Blockchain

Blockchains are currently trending and we can’t even imagine the current public debate without them. But what is so special about this tech­no­log­i­cal phe­nom­e­non and its close relation to cryp­tocur­ren­cies which offers a more far-reaching scope of ap­pli­ca­tion than Bitcoin?

Blockchains are used to verify trans­ac­tion data. Its scope of ap­pli­ca­tion exceeds that of its pre­de­ces­sors, which initially helped to protect, certify, and dis­trib­ute data. Fur­ther­more, it is possible to use blockchain-oriented methods without any in­ter­me­di­ary clearing houses. Payments, movement on the financial market, contracts, cer­ti­fi­ca­tions, at­tes­ta­tions, copy­rights, patents, and reg­istries can the­o­ret­i­cal­ly be ad­min­is­tered without the need to involve banks, notaries, cus­to­di­ans, or any state in­sti­tu­tions. The in­creas­ing interest in blockchain tech­nol­o­gy is not only evident in the banking sector, but also in the real estate, insurance, and health in­dus­tries, which can also benefit from blockchain’s wide range of use. Sup­port­ers of this tech­no­log­i­cal concept also predict its expansion to judicial systems, energy in­dus­tries, and public ad­min­is­tra­tion.

In this article, we explain both how blockchains work and why online asset exchanges could become even quicker, more flexible, and more cost efficient than ever.

Blockchain tech­nol­o­gy is primarily used in the doc­u­men­ta­tion of trans­ac­tions, which can be il­lus­trat­ed with the following example:

Paul has recently bought a new hat and would like to sell his old one through a small ads website. Hugo sees Paul’s ad on the internet. Both agree on the price of $10. However, ex­chang­ing a hat for cash is rather prob­lem­at­ic for both, as Paul is ready to send the hat only upon receiving money first. Hugo is not sure about the advance payment option, because there is always a danger that Paul will never send the hat. They therefore both ne­ces­si­tate an in­ter­me­di­ary to step in.

To solve this problem, both Paul and Hugo could avail of an online payment service provider, which would then not only handle their trans­ac­tion trans­par­ent­ly and safely, but also document the whole procedure for a small charge. Such a string of events has become the standard op­er­a­tional procedure.

Blockchain tech­nol­o­gy is an al­ter­na­tive option for the so-called “Trusted Third Party” (TTP). As a result, trans­ac­tions in blockchain networks are not verified by third parties, but rather by means of a jointly run, un­forge­able ac­count­ing system called Dis­trib­uted Ledger Tech­nol­o­gy (DLT).

Nowadays, blockchains are at our disposal in the same way as Bitcoin or Ethereum, all of which are used to assist online trans­ac­tions, just like the one between Paul and Hugo. To avail of them, the only remaining step for our pro­tag­o­nists is to join the online community in question. Generally speaking, it suffices for Paul and Hugo to download and install ap­pro­pri­ate client software, which would interlink their computers with a simple blockchain network.

Before the in­tro­duc­tion of blockchain tech­nol­o­gy, the internet’s in­ter­me­di­at­ing services were primarily based on the trust of both parties. If a client wants to acquire a product by an online vendor, both parties must form a re­la­tion­ship of trust with a cen­tral­ized in­ter­me­di­ary entity, namely an online payment service provider or a bank. The un­der­ly­ing as­sump­tion is that these will carry out trans­ac­tions in the desired way.

The structure in question becomes a prob­lem­at­ic concept when the in­ter­me­di­ary entity takes advantage of its central position during the trans­ac­tion­al procedure by turning it into a position of power, thereby only rep­re­sent­ing its own interests and at­tempt­ing to seize full control. Such an incident occurred in 2010, when PayPal, the most common of all payment services, suspended the account of the whistle-blowing platform WikiLeaks.

Over the past years, in the attempt to turn the internet into a more de­mo­c­ra­t­ic system, the cryp­to­graph­ic community has been con­sis­tent­ly working on networks based on the peer-to-peer (P2P) principle, which would con­se­quent­ly fa­cil­i­tate trans­ac­tions without the need for the presence of any in­ter­me­di­aries. Bit­Tor­rent, a col­lab­o­ra­tive com­mu­ni­ca­tion protocol for P2P file sharing, makes it possible for such trans­ac­tions to take place without any central server and enables a worldwide data exchange by means of anonymous usernames.

