BLOCKCHAIN

INTRODUCTION
Information technology has already remarkably disrupted industry and business practices .The
Internet on the other hand has created many new ways of doing business and even created new
industries that were not even existing a couple of years ago. Who would have thought that the
Internet would enable Spotify, Airbnb and Skype? The true catch of the information technology is
that it creates entirely new and more effective ways for business and people to co-operate. The
technology one should pay attention to at the moment is the blockchain technology. This fairly new
technology will as well as the Internet enable easier, cheaper and more efficient ways of doing
business, but also secure insecure ones. The blockchain is mostly known as the technology
underlying the virtual cryptocurrency bitcoin, but this thesis examines to what else it can be utilized
to. Since almost all of the data in today’s blockchains are bitcoins, this thesis will briefly analyze what
exactly bitcoin is and why it is capable of serving as an alternative currency. Even so, the aim of this
thesis is to emphasize that the technology is not restricted to this use only. In fact, bitcoin has been
notably criticized and is claimed to be a rather limited application of this technology. The Economist
(2016b) points out that it is therefore essential to differ between the specific technology behind the
virtual currency bitcoin and the general idea of blockchains. Buterin (2015) on the other hand
highlights the difference between private and public blockchains. In a nutshell, the blockchain is a
public, trusted and shared ledger (The Economist, 2016b), which is based on a peer-to-peer network,
which means that no one controls it, but it is maintained by thousands of participants (The
Economist, 2015). This makes it a shared ledger. The blockchain is public, since the blockchain is
available to all the participants (The Economist, 2016b). The information that is recorded in the
blockchains cannot be tampered with unnoticed, which on the other hand makes the blockchain a
trusted ledger (The Economist, 2015). These characteristics allow the blockchain to transfer
information without any intermediaries.

Blockchain is a shared immutable ledger that facilitates the process of recording

transactions and tracking assets across a business network. Anything of value can be
tracked and traded on the Blockchain network. A Blockchain is a distributed database, which
is shared over a computer network. Blockchain stores information electronically in a digital
format to make transactions secure.

Blockchain is a new technology, which is known as Distributed Ledger Technology (DLT).

With the help of Blockchain technology, currency as well as anything can be converted into
digital format and stored. Actually it is an exchange process, which works on data blocks. In
this, one block is connected to another block. These blocks cannot be hacked. Blockchain
technology aims to keep documents digitally secure. You can take Google Doc as an
example to understand Blockchain technology. When we create a document and share it
with a group of people, the document is distributed instead of copied or transferred. But,
Blockchain is more complex than Google Doc. Simply put, Blockchain is known as
Distributed Ledger Technology, which makes any digital asset immutable and transparent
through the use of decentralization.
Blockchain allows digital information to be recorded and distributed. Blockchain is an
irreversible record of transactions, which cannot be changed, deleted or destroyed.
Blockchain was first proposed in 1991 as a research project, but in the year 2009, Blockchain
was used in bitcoin.Bitcoin is a cryptocurrency which is built on the basis of Block
technology. Blockchain has since been used in the creation of various cryptocurrencies,
decentralized finance applications, non-fungible tokens and smart contracts.

