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Research Assistant @ Purdue University
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Cryptocurrency Series




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What is blockchain ?

  • Originally developed as a part of digital currency Bitcoin.
  • Blockchain can support a wide variety of applications such as peer-to-peer payment services, supply chain tracking etc.
  • Digital Record: A blockchain is a record of transactions like a traditional ledger, where a transaction can be any movement of money, goods or data.
  • Secure: It stores data in a way that it is virtually impossible to tamper the data without being detected by other users.
  • Decentralized: Blockchain uses decentralized verification systems that uses consensus of multiple users instead of traditional centralized ones regulated by a verified authority like a government or a credit card clearinghouse.

How does it work ?

  • Blockchain Steps:
    • First, gather and order data into blocks.
    • Second, chain them together securely using cryptography.
  • Recording a Transaction:
    • Say A sells car to B.
    • Transaction information is recorded and shared with other systems on the blockchain network.
  • Building transactions into Blocks:
    • On the network, the record is combined with other transactions to form a block and each transaction is time stamped.
    • Upon completion, a block also gets a time stamp.
    • All the data is sequential which helps to avoid duplicate records.
  • Connecting blocks into Chains:
    • Completed block is sent out across the network and appended to the chain.
    • Other participants may also be sending out their blocks but the time stamp ensures the correct order of blocks and participants have the latest versions.
  • Securing the chain:
    • Security is maintained using a hash and the cryptographic math makes the links between blocks made using these hashes virtually unbreakable.
    • A hash function takes the information in the block to create the hash which is a unique string of characters easy to generate but almost impossible to back trace to original data.
  • Locking it down:
    • The hash from one block is added to the data in the next block.
    • So, when the next block goes through the hash function a trace of hash from previous block is woven into the new hash.
    • The same is repeated further down the chain.
  • Raising the Alarm:
    • So if there is any tampering with a previously created block the hash encoded in the next block will not match up anymore.
    • The mismatch will cascade through all subsequent blocks denoting an alteration in the chain.
  • Establishing Trust:
    • Since all the participants have a copy of the block chain they can detect any data tampering.
    • If hashes match up across the chain, all parties know they can trust their records.

Blockchain in Action (Examples)

  • Enormous potential.
  • Because they establish trust, they provide simple, paperless way to establish ownership of money, information and objects - like concert tickets.
  • Trusted Concert Tickets:
    • Trusted Seller: It’s hard to tell a real ticket from a counterfeit, especially if bought through a third-party website or a private individual.
    • Going Straight to the Source: Blockchain can help buyers quickly establish that a ticket (and its seller) can be trusted.
    • The event venue will register all tickets to a blockchain which would be accessible online.
    • When a ticket is sold it will be assigned an address - a string of data publically viewable on the blockchain.
    • Owner is given a private key which is a hash of the address data.
    • The key can be used to unlock the address. So by producing the correct key the buyer can prove that the item is theirs without checking with the event venue.
    • If they choose to sell it, it is assigned a new address, and new owner gets a new private key and the transaction is added to the blockchain.
    • The ticket can be sold multiple number of times and when a seller unlocks the ticket with their private key, the buyer knows that the ticket they are getting is authentic.
  • More Efficient Markets:
    • Removing the Bottlenecks: In the financial markets the trade happens in a fraction of second, but the actual exchanging of assets and payments can take days, involving multiple banks and clearinghouses which can cause errors, delays and other unnecessary risks.
    • Smart Contract: A piece of computer code that describes a transaction step by step. It can connect to multiple blockchains, tracking multiple assets so it can swap those assets as needed to execute transactions.
    • A broker only needs to buy stock on behalf of a client. The order will be placed with the private keys of both the buyer and seller.
    • This will trigger the execution of a smart contract. It connects to multiple blockchains, verifies the availability of the stock and the payment and then makes the transfers between the seller and the buyer.
  • Digital ID:
    • Digitally issued IDs via a blockchain would be more secure mechanism than the traditional ones issued by governments.
    • Internation ID Blockchain, accessible anywhere in the world, allows people to prove identity, connect with family member or receive money without a bank account.
    • A person is a fingerprint. Fingerprint is digitized and added to blockchain with other data like name etc.
    • To prove identity they need to give their fingerprint which can be used to unlock and verify their ID.

Improvements Needed:

  • Early stage of the technology.
  • Has various hurdles to overcome:
    • Departure from manual work for businesses would add new costs and new risks which leads to reluctance to adopt the new tech.
    • Current blockchain technologies like bitcoin can support only 5-8 transactions per second which cannot keep up with applications like credit card transactions which amount to be around 10000 times what is supported.
    • Even though its transparent in ledgering there are no real standardization of implementation, which is required for relaibility and other legal issues.
    • Even though it uses business grade cryptography, it is not 100% secure. Large sums of money transaction therefore would be reluctant to adopt this technology.


Blockchain by Goldman Sachs

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