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Blockchain – how it changes the modern economy?

Karolina 20.05.2018

Cryptocurrencies like Bitcoin and Ethereum have gained tremendous market value and have been used by hundreds of thousands, perhaps millions of people all around the world. Even if many people question their perspectives today, practically no one doubts the value of the technology, on the basis of which all cryptocurrencies operate. It is, of course, a blockchain (chain of blocks), a revolution comparable only with the TCP/IP protocol on the basis of which the Internet works. Even if the success of cryptocurrencies turns out to be only temporary, blockchain will remain with us as the most effective solution to the problem of storing sensitive data in networked environment.

Most attempts to explain what blockchain is suffer from one of two serious ailments. Either they are cursory, even trivial and they do not really explain anything, or they scare people who are not familiar with mathematics or technical cryptography with jargon and the level of abstraction. We will try to explain the blockchain avoiding both of these ailments.

To change one dot, you have to fake the whole story

Blockchain is nothing more than a constantly prolonging record of certain operations (eg financial transactions), which is divided into blocks of fixed length. With the help of cryptography, each new block with the record of new operations is securely and irreversibly attached to the previous block. What does it mean safely and irreversibly? Well, each block contains, in addition to the operation record, the date and time of creation, and so-called cryptographic abbreviation (hash) of the previous block. This hash is nothing but a special mathematical function that transforms a certain set of data into a number. This is a one-way operation – the same set of data will always be converted into the same number, while from this number it is practically impossible to reconstruct the data set.

That’s why, as each block contains the hash of the previous block, it is impossible to change the contents of any of the previous blocks. Changed block will no longer match the next block attached. In this way, the blockchain becomes an invariable and modifiable record – to change the record in one block, you must change all subsequent blocks. It is possible, but …

Decentralization

Another important feature of the blockchain is that it does not exist in one copy. You can think of it as a distributed database in which the same information is stored in the memory of thousands of computers that synchronize their state at regular intervals. What particularly important is that there is no main copy here, all copies of the blockchain are identical, all are equal. Even if one of the copies is damaged or the data in it is changed, it will not prevent the external person from reading the correct data from the given blockchain.

How does blockchain vote?

As we already know, each of the network nodes contains their own copy of the blockchain. Each of these nodes works independently from others, no matter who gets access to it. At one point, one of the nodes may consider that, due to the need to save new data, it must add a new block. By adding this block, it must spread the information about all other nodes, thus updating the state of the blockchain. Such broadcasting is simply the presentation of the entire new block network, with a new issue, with a call to include it in the universally recognized blockchain state.
In the new block, however, there must be a cryptographic abbreviation of the previous block – and thus all that was created from the very beginning. The notified block network, so that it is recognized by all other nodes, must therefore confirm the history of the so far recorded transactions – and this is where the voting of all other nodes is carried out. If it is successful, then the block marked with a unique number and date is included in the blockchain, completing the process of recording transactions belonging to the given block. Blockchain has just grown on all nodes.
In this way, the risk of having data dependent on the correct operation of one system is eliminated. Instead of one entity caring about their safety, we have many independent entities that jointly agree on a consensus on what blockchain should contain.

Trust economy

Blockchain brings with it many promises. Virtually every day new white books appear, praising the use of an invariable, scattered and publicly available register in various fields of economy and administration. It aims to bring financial savings to everyone, increase data security and open the way to completely new IT services. To what extent are these promises real, and how much is it just climbing the Gartner curve hype cycle?

Deloitte in its last year’s report, Tech Trends 2017, talks about blockchain as the guardian of an emerging trust economy. In this economy, we leave behind credit ratings and other traditional mechanisms of trust for reputation and digital identity – which can be combined as part of transactions saved in the blockchain. For private individuals they can be their professional careers, credit histories, medical data, tax information. For organizations – all kinds of data confirming their credibility as business partners.

In this trust economy, Deloitte distinguishes three layers of blockchain application:
* Storing records in a secure, unchanging, auditable form – not only financial transactions, but also digital representations of physical resources.
* Exchange of digital resources without a trusted third party – blockchain users can directly transfer ownership of digital resources to each other without the need for exchangers, banks or payment operators.
* Performing smart contracts, or self-directed scripts that work on the basis of a blockchain, contain sets of rules and conditions, and allow you to track the state of completion of contracts and trigger specific actions with financial and legal consequences depending on that. All this is verified without a trusted third party.

Who trusted the blockchain?

For now, the world of finance is rather cautious, but one can talk about growing optimism. During this year’s Cloud Expo Europe conference, Joydeb Sengupta, the chief strategist at the CLS Group, said that blockchain technology is trying to solve essentially mathematical problems that have plagued the industry for years. Until now, traditional methods have been dealt with, but this has not done well. Sengupta therefore believes that by the end of the year we will see concrete implementation of blockchain in finance. His company has developed a solution for bilateral netting settlements for one of the stock exchanges – and as he claims, although it could have been done by traditional methods, it was decided to solve on the basis of blockchain.

The Kodak project made a huge impression on investors. The company announced the launch of a blockchain-based copyright management platform for photography, along with the accompanying cryptocurrency and smart-contract system, allowing photographers to immediately receive a remuneration from users of their photos. It was enough to capitalize on the New York Stock Exchange four times within a few days. Then there was an inevitable correction, but you can see that blockchain ignites the imagination.

However, the Kodak solution is a small thing compared to the initiatives in which Microsoft and IBM were involved. The Windows manufacturer is conducting pilot work on a digital identity platform that will allow users to control access to their sensitive data. Instead of scattering fragments of their digital identity through innumerable online services, they will gather everything in a blockchain-based information hub, giving service providers with only what they need to conclude a contract.

For its part, IBM, together with a dozen other companies dealing with fintech and new technologies, is working on the Sovrin Network. It is a network that will allow each participant to exchange data cryptographically confirmed by institutions such as banks, offices, workplaces or health care facilities. The holder of an information portfolio in which such verified data is stored, fully controls who has the access.

Not everything can be invariable

In fact, there is only one problem that blockchain supporters do not like to talk too much about. It is a GDPR regulation adopted by the Member States of the European Union, which among others introduces the right to be forgotten. The problem is that the basic feature of the blockchain is the irremovability of the data stored in this public registry – what has been saved will be there forever. How can you deal with this in the conditions of GDPR?

It seems that in many scenarios it will make blockchain implementation difficult. It is already known that these business chains of blocks will require advanced mechanisms to manage the access rights to the content they contain. One of the better ideas is, for example, encryption saved in data blocks – and in the event of a request to delete this data, destroy the used cryptographic key.

This, however, would require a hybrid approach in which at least the encryption keys are stored in a central database. Microsoft researchers who propose such blockchain ay that they will assure even better protection of users against cyber threats, protect financial information and consistency of the global financial system.

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