What is the Blockchain?

Blockchains are tamper-proof, distributed data structures in which transactions are logged in chronological order, traceable, unalterable and without a central authority. With blockchain technology, ownership relationships can be secured and regulated more directly and efficiently than before, as a complete and unchangeable data record creates the basis for this.

Let’s say you want to make a payment in the form of an electronic money transfer, you are dependent on an intermediary or a trusted third party, i.e. a bank, to process the transaction. This ensures that the money actually ends up with the target person and that the amount is debited to you. No money can be “generated” or “lost” during the transaction. The amount that leaves you ends up with the recipient, except of course for the fees incurred for the service.

If you want to make this payment directly, i.e. peer-to-peer, you need proof that the agreed amount really goes to the target person. Since an electronic money transfer has no physical component, such as a bank note, this is complicated. Furthermore, you both want to make sure that the amount cannot be increased or reduced afterwards. This is where the blockchain comes into play.

Definition of the Blockchain

The “blocks” stand for individual data records that are stored one after the other, creating a kind of data record chain.

In principle, the blockchain is nothing more than a large database that starts with an original block to which new data blocks are chronologically appended after they have been checked and confirmed. It thus maps a history of data records (e.g. financial transactions).

Even though the blockchain is often used for financial transactions, it is important to understand that it is not limited to one type of information. It can also be used for bookkeeping or to secure music, photos or texts.

The special thing about the blockchain database is that it is a distributed database. This means that everyone who participates in the blockchain system saves a complete copy of the data history on their computer. This procedure significantly increases the security against manipulation, because even if a copy is manipulated, many correct copies are still available and the manipulated data record can simply be “sorted out”. In addition, the sequence of the blocks is additionally secured by a checksum. This prevents the order of the blocks from being subsequently changed.

What are the advantages of blockchain technology?

Security

By storing data in the blockchain, risks arising from central data storage are avoided. In this respect, the network has no central weak points that attackers could exploit to change data. The security procedures of blockchain technology use current asymmetric encryption technologies in particular. These are based on so-called public and private keys. A public key (a long, randomly generated series of numbers) represents a user address on the blockchain. Transactions sent over the network are stored as belonging to this address. The private key acts analogously to a password, allowing the holder access to their transferred value units. Nevertheless, it is important for participants in the blockchain to secure their private keys so that they do not fall into unauthorised hands.

Transparency and immutability

The Bitcoin blockchain is automatically brought to a consensus of all network participants and verified every ten minutes or so. As a self-checking ecosystem of digital assets, the Bitcoin network reconciles each transaction at these ten-minute intervals. Each group of these transactions is called a “block”. Two properties follow from this:

– Transparency, as the data is embedded in a network as a whole and therefore public, and
– Immutability, since a retroactive change of any information seems impossible according to the current state of knowledge.

Theoretically, an attack on the immutability of a blockchain would be possible, but in practice it would be unlikely, especially since this would call into question the stability of the attacked currency as a whole, for example. This would presumably lead to a loss of the value of all currency units, which would make such an attack unprofitable for the attacker, as the unauthorisedly acquired currency units would then be worthless.

Decentralisation

Blockchain technology represents a decentralised technology. Everything that happens within the blockchain network is a function of the entire network. Because of the special way transactions are verified, some aspects of traditional commerce, such as a chain of trusted intermediaries, are not needed. Through the interaction of all network nodes, the common database is managed instead of leaving this task to a central entity.

Time saving

The decentralised solution of the blockchain thus circumvents the problem of trust in the intermediary and creates advantages such as transparency. Every participant can now see in real time how the data is being processed and can react accordingly. This is time-saving and cost-efficient.

What are the disadvantages of the blockchain?

Integration

The integration of the blockchain into the existing IT architecture is complicated and entails a high change management effort.

High memory requirements

The blockchain grows with each additional block and the growing amount of data is also stored on each node of the network. As a result, not all transaction scenarios can be mapped in this way.

Performance

Both the verification of the transactions and the synchronisation take time.

What can blockchain technology be used for?

Smart Contracts

Smart contracts (“intelligent contracts”) are contracts based on blockchain technology that do not require a third party (e.g. a notary) to ensure legal certainty. In addition, smart contracts can automatically come into force under certain conditions.

A practical application example of this process is software licensing. Smart contracts make it much easier for the user to acquire licences. But the licence seller also has advantages through the use of smart contracts. For example, it enables customers to automatically deactivate access to the licensed software if they miss payments.

The use of blockchain in the healthcare sector

In the field of healthcare, too, it can be seen that the blockchain can certainly offer advantages. For example, a blockchain can be configured in such a way that it only grants selected users access to the stored data. Nevertheless, the data can be stored in the distributed network so that sensitive data can be stored here. Above all, personal documents such as the patient file, medical findings and the course of illness can be stored on a blockchain. Access to this data is only granted to selected users who have previously been authorised by the owner of the data.

