2019 | Blockfacts Research Reports

Fundamentals of
the Blockchain

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FUNDAMENTALS OF THE BLOCKCHAIN

Blockchain technology has been hailed as one of the most revolutionary

technologies since the invention of the Internet. Due to its versatile, open-source

nature, this innovative technology has the potential to disrupt a wide range of

industries and sectors.

In this report, you will discover what the blockchain is, how it works, why it

matters and who the most prominent companies are that are pushing blockchain

technology forward.

What is the Blockchain?

The blockchain is a decentralised, distributed ledger used to record transactions

between two parties in a secure, transparent and immutable manner. Data is recorded

in blocks that are verified by network participants. Hence, the name blockchain.

A blockchain ledger is run on a distributed peer-to-peer network of computers, which

makes it available to all participants around the world for verification. Once

participants have verified and confirmed a transaction, it is recorded on the blockchain

and cannot be altered. The blockchain, therefore, enables us for the first time to

securely record, store, and transfer data without the need for a central authority to

process and verify it.

In the case of Bitcoin, individuals can make electronic money transactions without the

need for a bank or payment provider; therefore, de facto enabling each user to become

their own bank.

Blockchain technology was invented by the pseudo-anonymous Bitcoin

creator(s), Satoshi Nakamoto, with the release of the Bitcoin whitepaper in 2008.

Due to the open-source nature of the Bitcoin blockchain, a large number of new

blockchain networks launched in the past ten years to provide new features and

functionalities, including transactional privacy, smart contracts, and

decentralised application.

Why Blockchain?

Perhaps the most pertinent question about blockchain technology is: Why do we

need it?

The blockchain provides an entirely new way of sending, recording, and storing

data of any kind without the need for central authorities. It alleviates the need

for intermediaries to the benefit of the end user and, thus, heralds in a new era of

decentralisation.

The blockchain can be used to process financial transactions, record land titles,

ensure fair voting, increase cyber security, verify digital identities, send digital

micropayments, and deploy smart contracts through the use of cryptography

and without the need for third-party involvement.

“Whereas most technologies tend to automate workers on the periphery doing

menial tasks, blockchains automate away the centre. Instead of putting the taxi

driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers

work with the customer directly.” - Vitalik Buterin, blockchain developer and

founder of Ethereum.
Decentralisation ushers in a new digital peer-to-peer economy where users interact

with (and pay) each other directly without costly intermediaries standing in the

middle to take their cut. The blockchain is, therefore, poised to have a substantial

impact on the global economy once it reaches mass adoption.

For example, two individuals can enter into an agreement where one party rents out

a spare room for a week in exchange for a payment made in a blockchain-powered

digital currency. The terms of the agreement can be coded into a smart contract

that self-executes once the stay has been completed and the terms of the

agreement have been met. The full payment is then received by the party that

provided the spare room without someone like Airbnb taking a cut of the

transaction.

The blockchain can also be used to streamline existing operational processes for

corporations and public sector institutions that are currently relying on

intermediaries, which can reduce costs, improve operational efficiency, and increase

trust and transparency.

Additionally, the blockchain is able to create entirely new technologies (like smart

contracts), business models (like decentralised applications) and even new

industries that did not exist prior.

Components of a Blockchain

While different blockchain protocols come with various features, the majority of

blockchains come with the following key components:

The first component of a blockchain is a block. A block is the container of data

where transactions are saved. The primary ingredient of a block is the hash.
The algorithm turns any input received into a cryptographic code called a hash. A

block also contains the timestamp of the transaction as well as the hash value of

the previous transaction. This ensures that only “correct” blocks are included in the

blockchain.

A distributed ledger is another component of a blockchain that represents the

database held and updated independently by each participant (or node), who can

access the network without any permission from any other participant or central

authority. On the distributed ledger, transactions are recorded, timestamped, and

saved on multiple computers across the globe.