Features of Blockchain

 There are many features of Blockchain. Following are the main features

 1. Decentralized: The network is decentralized meaning a group of nodes maintains the network

making it decentralized. This is one of the key features of blockchain technology. Blockchain puts
us users in a straightforward position. As the system doesn’t require any governing authority, we
can directly access it from the web and store our assets there.
 2. Immutability: Immutability is something that can’t be changed or altered. This one is the top
Blockchain features that ensures that the technology will remain as it is a permanent, unalterable
network. As it is distributed system, every node on the system has a copy of the digital ledger.
When a transaction is added every node needs to check its validity. If the majority thinks it’s
valid, then it’s added to the ledger. This promotes transparency and makes it corruption-proof.
Without the majority consent from the nodes, no one can add any transaction blocks to the
ledger.Once the transaction blocks added to the ledger, no one can change it. Thus, any user on the
network won’t be able to edit, delete or update it.
 3. Enhanced Security: As it gets rid of the need for a central authority, no one can just simply
change any characteristics of the network for their benefit. Using encryption ensures another layer
of security for the system. Every information on the Blockchain is hashed cryptographically. So,
changing or trying to tamper with the data means changing all the hash IDs. If someone wants to
corrupt the network, he/she would have to alter every data stored on every node in the network.
There could be millions and millions of people, where everyone has the same copy of the ledger.
  4. Distributed Ledgers: A public ledger will provide every information about a transaction and
the participant nodes. Many people can see what really goes on in the ledger. The ledger on the
network is maintained by all other users on the system. Distributed ledger responds really well to
any suspicious activity or tamper. Nodes act as verifiers of the ledger. If a user wants to add a new
block others would have to verify the transaction and then give the green signal.To make the
blockchain features work, every active node has to maintain the ledger and participate for
validation.
 5. Consensus: Every blockchain succeeds because of the consensus algorithms. Every blockchain
has a consensus to help the network make any transactions. In simple, the consensus is a decision-
making process for the group of nodes active on the network. Here, the nodes can come to an
agreement quickly and relatively faster. When millions of nodes are validating a transaction, a
consensus is absolutely necessary for a system to run smoothly. Nodes might not trust each other,
but they can trust the algorithms that run at the core of it.

Types of Blockchain

There are four types of Blockchain,

 There are many features of Blockchain, following are the few main features

 1. Public Blockchain A public blockchain is a non-restrictive, permission-less distributed ledger

system. A node or user which is a part of the public blockchain is authorized to access current and
past records, verify transactions or do proof-of-work for an incoming block, and do mining.
 2. Private Blockchain A private blockchain is a restrictive or permission blockchain operative
only in a closed network. Private blockchains are usually used within an organization or
enterprises where only selected members are participants of a blockchain network. The level of
security, authorizations, permissions, accessibility is in the hands of the controlling organization.
Thus, private blockchains are similar in use as a public blockchain but have a small and restrictive
network.
 3. Consortium Blockchain A consortium blockchain is a semi-decentralized type where more
than one organization manages a blockchain network. More than one organization can act as a
node in this type of blockchain and exchange information or do mining.
 4. Hybrid Blockchain A hybrid blockchain is a combination of the private and public blockchain.
It uses the features of both types of blockchains that is one can have a private permission-based
system as well as a public permission-less system. With such a hybrid network, users can control
who gets access to which data stored in the blockchain. Only a selected section of data or records
from the blockchain can be allowed to go public keeping the rest as confidential in the private
network. The hybrid system of blockchain is flexible so that users can easily join a private
blockchain with multiple public blockchains. A transaction in a private network of a hybrid
blockchain is usually verified within that network.
Platforms of Blockchain :

 There are many Blockchain platforms are available in the industry. Some platforms
are proprietary and some are open source. Based on the nature and the requirement of
the application the platform can be decided. NIC is using the following platforms for
the development of the products under CoeBCT.

 Hyperledger Fabric: It is a platform having a modular architecture. It has a membership service

and consensus. It can enable a network of networks. Members of the fabric network can use
network work together in this platform. Hyperledger Fabric provides the user a secure and
scalable platform to support their confidential contracts and private transactions.
Key features:

 • This platform is highly modular and has a low latency of finality.

 • It can support solidity.
 • It supports multi-language intelligent contracts.
 • It has pluggable consensus and queryable data.

 Hyperledger Sawtooth: Hyperledger Sawtooth is another open-source blockchain project co-

founded by Hyperledger and the Linux Foundation. It has consensus mechanism known as Proof
of Elapsed Time. A Sawtooth Library is being developed, which will allow programmers of
customized distributed ledgers to select and choose whatever parts of Sawtooth to employ in their
applications. Sawtooth is also integrating Splinter for networking.
Key features:
 • Allow users to use Sawtooth Library while coding.
 • Provides Splinter for networks.
 Ethereum: Ethereum, also known as ETH. The main aim of this platform is to nullify the third
parties’ access who save data for further financial instrument tracking. Ethereum has the largest
community of core protocol developers, crypto-economic researchers, cypherpunks, and mining
organizations.
Key features:
 • This platform gives the advantage of rapid deployment.
 • It has Smart Contracts Functionality and Turing completeness.
 • It provides the feature of tokenization.
 • It is a proof-to-work-based system.

Blockchain as a Service (BaaS)

Blockchain as a Service (BaaS) is an offering that allows Government Departments to

leverage Blockchain services to build, host and use their own blockchain apps, smart
contracts and functions on the blockchain while the CoE manages all the necessary tasks
and activities to keep the infrastructure agile and operational.

