Blockchain – what are the benefits of using distributed ledger technology? Blockchain and distributed ledger technology

Distributed ledger technology: beyond blockchain. Report of the UK Government's Chief Scientific Adviser.

Preface

Human progress is characterized by the growth of new technologies and the human ingenuity that discovers them.

In the case of distributed ledger technology, we may be witnessing one of those possible explosions creative potential that allows you to achieve outstanding heights in innovation. It may turn out that this technology can provide new level trust in a wide range of services. Just as the open data policy, as we have already seen, has radically changed the relationship between citizens and the state, so the transparency of these technologies can change for the better our financial markets, supply chains, client and b2b services, and public registers.

We know that we will be challenged as Distributed Ledgers evolve and disrupt our understanding of data and how we store it. The UK is uniquely positioned to explore these phenomena and enable our public services and our economy to make the most of this technology. We already have world-class digital capabilities, innovative financial services, a strong research community and growing private sector expertise.

It is vital that our key assets - including the Alan Turing Institute, the Open Data Institute and the Digital Catapult think tank - work together with the private sector and international partners to unlock the full potential of this technology.

Therefore, we both take great joy in working together in leadership positions in this area and look forward to working with other agencies to develop these opportunities. And also, work on understanding how it can be applied this technology so that UK citizens and its economy can benefit significantly.

Introduction

The algorithms that enable distributed ledgers are powerful, disruptive innovations that have the potential to change the way public and private services are delivered, as well as increase productivity through a wide range of applications.

Registers have been at the heart of business since ancient times and were used to record information about many things, but mainly about assets such as money or property. At first, clay tablets were used for recording, then papyrus, parchment and paper. However, during all this time the only notable innovation was the introduction computer equipment, which was initially used simply to transfer information from paper into digital code. For the first time, algorithms are making it possible to co-create digital distributed ledgers that have properties and capabilities that go far beyond traditional paper ledgers.

A distributed ledger is essentially a database of assets that can be distributed across a network of diverse sites, geographic areas, or organizations. All network participants can have their own, identical copy of the ledger. Any changes to the registry are reflected in all copies within a few minutes, and in some cases, seconds. The assets in the registry can be financial, legal, physical or electronic. The security and reliability of the assets stored in the registry is carried out cryptographically using “keys” and signatures that control who can perform what actions in the general registry. Registry entries can also be modified by one, a few, or all participants in the network, depending on the rules of the network.

This technology is based on the “blockchain,” a technology invented to create the peer-to-peer (decentralized) digital currency Bitcoin in 2008. Blockchain algorithms allow Bitcoin transactions to be combined into “blocks” and added to the “chain” of existing blocks using a cryptographic signature. The Bitcoin ledger is designed to be distributed and “unchecked,” meaning anyone can add a block of transactions as long as they can piece together the cryptographic puzzle to add each new block. The incentive for this is a reward in the form of twenty-five bitcoins for each “block” that completes the puzzle. Anyone with internet access and the computing power to complete the cryptographic puzzle can add blocks to the ledger. Such people are called “Bitcoin miners” (from the English “mine” to mine). The analogy with “mining” is quite appropriate, since the process of “mining” Bitcoins is energy-intensive, since it requires large computing power. It has been calculated that generating Bitcoin requires over 1 Gigawatt of power, which could be comparable to Ireland's electricity use.

Bitcoin is the electronic equivalent of cash. The authenticity of cash is verified by its appearance and certain features, in the case of banknotes these are serial numbers and other security features. But in the case of cash, there is no ledger to record the transactions and there is also the problem of counterfeiting of both coins and banknotes. In the case of bitcoins, a transaction ledger guarantees their authenticity. Both money and bitcoins should be stored in safe place, in real or virtual wallets, respectively - and if they are not monitored properly, then both money and bitcoins can be stolen. The fundamental difference between conventional currencies and Bitcoins is that the former are issued by central banks, while the latter are issued in agreed quantities by the global “collaborative” effort that is Bitcoin technology. Cash as a method of exchange and trade dates back thousands of years and its origins include cowrie shells, minted coins and now Bitcoin.

But this report is not about Bitcoin. It's about the algorithmic technologies that make Bitcoin possible, and their potential to transform ledgers as tools capable of recording, producing, and securing huge numbers of transactions. So the basic blockchain approach can be changed to combine rules, smart contracts (the term “smart contracts” is also used), digital signatures and a number of other new tools.