Nodes are perhaps the most interesting part of a blockchain as they are in the

hands of the network participants. Nodes can be run on devices such as a PC,

laptop, or mobile phone with access to the Internet. A distributed network of nodes

is fundamental for keeping the integrity and security of a blockchain.

A consensus, or consensus mechanism, is the protocol deployed within a blockchain

to agree on a single state of the distributed network. A blockchain’s consensus

mechanism ensures that transactions are verified, processed, and confirmed in a

trustless manner through the combination of high-level cryptography and economic

incentive structures.

The most common type of consensus protocol is Proof-of-Work (PoW), which is

used by the Bitcoin blockchain. Proof-of-Work involves “miners” providing

computational power to solve mathematical equations to process and verify

transactions in exchange for a financial reward in the form of new bitcoin. For each

new block “mined”, 12.5 BTC are distributed to the miners.

A large number of blockchains also enable the development of smart contracts.

Smart contracts are self-executing, automated protocols that enable

decentralised automation by facilitating and enforcing a negotiated agreement

or transaction on a blockchain.

Through the combination of participating nodes, a distributed ledger, and a

consensus mechanism, blockchains are able to provide a trustless, decentralised

mechanism for the secure transfer and recording of data.

Key Features of the Blockchain

The blockchain has several features that make it stand out among existing

database solutions.

Speed: Blockchain transaction times can range from a few seconds to a few

hours, with the average across all major blockchains being less than 15 minutes.

Traditional cross-border financial transactions, on the other hand, involve

multiple banks and usually take a minimum of two days.

Cost Reduction: Organisations spend a substantial amount of money on

intermediaries and third-party solutions to process and record transactions in a

secure and timely manner. Through the use of blockchain technology, these

costs can be significantly reduced as blockchain transaction fees are traditionally

in the few cents per transactions.

Immutability: Once a transaction is verified and recorded on the blockchain, it is

effectively impossible to change this record. For that reason, blockchain

transactions are considered immutable, which ensures data quality.

Trust and Transparency: The blockchain functions as a “trustless” network,
which means trusting your counterparty is not a requirement because trust
is provided through cryptography. Moreover, blockchain transactions are
transparent and auditable, which makes it easy for all stakeholders,
including regulators, to verify historical blockchain-based transactions.

Security: Perhaps the biggest selling point of the blockchain is that it does
not provide a single point of failure as it runs on a network of distributed
nodes. Conversely, if a centralised system fails, the entire network is down.
When one or multiple nodes on a blockchain network are failing, the
network will continue to run. Not only is this vital to ensure business
continuity but it also adds a layer of cybersecurity on a network.

Eliminating Intermediaries: Finally, the blockchain has the potential to

alleviate the need for a wide range of intermediaries as it enables parties to
transact directly with one another on a peer-to-peer basis.

The combination of the blockchain’s features has not existed prior to the
invention of Bitcoin and blockchain technology, which is one of the many
reasons that make this new technology so powerful and potentially
impactful.

The Different Types of Blockchains

Due to the open-source nature of blockchain technology, a number of new types

of blockchains have evolved since the creation of Bitcoin. Currently, there are

three main types of blockchains; public, private and hybrid.

A public blockchain allows anyone in the world with an Internet connection to

participate as a user and a validator.

Moreover, all transactions on a public blockchain are viewable on a block
explorer. This type of blockchain is decentralised. Examples of public
blockchains include Bitcoin, Litecoin, and Ethereum.

A private blockchain, also known as a permissioned blockchain, is created and

maintained by one organisation. Only parties that receive permission to
access the blockchain are able to execute transactions on it. This type of
blockchain is centralised. An example of a private blockchain would be JP
Morgan’s Quorum blockchain.

A hybrid blockchain, also known as a consortium blockchain, is part public

and part private. Hybrid blockchains are owned and maintained by a number
of parties who agree on consensus and set rules. This type of blockchain is
only partly decentralised. An example of a hybrid blockchain would be XinFin.