NIC will handle the complex back-end for the departments and takes care of keeping all the
important blockchain-related artifacts and the infrastructure up and running. It also
includes support activities like bandwidth management, suitable allocation of resources,
hosting requirements, and provides security features also.

The core concepts of the blockchain:

The blockchain is a feature of a distributed ledger, which means that it is not controlled by any single
actor, but maintained by several participants (The Economist, 2016a). This allows people who do not
know or even have trust in each other to form a trustworthy ledger, where information is recorded
(The Economist, 2015). Any kind of immaterial information such as property rights and virtual
currency transactions can be stored in these blockchains.

The information is available to everyone and tamperproof, which allows the blockchain to be a
transparent machine that makes and preserves the truth (The Economist, 2015). The three essential
qualities of the blockchain are that it is a shared, trusted and public ledger (The Economist, 2016b).

The core idea of the blockchain technology is consequently the fact that it is accessible for everyone,
but still controlled or possessed by no user alone. It is with the help and co-operation of the
participants of the network that keep the ledger in accordance with present time. The participants
together enhance and continue the blockchain by complying strict rules and general agreement,
which mean that the participants agree on how the chain will be updated. (The Economist, 2016b)
This agreement is called ‘the consensus mechanism’ (The Economist, 2015).
The technology functions via a peer-to-peer network, which is based on thousands of ‘nodes’, e.g.
computers, worldwide (The Economist, 2015). Nodes can come and go as they please in the network
(Nakamoto, 2008). New blocks are born via a process called mining by specialized nodes, or in other
words miners. These miners operate anonymously by working together and trying to solve
mathematical puzzles, which creates new blocks to the blockchain.

This creation is not as simple as it may sound. It takes several steps to accomplish and confirm a new
block. In currency transactions, multiple miners verify the transactions and supervise that 8
everything is in order and that the person making the transaction actually has the money (s)he wants
to spend. If it is a valid transaction, the miners confirm the change.

Hereafter similar transactions are in a chronological order bundled in the same block, which in the
longer run forms a chain of blocks. (The Economist, 2015) The chain contains all of the accepted
transactions that has occurred since the birth of the blockchain (Peters & Panayi, 2015) and the
information is available to all at any given time. Peters and Panayi (2015) have referred to the
blockchain as a chronological ledger, or a database in which transactions are recorded by a network
consisting of computers.

Every transaction has an identifying code, known as a hash, which contains the original piece of
information of the transaction (The Economist, 2016b). The hash values of the transactions that are
bundled together in a block, are combined in a system called ‘the Merkle Tree’ (see figure 1). This
combined hash value is put into the header of a new block additionally with some other information,
such as the hash of the previous block (see figure 1 ‘Block 10 #’) and a timestamp. The previous hash
in the new block ensures that the blocks are not tampered with and hinders cheating. (The
Economist, 2015) The timestamp on the other hand proves that the data existed at the time being

Afterwards the header becomes part of a mathematical puzzle, which miners solve by manipulating a
certain number called a ‘nonce’ (The Economist, 2015). The miners go through trillions of possible
solutions to solve the puzzle and when the right solution is found, the miner who finds it, announces
it to the others in the network (Nakamoto, 2008). The other miners check the solution and it if it is
correct they confirm it and update the block correspondingly (The Economist, 2015). This is the
beauty of the blockchain – the puzzle is hard to solve, but simple to check. The hash of the header is
the identifying string of the newly mined block, which is now part of the blockchain. (The Economist,
2015)
Possible applications of the blockchain technology
The disruptive changes in the future financial sector
It is no wonder that the banking world is excited about this relatively new technology, since it has the
ability to enhance efficiency and cut down on expenses. The blockchain technology is from an
economic perspective 17 all about minimizing waste and increasing assets in companies.