Distributed ledger technologies can help government agencies collect taxes, pay pensions, issue passports, enter land registry records, guarantee supply chains for goods, and generally ensure the accuracy of records of government activities and services. In the UK National Health Service, these technologies provide the opportunity to improve healthcare by improving and validating the quality of services, as well as safe sharing records in accordance with strict rules. Depending on the circumstances, technology can enable individual service recipients to control access to personal data and discover who has used it.

Existing methods for managing data, especially personal data, typically use large, traditional IT systems located within a single institution. Added to these are a number of network management systems and messaging systems for communication with outside world, which increase the cost of using the IT system and its complexity. Highly centralized systems exhibit high costs of any failure. They can be vulnerable to cyber attacks, and the data is often out of sync, out of date, or simply incorrect.

In contrast, distributed ledgers are inherently much more secure from attacks because instead of a single database, they are multiple copies of the same database, and thus, to be successful, a cyber attack must be carried out on all copies simultaneously. The technology is also resistant to unauthorized modification or hacking, since network participants will immediately detect changes in one of the parts of the registry. In addition to this, the methods used to protect and update information mean that participants can share data and be confident that all copies of the ledger match each other at any given time.

But this does not mean that distributed ledgers are completely immune to cyber attacks, because if someone can find a way to “legally” change one copy, then they will change all copies of the ledger. Thus, ensuring the security of distributed registries is an important task and part of the overall problem of ensuring the security of the digital infrastructure on which modern society depends.

Governments of some countries are already beginning to use distributed ledger technologies in their work. For example, the Estonian government has been experimenting with distributed ledger technology for several years, using one implementation of the technology known as KSI (Keyless Signature Infrastructure), developed by the Estonian company Guardtime.

KSI allows citizens to verify the accuracy of their records in government databases. It also seems impossible for insiders with privileged access to work with data within a government network to carry out illegal activities. The ability to assure citizens that their data is correct and stored securely has allowed Estonia to launch electronic services, such as Electronic Business Register (e-Business Register) and Electronic Taxes (e-Tax). These services have reduced the administrative burden on the state and citizens. Estonia is one of the “Digital 5” or D5 group of countries, which also includes the UK, Israel, New Zealand and South Korea. There is an opportunity for the UK to work with these and other like-minded states and learn from them how to implement blockchain and related technologies.

The business community quickly appreciated the opportunities that opened up. Distributed ledgers can provide new ways to secure ownership and confirm the origin of goods or intellectual property. For example, Everledger provides a distributed ledger that guarantees the authenticity of diamonds from mining and cutting to sales and insurance. In a market with relatively high levels of document forgery, this technology makes authentication more efficient and has the potential to reduce fraud and prevent blood diamonds from entering the market.

The big challenge is communicating with senior policymakers and the public about the importance of these new technologies - and this is one of the main objectives of this report.

The first difficulty in communication is the strong association of blockchain technology with the Bitcoin system. Bitcoin is a cryptocurrency, so named because cryptography underlies the generation and tracking of the currency. Bitcoin is viewed with suspicion by citizens and government officials because it is associated with criminal transactions and “dark web” trading sites such as the Silk Road Internet portal on this moment not working. But digital cryptocurrencies are of interest to central banks and government financial institutions around the world, who are studying them with great interest. This is because the electronic distribution of digital currency provides high returns. And unlike physical currency, digital currency comes with a ledger of transactions that physical cash does not have.

The second communication challenge is the confusing range of terminology. The terminology is explained by Simon Taylor, who has provided a list of definitions at the end of this review. One term that can confuse users is “distributed,” which leads to the misconception that if something is distributed, there is therefore no entity or owner who fully controls it. This may or may not be the case - it all depends on the registry model chosen. In practice, there is a wide range of distributed ledger models with varying degrees of centralization and different types of access controls to meet different business needs. These can be either “uncontrolled” registries, which allow anyone to add data and cannot belong to anyone; and “controlled” registries, which can have one or more owners, and only they can add entries to the registry and check its contents.

The key idea is that by fully understanding this technology, government and private sector can choose the model that best suits a specific purpose, balancing security and centralized control for convenience and the ability to share data between institutions and individuals.

As with most new technologies, it is difficult to fully assess all future uses and threats. And with every new technology, the question is not whether the technology itself is good or bad. The questions are: what uses can the technology have? for what purpose? and in what form can it be used and how does it guarantee safety?