The Biggest Players in Blockchain

While there are hundreds if not thousands of blockchain startups across the

globe, a number of leading blockchain companies have emerged to pioneer this

new technology.

The most influential blockchain companies today include Binance, Blockstream,

Coinbase, ConsenSys, Kraken, Hyperledger, R3, and Ripple.

Binance, Coinbase, and Kraken are leading digital asset exchanges that provide

cryptoasset trading services to a global user base. Binance stands out from the

trio as it has recently launched its own blockchain, which is poised to become a

fierce competitor to existing blockchain networks. Coinbase, on the other hand,

focuses on making the purchase of digital assets as easy as possible to introduce

as many people around the world to crypto as possible.

Kraken focuses primarily on providing cryptoasset trading services to
professional investors, which the recent launch of its over-the-counter trading
service and the acquisition of a crypto derivatives trading platform show.

Blockstream is a blockchain development company that employs a large

number of Bitcoin Core developers and is primarily focused on the
improvement and maintenance of the Bitcoin blockchain. The company is also
involved in the development of sidechain solutions for Bitcoin, including the
Liquid Network, which enables off-chain transaction that could help to scale
the Bitcoin blockchain.

ConsenSys is a blockchain technology development company that focuses on

the development of Ethereum-based solutions and has become a driving
force behind the education and training of blockchain developers across the
globe.

Hyperledger and R3 provide enterprise-grade blockchains to help

corporations and financial institutions to implement DLT solutions while Ripple
is using blockchain technology to enable financial institutions and
corporations to lower their cost of money transfers.

Additionally, a large number of technology giants, including IBM, Microsoft,

and Oracle, have launched development solutions for businesses looking to
implement this technology and a number of banks have set up new
departments to develop potential blockchain-powered solutions to disrupt
their own business models.

IBM, for example, has emerged as a leader in enterprise blockchains solutions

and services through its ‘IBM Blockchain,’
to collaborate with businesses who want to develop and deploy blockchain
solutions to reduce costs, increase transparency and increase efficiencies for
specific business processes.

Microsoft offers similar solutions through its cloud-based Azure Blockchain,

which helps businesses with the creation, deployment, and hosting of
company-specific blockchain applications.

Moreover, leading Wall Street bank, JPMorgan Chase, announced the launch
of its very own blockchain-powered settlement currency, called JPMCoin, to
enable low-cost, high-speed money transfers between the bank and its
corporate clients. JPMCoin runs on the bank’s internal blockchain system,
called Quorum, and has its value pegged one-to-one to the US dollar.

Other notable publicly-traded companies involved in the research,

development or deployment of blockchain technology include Bank of
America, BP, Facebook, Goldman Sachs, Nasdaq, Overstock, Royal Dutch
Shell, Samsung, and Walmart.

Conclusion

Blockchain technology has the potential to disrupt a wide range of industries,

including financial services, supply chain management, electronic voting, music

streaming, charitable donations, and many more. Hence, it comes as no surprise

that technology giants, financial institutions, and governments are investing

heavily in the development of blockchain technologies.

In light of the current blockchain boom, it is difficult to envision a future where

the blockchain will not play a significant role in the transfer and storage of data.
From tokenised assets and health care records management to digital identity
and e-voting, the blockchain is poised to become an integral part of society.

Even if the adoption and implementation of the blockchain on a mass level

may take longer than some of its proponents have predicted in the past, we
can expect a number of industries to “run on the blockchain” with the next 10
to 20 years.
 Gustav Christopher Wagner, CFA - Founder of BlockFacts

Gustav has been interested in financial markets, investment strategies

and trading since early age. After working on the equities desk with
Unicredit in London, he started two businesses and built a digital retail
savings bank for Renault with more than 80,000 customers and £3bn in
client funds. Now his mission is to end the shenanigans and up the data
quality standards in digital assets to make them accessible for financial
institutions.

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