However, anonymity creates mistrust among those involved in online asset exchanges. To solve this problem, former professor of law and computer scientist Nick Szabo brought blockchain tech­nol­o­gy into the con­ver­sa­tion in 1997. According to him, contracts are based not only on mutual trust between both parties involved in a trans­ac­tion, but also on their ac­knowl­edge­ment of cor­re­spond­ing legal frame­works. Problems would nev­er­the­less arise if the two people in question either did not share a mutual un­der­stand­ing, had diverging contracts, or if one of the members accused the other of a breach of contract. According to Szabo, future “Smart Contract” forms should be software-based and al­go­rith­mi­cal­ly determine whether the parties involved meet their contract re­quire­ments or breach any reg­u­la­tions.

This approach has been taken up by an unknown hacker going by the name of Satoshi Nakamoto, who combined the already es­tab­lished tech­nolo­gies such as P2P, hashing, and en­cryp­tion to introduce a cryp­to­graph­ic method, with the aid of which he was able to interlink datasets in an ir­re­versible and un­forge­able way. The first ap­pli­ca­tion of blockchain tech­nol­o­gy – Bitcoin, a P2P cryp­tocur­ren­cy – comes from Nakatomo’s idea, which con­se­quent­ly resulted in other in­ven­tions such as Ethereum, Ripple, Trade­Block, and Dash.

Blockchain tech­nol­o­gy is based on the concept of dis­trib­uted ledgers, which require a computer network based on the P2P principle. Finding solutions to consensus building and val­i­da­tion therefore relies largely on cryp­to­graph­ic methods and ap­proach­es of game theory. 

A dis­trib­uted ledger is a public ledger conducted on a de­cen­tral­ized basis, the content of which (usually con­sist­ing of strings of data verifying account trans­ac­tions) is created jointly with the aid of a computer network. A copy of the database is present in each of the network’s nodes.

To come back to our example, Hugo transfers the money for the hat to Paul by means of a blockchain. This trans­ac­tion is then saved onto a dis­trib­uted ledger and is con­se­quent­ly traceable for all parties involved from the moment the transfer has been activated.

Instead of dealing with real-life cur­ren­cies such as the euro or the United States dollar, blockchain networks are primarily engaged in digital forms such as Bitcoin, Ethereum, Litecoin, or Dash. Dis­trib­uted ledgers have been based on the concept of P2P networks, which enable com­mu­ni­ca­tion between two equally-ranked computers. Changes to a database can only be made if re­spec­tive networks reach a mutual consensus.

In P2P blockchain networks, digital assets are not trans­ferred from A to B. Instead, the parties involved keep a copy of all trans­ac­tion-related data in its anonymous form, from which it can be proven beyond doubt who the owner of re­spec­tive digital assets is at any given time. In case of any changes made to the database, each copy is syn­chro­nized with the newest blockchain version on the level of all par­tic­i­pat­ing network nodes. The parties involved then interact with the blockchain by means of a client software, which holds control not only over the consensus method, but also over the repli­ca­tion of the database.

Changes to the database will only be accepted if the majority of all trans­ac­tion members involved allow for them to take place.

If this happens, the freshly im­ple­ment­ed blockchain is taken over by each par­tic­i­pant. However, if the majority votes against the motion and declares that changes cannot be right­ful­ly im­ple­ment­ed (perhaps because there have been some in­con­sis­ten­cies in the former blockchain copies), then the blockchain is simply rejected. Fur­ther­more, users wishing to implement changes to a blockchain must verify that they are au­tho­rized to make mod­i­fi­ca­tions to a database.

P2P con­nec­tions, which con­sti­tute a crucial part of a blockchain set-up, make sure that re­spec­tive par­tic­i­pants have access to their co-created trans­ac­tion database and are able to interact with it under a common set of rules. Although P2P is con­sid­ered a fun­da­men­tal part of the trans­par­ent data trans­ac­tion ad­min­is­tra­tion in a blockchain network, it cannot avoid being as­so­ci­at­ed with two chal­leng­ing aspects, namely ma­nip­u­la­tion and in­con­sis­ten­cy.

• Ma­nip­u­la­tion: If par­tic­i­pants of a peer-to-peer network pursue diverging aims, some of them may attempt to ma­nip­u­late the network’s func­tion­al­i­ty in their favor.
• Data in­con­sis­ten­cies: It is necessary for those P2P networks without any central ad­min­is­tra­tive entities to ensure that trans­ac­tions are accurate, complete, and (in most cases) performed only once.