To answer these questions, the UK Government Science Office has convened a group of experts from business, government and academics to assess the potential of distributed ledgers for use by government and the private sector, and to identify the actions that government and other stakeholders will need to take to facilitate the use of distributed ledger technology. registries to benefit and avoid possible harm. The purpose of this was to decipher the terminology of this technology for a policy audience and provide government officials with its concept and basis for their decisions on where it should be applied and how best to introduce it.

To summarize, distributed ledger technology provides governments with a platform to reduce fraud, corruption, errors and the cost of paper-intensive processes. It has the potential to redefine the relationship between government and citizen on issues of data sharing, transparency and trust. It has similar opportunities for the private sector.

This short review describes eight main recommendations from our experience. They are presented in the form of a summary description key points of seven chapters that cover concept, technology, governance, privacy and security, disruptive potential, applications, and global perspectives. The chapters were written by experts in distributed ledger technology in a language that should be accessible to people who are not experts. I am extremely grateful to these experts for their guidance and insightful contributions.

Mark Walport, Chief Scientific Adviser to Her Majesty's Government, December 2015

To view the study results in detail, you can download the study in PDF format below.

The implementation of the General Data Protection Regulation in Europe raises some critical questions about distributed ledger technology. And most importantly, how can GDPR be applied in the realm of immutable blockchain?

Indeed, the entry into force of the GDPR poses as yet unanswered questions for distributed ledger technology (DLT).

DLT approach to data

Let's start with the basics. Distributed ledger technology is digital system fixing data on different means storing data simultaneously. That is, what distinguishes them from ordinary databases is that they do not have a central server. Here, each individual node processes and verifies each block. In this way, a consensus rule is implemented in relation to each element. Blockchain can be used to record any data

This allows blockchains to be less vulnerable to attacks because data is stored in many places. But this does not mean that hacking is impossible.

In fact, most discussions of the problem of data protection in the blockchain revolve around the inability to change the data recorded in the distributed ledger.

Since there are many copies of a single record, all presumably protected by encryption and keys, it stands to reason that it would be very difficult to change all the records at once.

Approach to data in GDPR

GDPR, or General Data Protection Regulation, treats any personal data as something like an asset that appears to belong to someone, a person or an organization. Although the rule itself never mentions data ownership, the obligations to data entities are exactly the same as if the entities owned the data. Therefore, within the framework of the regulations, the right of the subject-owner of information is recorded to instruct the person managing the information what can or cannot be done with it. And the latter are obliged to follow the instructions of the former. To the point of deleting the data owned by the person.

Given that every transaction record must contain data components identifying the parties, it is clear that any records of transactions on a distributed ledger made by EU individuals are subject to GDPR rules. But now we remember the fact that in DLT there are many records of each transaction, it turns out that there are a huge number of copies of personal data regulated by the GDPR.

What does the GDPR say about blockchain data? Quite a lot actually. Firstly, Article 5 requires that data be processed in such a way as to ensure adequate security. This includes protection against unauthorized or unlawful processing, as well as against accidental loss, destruction or damage, using appropriate technical or organizational measures (so-called “integrity and confidentiality” rules).

The GDPR differentiates the responsibilities of data controllers and data centers. Article 4 states that the controller “shall determine the purposes and means of the processing of personal data,” while the data center “processes personal data on behalf of the controller.” That is, the question arises: which nodes will be interpreted as a controller, and which processors? Because under the GDPR, it is the controller who is responsible to the data subject for the actions of the data center.

Questions to answer

Clearly, there are several important questions that need to be answered.

Does GDPR really need to apply to DLT? For now, the default answer is “yes”—there are no exceptions to the law. But the structure and operating principle of the blockchain makes meeting these requirements very, very difficult to implement. But it is still necessary for the EU to issue a specific conclusion on this issue.

And even if the requirements of the GDPR do not apply to blockchain, how to ensure the protection of users’ personal data and the absence of violations? After all, the point of the GDPR is to provide data subjects with protection against the loss or misuse of their personal data.

If GDPR does not apply, does that mean that everyone who has recorded data on the blockchain has opted out of protecting their data in unilaterally and de facto, without knowing about it?

If applicable, who is considered the data controller and who is the processing center? Can a data subject hold a controller legally liable for the actions of nodes on the blockchain?

Does this mean that in some cases the GDPR is essentially unenforceable? If the data structure of blockchain means that sometimes GDPR works and sometimes it doesn't, then you have a situation where individuals have data protection in one area but not in another. If this is the case, then service providers will need to inform data subjects that the GDPR applies here and does not apply there. Do you understand how huge a number of controversial issues have already arisen and will continue to arise?