Traditional databases have been used as central data repositories in order to store transaction data.
Contracts, transactions and their records are the core of our political economy. Blockchain
implements the so-called Distributed Ledger Technology (DLT) – as opposed to a Centralised Ledger
Techonology - referring to the protocols and supporting infrastructure that enable computers in
different locations to propose and validate transactions and update records simultaneously across a
network (Figure 1). Supermarket chains, for example, with branches across a given country or several
countries need to maintain consistency across the different copies of the ledger. A master copy of the
ledger is updated timely and shared with all the network participants. In contrast, DLT enables copies
of the ledger to be shared across multiple locations (Goldman Sachs (2016)) and in a decentralized
manner without requiring a trusted central authority (Figure 6). The information contained in each
transaction included in Blockchain consists a block of transaction details like the seller, the buyer, the
price, the contract terms and other relevant details. Subsequently, each copy of the database saved
in different locations, called node, validates the transaction. The validation performed by the entire
network of nodes is consensus-based and done via encryption by pairing the common transaction
details with the unique signature of two or more transaction parties. A transaction is valid only if the
end-result of the encoding performed by each node is identical across nodes. Once a transaction is
validated, it is added to the chain of prior transactions that have been previously validated resulting
into a chain of blocks called Blockchain. The only person who can amend a block is the one who
owns it via a private key that they have. When there are changes to an individual block, the entire
Blockchain is updated and synced in real time.
Blockchain technology is based on the following five principles (Lansiti and Lakhani (2017)):

Distributed database: Each party on a Blockchain has access to the entire database and its complete
history. No single party controls the data or the information. Every party can verify the records of its
transaction partners directly, without an intermediary.

Peer-to-peer transmission: communication occurs directly between peers instead of through a

central node

Transparency with pseudonimity: Every transaction and its associated value are visible to anyone
with access to the system. Each node, or user, on a Blockchain has a unique 30-plus-character
alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of
their identity to others. Transactions occur between Blockchain addresses.

Irreversibility of records: Once a transaction is entered in the database and the accounts are
updated, the records cannot be altered, because they are linked to every transaction record that
came before them (hence the term “chain”). Various computational algorithms and approaches are
deployed to ensure that the recording on the database is permanent, chronologically ordered, and
available to all others on the network.

Computational logic: The digital nature of the ledger means that Blockchain transactions can be tied
to computational logic and in essence programmed. So users can set up algorithms and rules that
automatically trigger transactions between nodes.

Blockchain is a self-auditing ecosystem of a digital value as it reconciles every transaction that

happens in short time intervals. Information in Blockchain is not stored in a single location, implying
that the records it keeps are public and verifiable. There is not a centralized version of this
information for a hacker to corrupt, while it is hosted by many computers simultaneously. The
computer resources of most blockchains are significant, because it is not just one computer but
many. For example, the Bitcoin Blockchain harnesses anywhere between 10 and 100 times as much
computing power compared to all of Googles’s serving farms put together.

Potential uses of Blockchain technology include:

Smart contracts: Distributed ledgers enable the coding of simple contracts that will execute when
specified conditions are met; The sharing economy: Blockchain can enhance the sharing economy
manifested by Uber and AirBnB without intermediaries. For example, call a transportation car
without Uber’s intermediation;

Crowdfunding: Blockchain is aiding in creating crowd sourced venture capital funds;

Governance: Blockchain could enhance transparency in elections by making the results fully
transparent and publicly accessible

Supply chain auditing: Consumers increasingly want to know that the ethical claims companies make
about their products are real. Blockchain could help consumers to verify that the background story of
each product is real though the timestamping of a date and location;

File storage: Spreading data throughout the network protects files from being hacked or lost;
Protection of intellectual property: Blockchain eliminates the risk of file copying and redistribution of
creative works online by enabling smart contracts that protect copyright;

Internet of Things: Blockchain-enhanced smart contracts make the automation of remote systems
management possible enabling data exchanges between object and mechanisms;

Neighbourhood Microgrids: Blockchain technology enables the buying and selling of the renewable
energy generated by neighborhood microgrids;

Identity management: Distributed ledgers offer enhanced methods for proving who you are, along
with the possibility to digitize personal documents. Having a secure identity will also be important for
online interactions — for instance, in the sharing economy;

AML and KYC: Regulation is requiring financial institutions to perform a labour intensive multi-step
process for each new customer along the lines of Anti-Money Laundering (AML) that could had been
more cost effective and less laborious under Blockchain. Similarly Knowing your customer (KYC) costs
could be reduced through cross-institution client verification, and at the same time increase
monitoring and analysis effectiveness;

Data management: Credit growth in several developing countries is impeded by the lack of a credit
record. Performing transactions supported by Blockchain establishes a credit record and could
facilitate financial inclusion;

Land title registration: Property titles are prone to fraud in several developing countries, while
several lack a land registry, deterring foreign investment. As a distributed ledger technology,
Blockchain enhances credibility in land title registration, and Stock trading: Stock transactions
executed peer-to-peer do not require a central clearinghouse to settle a transactions resulting into a
more efficient and faster execution of asset transactions.