Coming back to the previous example of Hugo and Paul, upon settling the trans­ac­tion with a digital equiv­a­lent of real-life currency worth $10, blockchains must first make sure that the desired amount has actually been credited to Paul, and that this has only been done on a one-off basis (and not twice or perhaps even three times).

To avoid any data ma­nip­u­la­tion and guarantee con­sis­ten­cy within the co-managed database, fully developed im­ple­men­ta­tions of dis­trib­uted ledgers such as Bitcoin or Ethereum rely both on costing methods and ver­i­fi­ca­tion mech­a­nisms. Blockchain tech­nol­o­gy therefore makes use of cryp­to­graph­ic hash functions during consensus building as well as when linking anonymized data blocks.

Trans­ac­tion data is saved in the form of data blocks in blockchain networks, which are later in­ter­linked by means of hash values. Each block contains data relating to multiple trans­ac­tions, which are anonymized. Each blockchain network par­tic­i­pant can therefore take a closer look at the trans­ac­tions, but not at their executors.

Linking in­di­vid­ual data blocks is made possible thanks to hash values, which are inferred by blockchain software through hash functions from trans­ac­tion-related data. This concept becomes clearer after watching Anders Brown­worth’s free in­ter­ac­tive tutorials entitled “How Blockchain Works” at blockchain.mit.edu.

The hash values of data blocks without any content are also of the same length.

Hashcash is therefore a CPU-based proof-of-work system. In other words, the more an in­di­vid­ual network par­tic­i­pant con­tributes towards the overall computing power, the higher the chances that they will find the desired nonce value first. In Bitcoin’s case, this often leads to vicious com­pe­ti­tion between re­spec­tive users. To avoid a situation in which data blocks are generated at in­creas­ing­ly quick suc­ces­sions, thereby con­tribut­ing to a constant increase in Bitcoins, networks regularly adjust the right nonce values to the dif­fi­cul­ty of each task.

If two or more par­tic­i­pants assess the right nonce value at the exact same time, the blockchain is extended only by the data block con­tain­ing the higher amount of trans­ac­tions. As a result, data blocks of other users expire and the trans­ac­tions inscribed in them are recorded afresh in the pool of trans­ac­tions that still need to be processed (provided that they are not already included in the newly created data blocks).

Linking by means of hash values makes sure that any attempt to ma­nip­u­late re­spec­tive blockchains is virtually im­pos­si­ble. Anyone who inserts a false blockchain copy, sub­se­quent­ly causing changes to one or more data blocks, makes the blockchain stand out due to its in­com­pat­i­ble hash value. In this case, the falsifier would also re­cal­cu­late the hash values of all sub­se­quent data blocks by means of the falsified output value. Although this requires an immense computing power, the fraud would be noticed in the later stages when other network par­tic­i­pants compare the falsified blockchain with their own copies. If more than a half of the par­tic­i­pat­ing users object to the false copy, it is au­to­mat­i­cal­ly dismissed.

An al­ter­na­tive method available within the framework of consensus building is the proof-of-stake method. Blockchain networks relying on it often determine which par­tic­i­pants are allowed to generate data blocks by means of a weighted random sampling process. The weighting of each par­tic­i­pant is assessed on the basis of the amount of time spent in the group or the amount of cryp­tocur­ren­cy owned.

Using both the proof-of-work and the proof-of-stake method at the same time is also possible.

Econ­o­mists con­stant­ly watch the progress of blockchain tech­nol­o­gy with great interest. Basing solutions on blockchains lends itself par­tic­u­lar­ly well to de­cen­tral­ized business pro­ce­dures, as they can integrate more in­de­pen­dent parties together (common in logistics or when man­u­fac­tur­ing products). If tangible or in­tan­gi­ble assets (like property rights) are passed through several hands, blockchains offer the chance to visibly record all processes and any status changes for all par­tic­i­pants involved.

Fur­ther­more, blockchain tech­nol­o­gy complies with the rapidly de­vel­op­ing IoT sector. Internet of things is at a constant rise and so are the amount of devices that it brings together. In the future, data exchange and payments made in the IoT sector could be based on blockchains.