Supply Chain Management

The supply chain can be revolutionised through the use of blockchain. Benefits can be generated through the generation of simpler contracts and through continuous tracking of the relevant goods. For example, the supply chain of a food product would be completely transparently documented from the point of origin to the final supermarket. It is precisely here that the advantage of distributed data processing, as offered by the blockchain, becomes apparent. Especially extensive searches afterwards can cause delays and high administrative costs. A blockchain can compensate for these disadvantages.

Digital elections

A thoroughly tested application based on the blockchain could provide the necessary security. One possibility would be to send each eligible voter a token in a wallet, which can then be used to access the ballot paper. Each vote cast would then be stored on the blockchain. Depending on the type of blockchain used, there are different advantages and disadvantages. Traditional blockchains such as Ethereum or Bitcoin, so-called “public” blockchains, are completely transparent and can be viewed by everyone. The use of a public blockchain would generate additional trust, as everyone can follow the election themselves and any irregularities would be noticed directly. However, it must be ensured that no vote can be directly traced back to a person or a wallet.

Identity Management

Verifying a person’s identity is a challenge in selected business sectors. However, with the help of blockchain technology, people’s identities can be identified more securely and quickly than before. The basis for this is extensive databases that enable identification and verification. Existing identity documents in particular – driving licences, passports and ID cards – would thus be digitally secure. Manipulation would also be virtually impossible. Data loss would also be prevented because the data would be stored decentrally.

Insurances

Modern blockchains in particular offer the possibility of developing smart contracts. These are intelligent scripts that automatically initiate transactions on the blockchain. For insurance companies, this possibility offers great added value, because the processing of claims or insurance benefits in particular can be automated and secured. For example, it can be recognised that a single customer wants to file multiple concerns for an identical claim for damages.

Certificate management and issuance

Educational qualifications such as diplomas or certificates are a framework requirement in professional life and some people rely on forgeries to obtain a certificate from a renowned professional institution. By using blockchain, institutes, universities and colleges are given the opportunity to produce degrees and certificates that cannot be forged. These are secured with a personal key and recognised internationally. This would eliminate the need for official certification and the dispatch of the original documents.

Cryptocurrencies

Cryptocurrencies are a digital form of currency that is traded and exchanged like a normal paper currency. However, unlike paper currencies, most cryptocurrencies are not controlled by financial institutions or the government. Moreover, it should be realised that not all cryptocurrencies are the same. Each has its unique characteristics and areas of application.

Differentiating Bitcoin, Blockchain and Distributed Ledger Technology

Bitcoin

Bitcoin was the first decentralised virtual digital currency (cryptocurrency) to successfully implement the blockchain idea. Here, the blockchain is only the technical framework in which Bitcoin is implemented. Bitcoin is therefore only one possible use case of blockchain technology, but this became known as a framework primarily through Bitcoin.

Even if the further broad market success of Bitcoin is still open, among other things because of technical limitations, the concept of blockchain technology has found favour in many areas.

Distributed Ledger Technology

The term distributed ledger technology (DLT) is often used in connection with blockchain technology. A possible translation of distributed ledger is “distributed ledgers”. DLT refers to the technological framework around the use of distributed ledgers. However, blockchains or distributed ledgers can be used for many other applications and records besides Bitcoin, such as digital identity management. It is not uncommon to find synonymous use of the terms blockchain technology and distributed ledger technology in academia and practice.

Basic questions about the use of blockchains

Blockchain technology promises a wide range of possible applications. However, key IT security issues apply to the use of blockchain technology just as they do to other forms of electronic data processing. In addition, the following questions should be clarified if the use of a blockchain solution is being considered.

• Are the transactions relatively complex and subject to confidentiality or data protection?
• Is an acceptably high level of trust placed in the other participants of the network?
• Are the transactions to be processed storing a relatively large amount of data? Are the transaction volumes high in terms of the absolute number of transactions, or also in terms of the number per unit of time?
• Is the subsequent modifiability of data required?
• Is perimeter protection or physical separation of data necessary?
• Is a central authority or body needed to resolve conflicts?
• Is it a network with a small number of participants?
• Is a large number of interfaces to other networks or legacy systems required beyond the network to exchange data?
• Is it necessary that only one central instance can validate transactions?

Conclusion & outlook

Blockchain technology not only offers the advantages mentioned, but can also be used in numerous business areas. Above all, transparency, decentralisation and security play a key role. Numerous companies are already discovering the possibilities of the technology and developing their own products based on blockchain. Many experts see enormous future potential in the technology, so that the developments of the coming years are likely to be particularly exciting.