And regulators have yet to answer them.

The emergence of a new revolutionary blockchain technology has divided the progressive public into two camps - supporters and skeptics. The former predict success for the new product on par with the effect that the Internet once had, while the latter do not see any serious prospects for it. So what can blockchain bring to business, and is it really necessary?

Is there a market?blockchain technologies?

Despite the experimental stage of development, the technology was recognized as one of the ten most promising at the World Economic Forum. Experts believe that the economic and social potential of blockchain can fundamentally change the way markets are organized in all industries. By its structure, blockchain is a decentralized digital registry of transaction data that can be shared by a distributed network of market participants and literally change the logic of doing business. The peculiarity of systems created on the basis of blockchain solutions is increased fault tolerance and security, as well as efficiency and transparency of all processes.

According to forecasts by the American analytical company Transparency Market Research, the global market will reach $20 billion in 2024, with an annual growth rate of approximately 59%. At the same time, at the end of 2015, the blockchain market was valued at almost $316 million. Grand View Research analysts believe that in 2015 the industry already reached $509 million, and in 2016 it passed the $604.5 million mark.

Experts from both analytical companies call Microsoft the main players in the new market (the author of the text represents the company - Forbes), IBM, Deloitte, Chain Inc and a consortium of R3 banks. And the largest market at the moment is North America, which is logical, since the listed players are concentrated there. The bulk of investments in technology development are also made there. As a result, North America is expected to remain the leading region in the near term.

Banks drive progress

Today, the main driver of growth in the blockchain market is the financial sector, according to Transparency Market and Grand View. In particular, this is due to the growing needs of businesses for increased security of online payments, which can be achieved with the help of decentralized technology. J.P. Morgan also confirms that blockchain has conquered the sector financial services, whose venture capital is directed in large volumes specifically to technology startups. According to J.P. Morgan, investments in blockchain startups have already reached $300 million, and this figure is growing rapidly. Thus, in 2015 alone, investments amounted to $125 million, and in the first half of 2016, investments exceeded this amount. According to PricewaterhouseCoopers, investments in the blockchain industry for 9 months of 2016 amounted to $1.4 billion. Internal bank expenses on blockchain projects at J.P. Morgan were collectively estimated at $80 million, and this is only for 2015.

Banks are indeed actively showing interest in the development of blockchain technology. Back in 2013, the R3 banking consortium was created to test and develop blockchain products, such as, for example, new trading and settlement platforms, systems to support the issuance of securities. Now the consortium includes more than 40 large international financial organizations such as Goldman Sachs, Citigroup, Bank of America, Morgan Stanley and others. Thus, the Spanish financial giant also announced the implementation of a project to link the fiat accounts of its clients to the Ethereum blockchain. The bank plans to test the platform using micropayments to pay for its clients’ access to paid news on websites. and the Bank of England announced their intention to introduce blockchain technology into their payment systems. The first has already completed the development of a mechanism for settlement and clearing activities on the private Ethereum blockchain to automate processes, the second has stated that by 2020 it will use the blockchain in a real-time gross payment system, the daily turnover of which today reaches $600 billion.

Is there a blockchain in Russia?

Russian financial organizations also believe in the future of blockchain in the country. The head of Sberbank German Gref believes that active development technology will be received in the next 2-3 years. At the end of January 2017, Sberbank announced the development of a prototype of a blockchain-based currency exchange system. True, for its functioning a special platform is needed. But the bank still considers the technology promising and is thinking about ways to apply it. And earlier, Sberbank announced its plans to launch an alternative electronic document management system based on blockchain. In 2016, the Bank of Russia initiated the creation of its consortium, which included Sberbank, Qiwi, B&N Bank, Otkritie Bank, Tinkoff Bank, Alfa Bank and others. New organization will study and implement blockchain technology, among other things.

The versatility of blockchain

An interesting application of the technology was invented by the Russian Carbon Fund and Aira Group - a project to create an exchange of carbon contracts. If sold through an exchange, transactions worth hundreds of millions of dollars can be carried out. Airalab (read more about its founders in Forbes) has developed a blockchain platform for the carbon market, which can be used worldwide, in countries where the Kyoto Protocol has been ratified. As is known, within the framework of this document, most industrialized countries agreed to reduce and regulate greenhouse gas emissions. They can do this either by introducing expensive energy-saving technologies or by purchasing carbon contracts.