Blockchain tech­nol­o­gy is becoming an in­creas­ing­ly important factor in pilot projects. The trend is also moving closer towards private blockchains, which is pro­pri­etary software developed es­pe­cial­ly for internal business ap­pli­ca­tions. Contrary to open source blockchains such as Ethereum or Bitcoin, private blockchains are only available to a selected group of in­di­vid­u­als (workers, business partners, stake­hold­ers etc.).

Blockchain tech­nol­o­gy offers highly trans­par­ent automated pro­ce­dures, which do not always meet with the approval of all group members. Only a minority of all busi­ness­es have full trust in the legal security of the tech­nol­o­gy. One of the most common problem areas of this sector is the possible loss of control over it, as well as deficient data pro­tec­tion or its unclear legal status.

De­cen­tral­ized ap­pli­ca­tions of blockchains can do without any su­per­vi­so­ry au­thor­i­ties – this software brings many par­tic­i­pants together and regulates any pro­ce­dures related to their trans­ac­tions or status changes without the need for any human in­ter­ven­tion. From a legal point of view, it is worth ques­tion­ing who should be made ac­count­able for any potential mistakes or conflicts.

Open source blockchains are con­tin­u­ous­ly pre­sent­ing companies with data pro­tec­tion problems. Although trans­ac­tion par­tic­i­pants within a blockchain network are anonymous, in­for­ma­tion on the nature and scope of each trans­ac­tion is ac­ces­si­ble to all network par­tic­i­pants. This is, however, something that companies sometimes keep con­fi­den­tial and it is for this reason that most of them check for admission re­stric­tions within various blockchain tech­nolo­gies and their re­spec­tive areas of use.

At the same time, open source blockchains used as part of consortia have also ex­pe­ri­enced a strong push forward. An example of this from the world of business is the so-called Hy­per­ledger, which is an umbrella project of the Linux Foun­da­tion working together with SAP, Daimler, IBM, and Intel. Business ap­pli­ca­tions based on Ethereum blockchains soon es­tab­lished what is nowadays known as the En­ter­prise Ethereum Alliance. In the insurance industry, leading companies such as Aegon, Allianz, or Munich Re federated into a blockchain con­sor­tium under the name of B3i standing for “Blockchain Insurance Industry Ini­tia­tive.”

As a result, the research scope goes far beyond de­cen­tral­ized ap­pli­ca­tions (called dApps). Blockchain tech­nol­o­gy offers valuable sug­ges­tions for de­cen­tral­ized or­ga­ni­za­tions on contracts (smart contracts) and or­ga­ni­za­tion­al forms (such as DAOs – de­cen­tral­ized au­tonomous or­ga­ni­za­tions). In theory, even entire companies can be managed by means of blockchains.

Dis­con­tent caused by in­creas­ing digital cen­tral­iza­tion is one of the most sig­nif­i­cant reasons behind the rapid progress of blockchain tech­nol­o­gy. As a result, blockchains step in to replace cen­tral­ized service providers, in­ter­me­di­aries, and su­per­vi­so­ry au­thor­i­ties with their de­cen­tral­ized system.

Smart contracts are an example of such a de­cen­tral­iza­tion procedure, as they enable the com­ple­tion of sale contracts on the internet without the need to involve any banks, notaries, attorneys, or organized exchange markets. Instead, contracts are processed by blockchain networks re­pro­duced during each cor­re­spond­ing trans­ac­tion. Smart contracts can be used for the provision of the following services:

• Gaining access to rented property or rented vehicles by means of cen­tral­ized key man­age­ment (for the likes of cars, apart­ments, hotel rooms, and lockers)
• Proof of copyright, trade­marks, domain rights, and licenses
• Doc­u­men­ta­tion of data (com­mer­cial documents, GPS data, genomic data, medical records, pro­duc­tion data)
• Set­tle­ment of trust agree­ments
• Notarial records without the need for notary’s presence (property ownership and usage rights)
• Usage of financial in­stru­ments such as com­mer­cial documents, bonds, and de­riv­a­tives
• Instant awarding of loans, apartment rentals

The future potential of blockchain tech­nol­o­gy and its ability to rev­o­lu­tion­ize contract-related issues depends, above all, on whether or not it will succeed in beating two sig­nif­i­cant hurdles. Firstly, what must be clarified is the con­fi­den­tial manner by means of which data found in blockchain networks is processed. Secondly, what is still missing is a scheme which would suc­cess­ful­ly prosecute any breaches of contract and enforce the set­tle­ment of missing due payments.

