodes
You may often here the term ‘nodes’ or ‘node counts’ in relation to cryptocurrency.
Nodes are computers in the network of a cryptocurrency which receive new transactions and blocks and validate those that are legitimate and ignores those that are unsound.
Node counts refer to the number of computers running the software and connected to the network. The number of nodes correlates to the security and activeness of the network.
One of the key benefits of cryptocurrency is that the value of money in a cryptocurrency cannot be affected by inflation or monetary policy in any respective country. Over recent years there have been a huge number of cryptocurrencies launched, the main ones currently include bitcoin, ethereum, ripple, litecoin, cardano and EOS.
There is more to blockchain than just cryptocurrency.
Banks are increasingly looking at ways to incorporate blockchain technology. Credit:PABlockchain technology in banking
Perhaps not surprisingly, the banking and financial services sector have taken an interest in blockchain technology. This is because it makes it harder for fraudulent transactions to take place. Financial fraud is a huge concern for banks and blockchain offers much greater security.
It is still early days for banks in terms of how far they are prepared to embrace blockchain technology but we are already seeing signs of movement.
In August 2017, six banks including Barclays and HSBC, announced plans to develop a ‘utility settlement coin’ (USC).
With plans to launch the product at the end of 2018, the USC would be part of a digital cash system created via blockchain technology. USC is expected to enable safer and faster payments between bank accounts.
. The ASX is expected to replace its current clearing system with blockchain technology this year Credit:PA.Blockchain in finance and investing
The idea of using blockchain technology for securities and commodities trading is nothing new. Given the security and efficiency associated with blockchain it would be of little surprise if stock exchanges increasingly looked to adopt distributed ledger technology system such as blockchain.
Australia's main stock exchange The Australian Securities Exchange (ASX), announced back in December 2017 that it plans to become the first global market to use blockchain to clear and settle trades. The ASX is expected to replace its current clearing system with blockchain technology later this year.
The introduction of blockchain is designed to cut the cost of transactions and make them faster and more secure.
The ASX is not the only exchange registering an interest in blockchain. Last year Nasdaq teamed up with Swedish bank SEB to test a mutual-fund trading platform that will run on blockchain. The shared digital ledger would be used to record all transactions in real-time, while changes to trades made by investors would also be possible and instantly visible.
In the UK, the London Stock Exchange (LSE) is expected to adopt blockchain soon too. In 2017 the LSE announced a partnership with IBM to develop a platform powered by blockchain.
Cross-border business
Cross-border financial transactions are likely to benefit due to the swiftness of the blockchain system.
Businesses and consumers want to move their money around the world as efficiently as possible. International payment systems have long been criticised for being inefficient and costly. Transactions in various currencies can require the involvement of numerous intermediaries and take weeks to complete.
Blockchain can transform how cross-border payments are processed. By addressing clearing and settlement on the same network, settlement time should be significantly reduced.
As a report from IBM points out, the benefits could be truly global. Modernising payments can help accelerate financial inclusion in unbanked regions by providing digitally-connected consumers in emerging markets with access to the global financial system.
As Vitalik Buterin, inventor of ethereum is keen to point out, blockchain has a real appeal to emerging market countries and regions.
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organisations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.”
As a report by insurance and banking giant Allianz points out, there are around two billion people in the world with no access to financial services. Blockchain lowers barriers for financial inclusion, allowing people to store and move value, thereby being able to participate in the economy.
Blockchain in insurance
Blockchain also provides benefits to the world of insurance. As insurance companies explore diverse solutions, blockchain has emerged as a way to bring about transformation in several areas, including underwriting, and claims processing.
In relation to underwriting, it can take many months to evaluate the risk versus reward for larger corporate policies.
On blockchain, external data can be included to decrease risk liability and provide semi-automatic pricing. This can help to automate and shorten the underwriting process and significantly reduce operational costs.
With claims processing, a distributed blockchain network makes it easier for all insurers to access the same information securely, reducing administrative duties associated with claims. With less risk of fraud, claims can be handled far more efficiently.
Supply chain management and blockchain
For supply chain management, blockchain technology offers the benefits of traceability and cost-effectiveness. Essentially, a blockchain can be used to track the movement of goods, their origin and quantity etc. This brings about a new level of transparency to business-to-business dealings - for instance it greatly simplifies things such as ownership transfer, production process assurance and payments.
Quality assurance using blockchain
If an irregularity is identified within the supply chain, a blockchain system can lead you directly to its point of origin. Blockchain makes it easier for companies to carry out quality audits and then take necessary action.
For instance, in the food sector, manufacturers need to track the origination and batch information of products for quality assurance and safety reasons.
Smart contracts ensured by blockchain
Time-consuming contractual transactions can slow down the growth of a company, especially a business that has to process a constant stream of contracts on a daily basis. Smart contracts, enable legally binding agreements to be automatically validated, signed and enforced through a blockchain system. This eliminates the need for mediators, saving the company a great deal of time and money.
Blockchain technology could be used to prevent vote rigging in elections. Credit PABlockchain in elections
Interference in political Elections is a topic that has attracted constant headlines in recent years. Allegations of Russian involvement in Donald Trump’s election to US president in 2016; the controversy over the Florida recount in favour of George W Bush in 2000 and a string of vote rigging allegations in Zimbabwe are just a few examples.
Dubious election practices are nothing new – in fact they go back centuries. However, blockchain technology could significantly diminish the likelihood of electoral fraud. It is currently being trialled in local elections but in time we might see blockchain being used in national votes.
What people say about blockchain
Don Tapscott, author and a leading authority on innovation: “The first generation of the digital revolution brought us the Internet of information. The second generation — powered by blockchain technology — is bringing us the Internet of value: a new platform to reshape the world of business and transform the old order of human affairs for the better.”
Abigail Johnson – US businesswoman and CEO of Fidelity Investments: “Blockchain technology isn’t just a more efficient way to settle securities. It will fundamentally change market structures, and maybe even the architecture of the Internet itself.”
Adam Draper, US business man, founder and CEO of Boost VC: “There are very few shifts in global infrastructure that can happen in our lifetimes. The financial infrastructure is one of them, and the Blockchain is changing the way we think about the transfer of value.”
Patrick M Byrne – US entrepreneur, e-commerce pioneer and CEO of Overstock.com: “The main event isn’t bitcoin. It is using Blockchain to disrupt other industries and Wall Street.”
Vitalik Buterin, inventor of Ethereum: “Blockchains will drop search costs, causing a kind of decomposition that allows you to have markets of entities that are horizontally segregated and vertically segregated.”
Erik Voorhees co-founder of the bitcoin company Coinapult: “I have no problem with the financial industry inviting the Trojan Horse of blockchain technology into their walled garden. Because I know how powerful the technology is.”
Fred Ehrsam co-founder of Coinbase: “Everything will be tokenised and connected by a blockchain one day.”
William Mougayar, entrepreneur and founder of Token Summit: “The blockchain symbolises a shift in power from the centres to the edges of the networks.”
Jaan Tallinn, co-founder of technology giant Skype: “The interesting thing about blockchain is that it has made it possible for humanity to reach a consensus about a piece of data without having any authority to dictate it.”
Perianne Boring, founder and president at Chamber of Digital Commerce: “Blockchain technology has such a wide range of transformational use cases, from recreating the plumbing of Wall Street to creating financial sovereignty in the farthest regions of the world.”
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