The carbon contract is sold on the exchange, it can be purchased if a company or production has used up its permissible limit on carbon dioxide emissions, thereby compensating for the harm. And those who reduce emissions can resell their credits on carbon exchanges. Experts predict that by 2020, the price volume of the global carbon market could reach $2-3 trillion per year.

Carbon contracts have a strict registry system. Each contract has an issuer, owner, serial number, type, classification, certifier. Registration of carbon contracts is carried out by independent registry bodies, information about them is maintained in an accessible and verifiable manner for everyone. However, the difficulty is that carbon markets are highly segmented, market institutions are fragmented, and instruments are not convertible. That’s why the use of blockchain technology and smart contracts, which eliminate all these issues, is so relevant here. The platform created by Russian Carbon and Aira Group operates with units that, in fact, represent the same underlying asset - the right to emit greenhouse gases. Moreover, this asset can be used by an almost unlimited number of users from international, government agencies, transnational corporations to private companies, individual consumers of goods and services, even in very segmented markets. Moreover, the underlying asset can be generated at any point globe and does not require physical transportation.

This alternative system can be used as a platform for transactions for the registration and assignment of “carbon” assets and liabilities, as well as for the selection of projects for investment. The ecosystem will provide the technological ability to access existing instruments with minimal transaction costs and provide access to data on the price ratio of instruments and price changes. At the end of 2016 at new platform A pilot transaction was successfully carried out, in which the Russian Carbon Fund and Airalab took part as the “operator”, Aira Group as the “issuer”, Baker and McKenzie as the “auditor”.

As a result of the project, existing and potential project participants will expand the accessibility of disparate markets and market niches while reducing transaction costs. At the same time, for companies that have already been subject to greenhouse regulation or will become subject to such regulation, this is risk hedging. In turn, investors will have access to a wide range of investment instruments on one platform with the opportunity to verify the origin and history of the investment object. And auditors will be able to expand the circle of consumers who need relevant expertise. Plus there is even for private individual consumers who will be able to independently choose the environmental project for which they want to pay.

Real Prospects of Blockchain

Many people are still just taking a closer look at blockchain technology. Numerous consortia of players in the financial sector of the economy are cautious about creating solutions and launching pilots. It is obvious that blockchain will eliminate certain types of correspondent relationships, clearing houses and intermediaries, contract executors, outdated models of payment systems and brokers. It is also obvious that it will become the main driver for the transformation of most sectors of the economy, and not just its financial sector.

Thus, in the coming years, promising areas for blockchain will be, for example, healthcare, insurance, retail, real estate, property registration and the music industry. With blockchain, processes that previously took several days can now be completed within a few minutes, establish data exchange between counterparties, increase the availability of services for clients, and improve service. In addition, the technology helps to dramatically improve the performance, fault tolerance, and security of systems. All this will improve the efficiency of any business.

Distributed ledger technology, which began with the advent of Bitcoin, is rapidly growing into a crowdsourcing system capable of verifying any transaction. Will it be able to replace central banks, notaries and election commissions?

Text: John Plansky, Tim O'Donnell and Kimberly Richards
Translation: Elena Gordishevskaya

A precious work of art changes its owner. The names of the seller and buyer are not disclosed, however, the exchange is confirmed, the history of the origin and ownership of this piece of art is attached, and the piece itself is automatically insured against theft.

A voting machine is counting votes in a developing country with a notoriously corrupt political establishment. Although there is no central government database, every vote cast is identified and cannot be duplicated. The anonymity of voters is preserved, and the election results are not in doubt.

The banking consortium gains market share by trading in real time (instead of waiting three days for clearing) and guaranteeing loan placement within a day (instead of two weeks), all with minimal risk. These same banks begin to conduct one-day currency trading at the optimal exchange rate, reducing the costs of these operations tenfold. All such transactions are tracked and recorded so that the government can see the movement of capital across its borders and monitor patterns of transactions that may indicate money laundering. But the identities of the sellers and buyers themselves are impossible to know.

The technology that could make all this possible is called blockchain (“block chain”). This was originally the formal name for search base data created for the digital currency Bitcoin, and today the term is widely used to refer to any distributed digital ledger that uses software algorithms for secure and anonymous recording of transactions. This technology is sometimes called distributed registry(more general name) cryptocurrency(from digital currencies from which this technology originated), bitcoin(the most famous of the cryptocurrencies), as well as decentralized verification(main distinctive feature of this type systems).