More complex legal entities including entire or­ga­ni­za­tion­al struc­tures are also modelled by means of various blockchains. These are termed as DAOs (de­cen­tral­ized au­tonomous or­ga­ni­za­tions) which stem from the concept “The DAO” – a crowd­fund­ing project brought to life in May 2016 by an Ethereum-based blockchain. This blockchain rep­re­sents a com­mer­cial model that aims to organize non-profit companies in a de­cen­tral­ized and au­tonomous way.

With a financial capacity of over $168 million, “The DAO” is by far the biggest crowd­fund­ing project of all time. Depending on the invested amount, each project member was given voting rights for issues per­tain­ing to the awarding of contracts and in­vest­ments based on smart contracts. Votes were cast elec­tron­i­cal­ly and processed by their cor­re­spond­ing blockchains. Members invested in Ether, but the project failed im­me­di­ate­ly, as hackers managed to lay their hands on around $50 million.

To become de­cen­tral­ized, some blockchain-based projects even tend to go one step further. Since 2015, Bitnation has become an internet nation widely available to all users without any borders or central governing bodies. All of its basic needs are market-oriented and met by private providers. In the long run, Bitcoin could establish itself as an al­ter­na­tive for what has tra­di­tion­al­ly been perceived as a nation.

Every Bitnation citizen has the right to vote, can bring in ideas, and promote them. Entry into the Bitcoin nation is not de­ter­mined by one’s actual place of residence. This blockchain project not only provides passports, but also makes entries in the land register possible. It is predicted that marrying other Bitnation citizens will also be possible in the future. One can join different forms of gov­ern­ment, each with their own laws. Op­er­a­tions are stored in encrypted text files and each citizen can be easily iden­ti­fied with an in­di­vid­ual code. Contracts and other ap­pli­ca­tions are regulated by means of smart contracts and the only available payment option are Bitcoins with blockchains as the governing control mech­a­nisms.

Bitnation critics see its main fault in the purely economy-oriented nature of the project. In this virtual concept of a nation, law and order would have to be regulated by private entities. En­vi­ron­men­tal and social standards are not part of the dis­cus­sion. On top of this, mi­nori­ties find them­selves at a serious dis­ad­van­tage.

Aside from the pre­vi­ous­ly mentioned P2P currency systems, blockchain tech­nol­o­gy is put into practice very rarely. Currently, the majority of blockchain projects are still in their pilot phase or exist only as a concept which has not yet been put into practice. Nev­er­the­less, new ap­proach­es to blockchain ap­pli­ca­tions are con­stant­ly generated in almost every sector where economic aspects are the primary cause for concern.

The potential of blockchain tech­nol­o­gy is evident es­pe­cial­ly in cases where music and art in­dus­tries ne­ces­si­tate the im­ple­men­ta­tion of copy­rights. A blockchain network allowing artists both to register in­tel­lec­tu­al property (such as artworks or tech­no­log­i­cal in­ven­tions) in a publicly ac­ces­si­ble database and define its terms of use would simply make mediating au­thor­i­ties such as labels, agencies, and national copyright col­lec­tives obsolete.

In the past few years, the dig­i­tal­iza­tion of music has injected a lot of tension. The Canadian start-up Peer­tracks is now looking to rev­o­lu­tion­ize the music market by putting an end to the worldwide disarray caused by rights and licensing.

A piece of music, from the moment it is recorded up until it is sold, en­com­pass­es a complex network of par­tic­i­pat­ing entities. It is often the case that various in­di­vid­u­als or stake­hold­ers are in pos­ses­sion of rights to the same song. Com­pos­i­tors create music, to which authors write cor­re­spond­ing lyrics. Artists then interpret the song for them­selves, while labels organize the pro­duc­tion line and take over any com­mer­cial re­spon­si­bil­i­ties including marketing, promotion, and dis­tri­b­u­tion. All these services are included within the copy­rights and all par­tic­i­pants receive pro­por­tion­ate amounts of revenue earned from the sale of CDs, downloads, or streams. Peer­tracks therefore intends to trans­par­ent­ly dis­ag­gre­gate the entitling rights of each par­tic­i­pat­ing entity and process all payment methods by means of a single blockchain.

The Berlin-based start-up company Ascribe offers a similar concept, which addresses artists, pho­tog­ra­phers, and designers who would like to secure copy­rights for their digital works. The platform gives creative in­di­vid­u­als the chance to register com­po­si­tions and award usage rights to their re­spec­tive owners. With the aid of user history, it is possible to trace every step of a reg­is­tered work and how it has been used in practice.

