How Blockchain enables application
Blockchain as discussed is the distributed ledger technology underlying
the operates of Bitcoins. It leverages the global peer network to deliver
transparent integrity of value exchanged between parties. It holds a much
higher value in terms of technology and its related advantages as compared to
the currency it supports. Blockchain’s value is also derived from the apparent
platform of security. As we progress with the development and
application of blockchains, it’s important to make sure that the initial
conditions we’re setting up are abreast with credible security in the internet
One of the most widely publicized
cryptocurrency which functions on the concept of blockchains is Bitcoins. The
year 2017 has been a roller coaster ride for bitcoin markets. It crossed the
threshold of $1000 early this year and in the past month it has soared to a
high of $17000 and on some markets, it has hit a high of $18000 as well.
Consider a scenario of making purchases using Bitcoins, for example you buy a
muffler and cap worth $25 using Bitcoin and in a weeks’ time the value of
Bitcoin surges tenfold, it would appear that the purchase was worth $250.
Rather it would be beneficial to treat the bitcoin currency as a holding asset
in hopes of asset appreciation in the future and reap bigger bonuses. Based on
this it is essential to raise the question about what is valuable in Bitcoins.
The most conclusive answer would be blockchains and related security features
which add value to it.
To have a better understanding of the
blockchain technology consider the following network:
When the sender hosts the transaction into the
network, it is termed as a block which is then broadcasted to a network of
computers participating which are called nodes. The network of nodes validates
the transaction and the sender’s status using algorithms and state the
transaction cryptocurrency, contract, records etc. Once verified, the
transaction is combined with other transactions to create a new block of data
for the ledger. The new block is then added to an existing blockchain in way
that is permanent and unalterable.
The process of validation from multiple end
points and transparency of data is an invaluable form of security which
provides added value to the blockchains innovation. Additionally, the
permanency of information serves as an added advantage to the security feature.
The storage of information is of crucial importance even though it represents
historical data. if we want to steal
a bitcoin, we’d have to rewrite a coin’s or asset’s entire history on the
blockchain in broad daylight because the blockchain is a distributed ledger
representing a network consensus of every transaction that has ever occurred.
This would not deliver success for invaders with malicious intent. Among all
the cryptocurrencies, Bitcoin since its inception in 2009 is the most tried and
tested platform in the market, which has withstood cyber-attacks for more than
7 years. The inherent Blockchain infrastructure provides a further level in
data accessibility, given that data is accessible through any of the nodes in
the network, even in the event of attack which aims disrupting some of the
transparency and integrity is s the prime reason that blockchain is the most
suitable technology for peer-to-peer networks as it solves the principal
problem created by disintermediation. The technology affirms loss of intermediaries
and guarantees that counterparties are who they claim to be, sellers own the
asset they want to sell, and that buyers are good for the money. The fact that
everybody can see the past transactions, and that therefore everybody can
reconstruct who had what at each point in time, creates trust. For example, in
the United States roughly 30% of insurance applications against secured titles
are found to be faulty. It takes the insurance companies to verify title of
underlying asset anywhere between 4-12 working days. Only when the title is
determined to be clear, the insurance company issues a policy against the
security of the title. If the property records were stored on blockchain, it
would reduce the processing time significantly as data from the incipience will
be available on the blockchain platform.
From experience, we know that central
databases can be hacked as in the case of banks but with a distributed
database, the same information is kept at many different locations. To have
unauthorized access to the data stored, one must hack the distributed ledger at
various locations simultaneously which would be a difficult feat to accomplish.
In tandem, the French government approved trading of unlisted securities using
blockchain digital ledgers. It allows the Fintech companies and banks to set up
blockchain platforms where unlisted securities can be traded instantaneously in
a cheaper, safer and transparent environment. With Blockchain technology each
transaction is uniquely encoded via cryptography which is validated by other
participants in the blockchain, any attempt to alter, remove or fabricate data
would be detected by others and corrected immediately.