Blockchain applications
 Crypto currencies: Bitcoin pioneered the Blockchain technology in 2009. Bitcoin
is a completely digital money payment system in a consensus network. There is not a central
authority or middlemen as it is a peer-to-peer payment network powered by its users.
Bitcoin is the first implementation of the cryptocurrency concept or money that uses
cryptography to control its creation and transactions rather than a central authority. Other
cryptocurrencies exist as well, but Bitcoin is the strongest cryptocurrency in terms of market
capitalization and share in transactions.
Bitcoin is nothing more than a mobile app or a computer software that provides a Bitcoin
wallet and allows a user to make and receive payments in Bitcoins from others in the same
Bitcoin network. The latter shares a public ledger that includes all the transactions, digitally
signed and verifiable, enabling users to have full control over sending bitcoins from their own
Bitcoin addresses. The common public ledger is maintained by the Blockchain technology. All
is needed is a wallet application,4 either on a computer or a smartphone, where the
recipient’s address and the payment amount are entered, without having a merchant
account.
One acquires Bitcoins as a payment for goods or services; Bitcoin exchanges where Bitcoins
are bought in exchange for other currencies; exchange Bitcoins with someone nearby or earn
bitcoins as a payment for the creation of new Bitcoins. Bitcoins can be used in the same way
credit cards and online banking networks are used to pay online and in physical stores just
like any other form of money and it can be exchanged in physical form such as the Denarium
coins

Bitcoin’s advantages include:

 Payment freedom: able to send and receive bitcoins anywhere in the world at any
time, irrespective of bank holidays.
 Fee choice: there is not a fee to receive Bitcoins, while most wallets let you control how
large a fee to pay when spending. In general, transactions fees are substantially lower
than fees charged by traditional payment network operators, and fees are not based on
the amount transferred, but generally on the transaction size measured in bytes. This
means that a multi-million dollar transaction can be processed for the same fee as a
single dollar.
 Fewer risks for merchants: merchants can expand to new markets where credit cards
are not available and fraud rates are high, while they are protected from losses due to
fraud as Bitcoin transactions are secure and do not contain customers’ sensitive
information.
 Security and control: As they are based in Blockchain, Bitcoins are very diffilcult to
hack. Users are in control of their transactions, with merchants unable to force
unwanted or unnoticed charges as can happen with other payment methods.
 Transparent and neutral: Bitcoin is neutral, transparent and predictable as all the
information regarding the Bitcoin money supply is publicly available, usable and
verifiable in real time on the Blockchain
 Smart Contracts: A "smart contract" is a term used to describe a piece of
code stored in the blockchain that, when certain conditions are met, is automatically
executed without the involvement of the code's initial author. Smart contracts permit the
blockchain to store more data and do calculations. All information in a smart contract can be
verified by any party at any time. Due to the technology of the blockchain, once recorded,
the code cannot be changed. The machine-readable nature of the code ensures that there
is no possibility for ambiguity in its meaning They provide a high degree of safety because
terms of the contract can't be altered afterwards and are frequently encoded using
cryptography. A blockchain generally transfers an item or makes a payment instantly. One
usage is extreme event insurance. Zheng et al. (2020) conducted an in-depth analysis and
claim that Blockchain can help speed up the claims process rather than relying on traditional
methods. Bitcoin blockchain has been applied in executing the payment transactions under
complicated conditions or the delivery of a crypto asset. The Ethereum public blockchain
may be used to execute increasingly complicated smart contracts.

Initial Coin Offerings (ICO): Initial Coin Offerings (ICO) is another

emerging service where blockchain contribute significantly with its applications. ICOs allow less well-
informed participants to monitor the investing behaviour of the experts and contribute to achieving
critical mass. This is because ICOs are both rights of use and investments, which have a significant
impact on both of these outcomes (Zhang et al., 2019). Because of the network effect, it is possible
to see an increase in the value of tokens when there is a significant demand for them. Attention and
subsequent platform adoption increase as a result of increased value.