When blockchain-oriented tech­nolo­gies establish them­selves firmly within the media industry, companies actively using them will have to prepare for radical struc­tur­al changes. This is primarily related to media cor­po­ra­tions and their role as central content dis­trib­u­tors.

What is worth taking into account here are the various blockchain-based platforms that create virtual en­vi­ron­ments for direct in­ter­ac­tions between content creators and consumers. An example of this in­fra­struc­tur­al phe­nom­e­non is Civil, which rep­re­sents a de­cen­tral­ized mar­ket­place for media content. From a list of jour­nal­is­tic pro­duc­tions, users of the platform can choose whatever they find in­ter­est­ing and pay cor­re­spond­ing text authors directly by means of a blockchain via so-called “CVL tokens” – the official cryp­tocur­ren­cy of the content hub.

Blockchains are also al­ter­na­tive forms of mediating au­thor­i­ties in the ad­ver­tis­ing industry, with online ad­ver­tis­ing seen as the sector with most potential for the im­ple­men­ta­tion of blockchain tech­nolo­gies. Blockchain-based ad­ver­tise­ment networks that enable bookings to be made directly with pub­lish­ers are able to reduce the need of in­ter­me­di­aries and develop the ad­ver­tise­ment market into a more trans­par­ent sector.

License trading between producers and their cor­re­spond­ing consumers is yet another area of ap­pli­ca­tion for blockchain tech­nolo­gies. There are already many companies availing of blockchain-based solutions in order to step up their contacts with TV stations, online portals, or providers of video-on-demand services.

Blockchains and fashion? Not a problem. The industry con­cen­trates pre­dom­i­nant­ly on securing brand licenses. The first ever blockchain designed specif­i­cal­ly for the fashion sector has been developed by Ethereum developer Fabian Vo­gel­steller and his company Lukso.

This blockchain has been first applied to a chip, which provides luxury products with a unique ID number. Products ne­ces­si­tat­ing pro­tec­tion against fal­si­fi­ca­tions are therefore reg­is­tered within re­spec­tive blockchains by means of such chips. Currently, the majority of luxury brands use QR codes for the iden­ti­fi­ca­tion process of their branded products.

Each year, faulty ad­min­is­tra­tive systems cause billions of dollars to be lost in health­care costs. Thousands of patients die as a result of such flawed systems. Blockchain tech­nol­o­gy could make favorable con­tri­bu­tions fa­cil­i­tat­ing the man­age­ment of health records. By working together with the blockchain company Tierion, Philips was able to develop a concept aiding any future storage of patient-related data by means of blockchains. In Hy­per­ledger’s case, the Hy­per­ledger Health­care Working Group (HLGC Working Group) is actively looking for solutions which enable patients to make their personal data available to third parties. 

Beat, yet another start-up worth men­tion­ing, has devoted its efforts to a much different aspect of the health industry, as it combines frag­ment­ed data from the sports and health sectors to fa­cil­i­tate per­for­mance mea­sure­ments for athletes. Here, a blockchain is employed to act as a data pool.

Axa, one of the biggest insurance companies on the market, has recently im­ple­ment­ed a new policy entitled Fizzy, which is based on an Ethereum blockchain. Those who would like to avail of the cover offered by travel insurance (most cover against un­ex­pect­ed flight delays) do not have to do anything other than register them­selves. The aim here is to form a more trans­par­ent picture of the contracts for date and claims pro­cess­ing by means of various blockchains.

In terms of financial services, in­ter­me­di­aries such as banks, external payment services, and stock markets react ad­e­quate­ly to the threats of blockchain tech­nol­o­gy by adapting to the situation on the market. Continued research interest presents the sector in question with blockchain solutions, which enable making trans­ac­tions in a more efficient manner and thereby reduce costs.

If there is one company which rec­og­nized the potential of blockchain tech­nol­o­gy for the financial market very early on, it’s certainly Visa. By means of the blockchain-based online platform Visa B2B Connect, the credit card company aims to make direct cross-border payments between companies safer, more efficient, and more trans­par­ent. Visa’s main market rival, Mas­ter­Card, also plans on using blockchain tech­nol­o­gy in the future. At the beginning of 2018, the company published a patent ap­pli­ca­tion for a blockchain, by means of which credit card identity data is sure to be stored safely. It is by using such forms of tech­nol­o­gy that Mas­ter­Card hopes to enhance the pro­tec­tion of customer data.