multiple records of a single transaction would appear to be cumbersome and less
efficient than maintaining data in a single centralized database. In real world
application, multiple parties involved in a transaction maintain databases
regarding the same transaction, the only difference being that the data pertaining
to the same transaction is often in conflict. This arises due to human error
and requires rectification which is time consuming and costly affair between
organizations. Therefore, implementing a distributed database system like
blockchains can help eliminate the need for manual reconciliation through
security aspects of blockchains has potential to revolutionize the banking
industry especially considering the anti-money laundering compliance
procedures. By setting up blockchain platforms, it allows secure codification
of account details which provides transparency of payment transactions and
reduce false rates associated with it. It would also result in smooth audit
procedures and reduce the cumbersome compliance procedures the banks are
subjected to. Additionally, secure distributed databases of client information
shared between institutions could help reduce duplicative efforts in customer
onboarding. In early 2017, Blockchains was tested in India with seven major
banks as participants. An analysis of data over nine months has concluded that
it has helped in reducing fraudulent account manipulations and duplicate
eliminating security hindering factors like human errors and automatic fraud
detection, Blockchain technology has allowed to create a virtual impenetrable
boundary around data, identities and other sensitive information which
facilitates the execution of digital contracts in a transparent, conflict-free way while avoiding
the services of a middleman. For example, cryptocurrencies like REMME’s
blockchain, allow businesses to authenticate users and devices without the need
for a password, Obsidian uses
the blockchain-decentralized network and ensures the privacy and security of chats etc.
Every invention comes with its associated
concerns related to security and mass adoption. Cryptocurrency as an evolving
development in the fintech industry has its own set of security and legal
concerns as well.
of the concerns is that when transaction or personal data are published
globally without encryption it may lead to identity theft or privacy issues
which would further fuel regulatory and legal problems. The solution might be
to store data only in an encrypted form in a blockchain which is accessible
using a digital key. If suppose one loses the key or worse it is published, all
the data will be made public and cannot be altered due to the blockchain security
Another issue faced by
the blockchain technology is the 51% attack. In case more than half of the computers working as nodes
in a network were to lie, the lie will become the truth. Consider, an organization or
individual holding 51% of the hash power, the attacker has the power to reverse
transactions he hosted, prevent transactions from gaining confirmations, and
prevent other miners from mining. As a solution, bitcoin mining pools are monitored closely to
ensure no individual or organisation unknowingly gains such network influence.
Lastly, the most notable security issue in
employing Blockchain systems is the regulatory reforms to be put into place.
Across the globe, cryptocurrencies and impending regulation have been of
concern to the governments. Many are of the view that allowing cryptocurrency for legal transactions and use
would result in loss of economic power and a shift towards decentralized
economies globally. Some countries which have allowed use of Blockchain
technology have had the system under heavy scrutiny whereas on the other hand
there are some countries which have gone to the extent of banning the use of
such technology as they consider it disruptive.
In the United States, the Federal Government has not yet
exercised it constitutional power to regulate Blockchain technology related cryptocurrencies.
The individual states have therefore taken it into their own authority to implement
laws and regulations regarding the same. The state of New York enacted a
legislation recognizing blockchain and was the first state in USA to regulate
virtual currency companies.
In 2017, at least
eight U.S. States have worked on bills accepting or promoting
the use of Bitcoin and blockchain technology, while a couple of them have
already passed them into law. The most notable have been in the states of
Arizona which recognized and regulates digital contracts and Chicago where the
real estate records have been stored in blockchains and are regulated by the
state. Bitcoin is also set to be given
the same financial
safeguards as traditional assets. The U.S. Commodity Futures
Trading Commission has approved a cryptocurrency trading platform which is the
first federally regulated digital currency options exchange and
clearinghouse in the U.S. Even though there have been efforts from
authorities on regulations, it seems to be inefficient in a way that the
futures market is being regulated but the actual underlying asset is completely
unregulated. It paves the way for cyber security issues which could prove
catastrophic and irreversible in nature considering the blockchain technology.
In the European
Union, Blockchain technology has been welcomed with open arms. They have
encouraged to test the uses and impacts and regulatory reforms while providing entrepreneurs
confidence that their “approved” applications will be more trusted by
their target markets. Most remarkably, Switzerland has
become one of the main European hubs for cryptocurrency and blockchain
development led by the Crypto Valley Association, a Swiss non-profit blockchain
and cryptographic technology ecosystem.
In the realm of Finance industry and particularly trading,
perhaps the most important matter of concern would be a public or private
blockchain. The sole distinction between public and private blockchain is
related to who can participate in the network, execute the authentication and maintain the shared ledger.
In a public blockchain network anyone can join and
participate which is a major drawback, the openness of a public blockchain
implies little to no privacy for transactions and
only supports a weak notion of security. On the other hand, a private
blockchain network is exactly the opposite of a public blockchain.
Businesses who set up a private blockchain,
will generally set up a permissioned network. Which
restricts who can participate in the network and in what transactions.
Participants need to obtain an invitation to join the network. Existing
participants could decide future entrants; a regulatory authority could issue
licenses for participation; or a consortium could make the decisions instead.
Once an entity has joined the network, it will play a role in maintaining the
blockchain in a decentralized manner.