At its core, blockchain is a self-sustaining peer-to-peer database technology for managing and recording transactions without the intervention of a central bank or clearinghouse. Since verification in blockchain technology occurs through algorithms and the coordination of the actions of many computers, the system is considered invulnerable to data manipulation or falsification, as well as political control. It was created to protect the network from possible domination by one computer or a group of computers. The identity of each participant remains fairly anonymous and is identified only by a pseudonym, and each transaction is secure. Moreover, because each central transaction is processed only once, on one shared digital ledger, blockchain reduces the redundancy and latency that characterizes today's banking system.

Companies that have already shown interest in blockchain technology include HP, Microsoft, IBM and Intel. In the financial services sector, some large firms are establishing partnerships with technology startups to explore opportunities in this area. For example, in October 2015, financial technology firm R3 announced the creation of a consortium of 25 banks aimed at developing a common crypto platform. The consortium included such influential banks as Citi, Bank of America, HSBC, Deutsche Bank, Morgan Stanley, UniCredit, Société Générale, Mitsubishi UFG financial group, National Australia Bank and Royal Bank of Canada. Another pioneer of this technology is Nasdaq, whose CEO Robert Greifeld, also in October 2015, introduced to the general public Nasdaq Linq, a blockchain-based digital registry for transferring shares of private companies.

If such experiments live up to expectations, blockchain technology will become a fundamentally new and decisive force in any trading platform where trust is paramount and people need protection from identity theft, including the public sector (government records management and election vote counting), healthcare (where data is anonymous but easily accessible), retail (making high-value purchases such as car rentals or real estate), and, of course, all types of financial services. In fact, some forward-thinking banks are already exploring options for using blockchain technology to change the way they conduct trading and settlement, back-office operations, investment and fixed asset management. They understand that technology can be the differentiator of their potential, enabling them to process transactions more efficiently, securely, privately, securely and quickly. By providing access to data through a common digital platform, blockchain may change the way transactions are conducted in the same way that geo-positioning systems (GPS) changed transportation.

No matter how impressive the potential of the technology, doubts about it are no less serious. Distributed ledgers are so new, complex and subject to rapid change that it is difficult to predict what they might evolve into or guarantee that they will work at all. In August 2015, research and advisory firm Gartner Group said in a report that cryptocurrency was going through its “cycle of maturity”: it had passed the “peak of inflated expectations” and was heading towards the “trough of lost illusions.” Another research firm, Forrester, titled its 2015 report on blockchain technology “Don't Believe in Miracles,” advising entrepreneurs to wait five to ten years before jumping into blockchain, partly due to legal restrictions.

At the same time, some organizations are vigorously promoting research and development in this area. “The distributed payments technology embodied in Bitcoin has real potential,” Bank of England chief economist Andrew Haldane said in September 2015. “On the surface, it solves a major problem in monetary economics: how to establish trust—the essence of money—in a distributed network.”

The main thing now is to act without haste. Don't try to transform right away existing systems in the blockchain. Instead, explore how distributed ledger technology can be used against your business, and how your company can use it to get ahead instead. Run one or two pilot projects. In any case, your investment should be relevant to the benefit you offer and meet the basic needs of your business partners and clients, ensuring speed, convenience and control over their transactions. Develop a clear strategy that will bring profit to your company, regardless of whether blockchain fulfills its transformative role.

The Origins of Blockchain Technology

Decentralized digital currency emerged in 2008 as a counterculture initiative. In its early years, it was often described as a covert protest against the global banking system in response to the financial crisis, and Bitcoin was used as an alternative currency in money laundering and illicit schemes. trading platforms on the dark web like Silk Road (which was methodically dismantled by law enforcement). The name of the creator of the Bitcoin protocol, Satoshi Nakamoto, is believed to be a pseudonym, and separate attempts to establish his/her real identity have not yielded any conclusive results. In 2008, Nakamoto published specifications for the Bitcoin system, and in 2009 he opened software system for a peer-to-peer network. At that time, 1000 bitcoins were worth less than $3.

From the very beginning, digital currency received recognition from the legal financial sector as a potential dark horse and a possible investment object. The value of Bitcoin began to skyrocket after 2010. It reached its peak on November 29, 2013, when one unit of Bitcoin sold for $1,125. Since then, its price has corrected significantly and fluctuated between $200 and $400 for most of 2015. But the fate of this currency has not yet been finally decided, as well as the boundaries of its recognition.