Fundrais­ing for start-ups can also be processed by means of blockchains and cryp­tocur­ren­cies. Such has been proven by Zoe Adamovicz and Marcin Rudolf and their newly founded start-up Neufund. This platform fa­cil­i­tates and speeds up the process of classic venture capital (VC) fundrais­ing methods. Founders of start-ups, which are not based on blockchains or Bitcoin systems, are becoming in­creas­ing­ly in­ter­est­ed in enabling financing by means of such tech­no­log­i­cal vari­a­tions.

An example of a social project based on blockchain tech­nol­o­gy is that of the World Food Program (WFP) organized by the UN. The private blockchain generated by Datarella for the very purpose of this project aims to prevent any form of fraud and reduce the costs during the al­lo­ca­tion of donations to refugees.

Each refugee is tagged and receives a limited budget for food. The iden­ti­fi­ca­tion of each one of them and their re­spec­tive budget is made possible by means of a retinal scan in the shop area of the camp. The cryp­tocur­ren­cy used in the process is Ethereum, with each purchase free of any extra charge and directed through blockchain-based accounts.

In the past, tech­nolo­gies based on blockchains have been able to suc­cess­ful­ly de­cen­tral­ize various systems. As a result, they not only help to break up powerful concerns but also shape internet trans­ac­tions in a more trans­par­ent manner. The downside to such dis­trib­uted systems is their re­dun­dan­cy. In a blockchain network, each node is supplied with a copy of re­spec­tive trans­ac­tion histories. In principle, each person par­tic­i­pat­ing in any given consensus method such as the proof-of-work performs the same cal­cu­la­tion. In addition, blockchain ap­pli­ca­tions generate large amounts of data, which must be down­loaded by each user as part of the val­i­da­tion process. Reducing the enormous energy con­sump­tion levels and other similar resources by means of blockchain ap­pli­ca­tions is therefore seen as one of the key chal­lenges.

The in­creas­ing speed of trans­ac­tions is also con­sid­ered a rather chal­leng­ing aspect. Bitcoin – the blockchain solution with the highest level of market cap­i­tal­iza­tion and trans­ac­tions – processes seven of them per second (on average). Such a rate is in­flu­enced by the com­pu­ta­tion­al­ly intensive consensus method. However, this value is no match for the pro­cess­ing speed of leading payment service providers. In the same time span, PayPal alone processes around 450 trans­ac­tions, while Visa manages a stag­ger­ing 56,000. The fastest online payment system – Alipay, owned by the Chinese Alibaba Group – processes up to 256,000 trans­ac­tions per second. However, Lighting Network has already drafted a method, with the aid of which Bitcoin trans­ac­tions can be ac­cel­er­at­ed. Raiden Network offers a similar solution for Ethereum.

Blockchains are managed without any trusted third party (TTP). The­o­ret­i­cal­ly speaking, their security is ensured by the de­cen­tral­ized trans­ac­tion history man­age­ment. This is effective only in large blockchain networks, because stake­hold­er groups owning more than 50 percent of all network nodes are easily able to nullify the col­lec­tive val­i­da­tion and introduce an al­ter­na­tive trans­ac­tion history. A potential risk of ma­nip­u­la­tion arises even in cases where the majority of users of an in­ter­na­tion­al blockchain network come from the same country.

Data pro­tec­tion re­quire­ments also pose various chal­lenges for blockchain de­vel­op­ers. Public blockchains es­pe­cial­ly lack the correct solutions for the secure pro­cess­ing of trans­ac­tion data. Although they anonymize trans­ac­tion par­tic­i­pants, public blockchains make every other trans­ac­tion detail available to all network par­tic­i­pants.

One thing is certain – blockchains will succeed. They have already shown what they are capable of.  While public blockchains such as those using cryp­tocur­ren­cies like Bitcoin focus primarily on private users, most companies relying on new tech­nol­o­gy initially place their bets on private blockchain solutions.

Future success of blockchain struc­tures and their struggle against cen­tral­ized systems depends largely on the research community and its ability to overcome hurdles related to data security and pro­cess­ing costs. Nev­er­the­less, the potential to make trans­ac­tions faster, more trans­par­ent, and more cost-effective (for virtually any industry what­so­ev­er) is evident in both of the use cases mentioned in this article.