Anyone can try to create Bitcoin, but it's not that easy. The technique of creating Bitcoin, known as “mining,” was created specifically to protect the value of the currency through scarcity. Bitcoins can only be created in limited quantities: each Bitcoin takes on average about 10 minutes to create, and each subsequent Bitcoin is slightly more difficult to create than the previous one. Processing each Bitcoin requires such a high level of computing power that it digital currency They are even criticized for not being environmentally friendly - so much carbon is released into the atmosphere to power computers. As a medium of exchange, Bitcoin, like the US dollar or any other currency, has no intrinsic value. It can be bought and sold, but you cannot automatically buy back a traded item, such as gold. However, just as most currencies have a government and central bank behind them, the value of Bitcoin is verified by the peer-to-peer network that created it. Anyone who buys Bitcoin knows it is trustworthy because it and all other Bitcoins are tracked by the same distributed ledger from the moment they are created.

The distributed ledger, the first blockchain ledger created for Bitcoin and setting the template for the rest, represents the most advanced and potentially important aspect of the technology. Participants interact with each other behind pseudonyms, and their real personal data is encrypted. The registry uses encryption public key, which is virtually impossible to hack because the message can only be unlocked if the public and private elements (the latter known only to the recipient) are connected.

The term " blockchain"("block chain") got its name from the way transactions are stored. For example, every time Bitcoin is created or changes hands, the ledger automatically creates new entry o a transaction consisting of blocks of data, each of which is encrypted by changing ("hashing") part of the previous block. The cryptographic connection between one block and the next forms something like a chain. This process creates a mathematical difficulty in creating a successful forgery because blocks of transactions, like individual transactions, are continuously confirmed. The algorithms also include creating an ID for each seller and buyer by adding these IDs to a block.

One of the most remarkable features of blockchain architecture is its decentralized technology, thanks to which every transaction is securely recorded. When a blockchain transaction occurs (for example, selling Bitcoin), a number of independent computers connected through the network process the algorithm and confirm the calculations made by others.

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Get to know this brand new technology and IBM's contribution to its development. The entire global community is betting on how fundamentally blockchain technology will change the way organizations conduct their financial transactions. Let's look at how the blockchain network works, what makes it unique, and how IBM is helping to improve it. First, a little background.

Role of registries

In today's world, interconnected and united global network, economic activity occurs through commercial networks that blur national, geographic, and jurisdictional boundaries. As a rule, such networks are intertwined on trading platforms, where manufacturers, consumers, suppliers, partners, active participants market or intermediaries, as well as other interested parties, own, manage, and exercise their rights and privileges over values known as assets.

Assets can be tangible and physical, such as cars and houses, or intangible and virtual, such as stock certificates and patents. Taking ownership of assets and transferring them, known as a transaction, creates value for business networks.

As a rule, the participants in transactions are various buyers, sellers and intermediaries (for example, banks, auditors or notaries), the commercial agreements and contracts between which are entered into various registers. In commercial activities, several registers are typically used to maintain records of assets owned and assets transferred by participants to each other in various types of activities. Registers are systems for recording the economic activities and interests of enterprises.

A typical registry looks like this:

Problems of existing business registers

The registers used today in business activities are largely imperfect. They are ineffective, expensive, and their operation is opaque and susceptible to fraudulent manipulation and illegal actions. These problems are a consequence of the use of third-party centralized systems based on trust, such as financial, settlement and clearing organizations and other intermediaries of existing organizational structures.

Such centralized registry systems create a kind of interference and obstacles that extend the execution time of transactions. Their lack of transparency, as well as their susceptibility to corruption and fraud, has led to controversy. At the same time, their settlement, execution of reverse transactions and insurance of transactions are quite expensive both in terms of money and time - all these risks and uncertainties lead to missed business opportunities.

Additionally, out-of-order copies of ledgers used in each participant's own systems cause erroneous business decisions to be made based on temporary inaccurate data. IN best case scenario decision making based on up-to-date information is postponed while the differing copies of the registers are brought into conformity.

What is blockchain?

Terms used in blockchain technology and their use cases

Blockchain is a tamper-proof digital ledger common use, which keeps records of transactions on a public or private peer-to-peer network. The registry, distributed among all network nodes, continuously records the history of transactions with assets between peer (same order) network nodes in the form of blocks of information.

All approved transaction blocks are connected into a chain - from the initial block to the last one added, hence the name of the technology - blockchain. block chain- block chain). Thus, the blockchain acts as a single source of reliable data, and participants in the blockchain chain see only those transactions that relate specifically to them.

How does a blockchain network work?

Instead of turning to third parties, such as financial institutions, as intermediaries for transactions, blockchain network nodes use a special consensus protocol to agree on the contents of the registry, as well as cryptographic hashing algorithms and digital signatures to ensure the integrity of the transaction and transfer of its parameters.

The consensus mechanism ensures that distributed ledgers are exact copies, which reduces the risk of fraudulent transactions occurring as outside interference can occur in many places at the same time. Cryptographic hashing algorithms, such as the SHA256 computational algorithm, ensure that any change in transaction inputs, no matter how small, will result in a different hash value appearing in the calculation results, indicating that the transaction inputs are likely to be compromised. Digital signatures ensure that transactions are carried out by legitimate senders (signed with private keys) and not by attackers.

A decentralized peer-to-peer blockchain network makes it impossible for individual participants or groups of participants to control the underlying infrastructure or destabilize the entire system. All network participants are equal and connect to it using the same protocols. Participants may be individuals government agencies, organization or association of all listed types of participants.

Essentially, the system records the chronological order of transactions with all network nodes that have accepted the validity of transactions through the chosen consensus model. The result is irrevocable transactions agreed upon by all network participants in a decentralized manner.

In traditional commercial networks, all participants maintain their own duplicate ledgers, discrepancies between which lead to disputes, increase settlement times, and also require the involvement of intermediaries with all the associated costs. At the same time, the use of distributed registries based on blockchain technology, in which transactions cannot be changed after consensus is adopted and entered into the registry, can save entrepreneurs time and money, as well as reduce possible risks.

Blockchain technologies promise higher transparency of interaction between interested parties, improved automation, adaptation of registries to individual requirements, as well as more high level trust in record keeping. Blockchain consensus mechanisms have the advantage of a consolidated and organized data set, with less error and quasi-real reference data, and allowing participants to make changes to the descriptions of their assets.

Since no one participant owns the central source of the information contained in the distributed ledger, blockchain technologies increase the level of trust and ensure the integrity of the information flow between participants.

Immutability of blockchain mechanisms leads to lower audit costs and increased transparency of compliance regulatory requirements. And because contracts entered into on blockchain-based commercial networks are smart, automated and final, businesses benefit from high speed of execution, reduced costs and risks, and timely settlement of contracts.

Benefits of blockchain for business

To determine if blockchain is right for you, ask yourself the following questions:

Is a commercial transaction network used?
Is participant consensus required to confirm transactions?
Are auditing and source tracing mandatory?
Should the transaction record be immutable or tamper-proof?
Should the dispute resolution procedure be final?

If you answered yes to the first and at least one other of these questions, then in your case the use of blockchain technology will be beneficial. For blockchain to be an effective solution, it requires a network. However, the network can be different types. This may be a network between organizations in the form of a value chain, or a network within one organization. Within an organization, a blockchain network can be used to distribute data between departments or, alternatively, to create an audit or corporate control network. In addition, the network can also exist between individuals who, for example, need to store data, digital assets or contracts on the blockchain.

Introducing the Linux Foundation's Hyperledger Project

Requirements for companies to use blockchain

We believe that blockchain is a truly revolutionary technology that has the potential to transform commercial networks. We also believe that this technology should be developed in open access with the participation of other technology companies and industries. That's why IBM continues to provide Hyperledger Fabric code.

From IBM's point of view, industrial blockchain technologies have the following characteristics:

controlled and general register is a strictly applied accounting system (SOR) and the only source of authentic data. It is visible to all participants in the commercial network;
a consensus protocol agreed upon by all participants in the commercial network ensures that the ledger is updated exclusively through transactions confirmed by the network;
cryptography provides protection against unauthorized access, authentication and integrity of transactions;
Smart contracts contain the terms of agreements between participants regarding business activities occurring on the network. They are stored in the matching node of the blockchain and are activated as a result of transactions.

In addition to this, industrial blockchain technology must meet key industry requirements such as performance, person identification, private and confidential transactions. The Hyperledger Fabric architecture was designed to meet these needs. It is also designed using a pluggable consensus model, allowing enterprises to choose the optimal algorithm for their network.

Where to begin?

IBM offers flexible platforms and secure infrastructure to help you develop, deploy and manage blockchain networks. Learn more about blockchain solutions