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Further applications of the blockchain
George Foroglou
University of Macedonia, Finance and Accounting
georgios.e.foroglou@gmail.com | +30 699 416 7076
Anna-Lali Tsilidou
University of Macedonia, Finance and Accounting
anna.e.tsilidou@gmail.com | +30 698 872 9772
…
Abstract
In this research we investigate into the blockchain technology; its current use and explore other
possible implementations of this protocol. In the first part a thorough explanation of the technology and
the problems it is trying to tackle is attempted. At the same time a background on Bitcoin (the first
application of the technology) is provided. In the second part it is examined whether the technology
could be leveraged to solve problems in different fields, while some specific recommendations for the
Greek economy are also made.
[Bitcoin, Blockchain, Applications ]
1. Bitcoin and the blockchain technology
The first application of the blockchain technology was Bitcoin, a digital currency which was
based on a protocol that allows the users of the network to perform transactions with virtual
money that exist only in their computers in a fast, and secure way. A blockchain is a public
ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as
‘completed’ blocks are added to it with a new set of recordings. A block is the ‘current’ part
of a blockchain which records some or all of the recent transactions, and once completed goes
into the blockchain as permanent database. Each time a block gets completed, a new block is
generated. There is a countless number of such blocks in the blockchain. The blocks are
linked to each other (like a chain) in proper linear, chronological order with every block
containing a hash of the previous block. The blockchain is seen as the main technological
innovation of Bitcoin, since it stands as proof of all the transactions on the network. Each
node (computer connected to the Bitcoin network using a client that performs the task of
validating and relaying transactions) gets a copy of the blockchain, which gets downloaded
automatically upon joining the Bitcoin network. The blockchain has complete information
about the addresses and their balances right from the genesis block to the most recently
completed block. To use conventional banking as an analogy, the blockchain is like a full
history of banking transactions. Bitcoin transactions are entered chronologically in a
blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank
statements. Blockchain is kept up to date with the help of cryptography and copious
computing power, provided by a global network of tens of thousands of computers. Openness
helps the system remain secure: the blockchain is public so every participant can check
whether a transfer comes from the rightful owner.
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1.1. Blocks
Blocks are found in the Bitcoin block chain. Blocks connect all transactions together.
Transactions are combined into single blocks and are verified every ten minutes through
mining. Each subsequent block strengthens the verification of the previous blocks, making it
impossible to double spend Bitcoin transactions (see double spend below). Every block
contains a hash of the previous block. This has the effect of creating a chain of blocks from
the genesis block to the current block. Each block is guaranteed to come after the previous
block chronologically because the previous block's hash would otherwise not be known. Each
block is also computationally impractical to modify once it has been in the chain for a while
because every block after it would also have to be regenerated. These properties are what
make double spending of Bitcoins very difficult. Honest generators only build onto a block
(by referencing it in blocks they create) if it is the latest block in the longest valid chain.
"Length" is calculated as total combined difficulty of that chain, not number of blocks, though
this distinction is only important in the context of a few potential attacks. A chain is valid if
all of the blocks and transactions within it are valid, and only if it starts with the genesis
block. For any block on the chain, there is only one path to the genesis block. Coming from
the genesis block, however, there can be forks. One-block forks are created from time to time
when two blocks are created just a few seconds apart. When that happens, generating nodes
build onto whichever one of the blocks they received first. Whichever block ends up being
included in the next block becomes part of the main chain because that chain is longer. More
serious forks have occurred after fixing bugs that required backward-incompatible changes.
Blocks in shorter chains (or invalid chains) are not used for anything. When the Bitcoin client
switches to another, longer chain, all valid transactions of the blocks inside the shorter chain
are re-added to the pool of queued transactions and will be included in another block. The
reward for the blocks on the shorter chain will not be present in the longest chain, so they will
be practically lost, which is why a network-enforced 100-block maturation time for
generations exists. Because a block can only reference one previous block, it is impossible for
two forked chains to merge. The ever-growing size of the blockchain is considered by some
to be a problem due to issues like storage and synchronization. On an average, every 10
minutes, a new block is appended to the blockchain through mining.
1.2. Blockchain as a public record
With Bitcoin, there is no single organization in charge of the currency, which is an enormous
change when one thinks about the power a central bank has, controlling over the money
supply. The idea here is to make it so everyone (collectively) is the bank. In particular,
everyone using Bitcoin keeps a complete record of which Bitcoins belong to which person.
One can think of blockchain as a shared public ledger showing all Bitcoin transactions. The
blockchain shows every single record of Bitcoin transactions in order, dating back to the very
first one. The entire blockchain can be downloaded and openly reviewed by anyone, or you
can use a block explorer to review the blockchain online.
1.3 Double Spending
The blockchain technology is especially useful in addressing the problem of double spending
(multiple spending of Bitcoins). When the one party registers a transaction, it is broadcasted
to the entire network of Bitcoin users, and asks them to help determine whether the
transaction is legitimate. If they collectively decide that the transaction is in order, then the
recipient can accept the Bitcoins, and everyone will update their block chain. This type of
protocol can help prevent double spending, since if the sender tries to spend his/her Bitcoin
with multiple times, other people on the network will notice, and network users will notify the
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multiple recipients that there is a problem with the transaction, and the transaction shouldn’t
go through.
1.4 Proof-of-work and mining
Some users may try to double-spend by using an automated system to set up a large number
of separate identities to validate their transactions. There’ s a clever way of avoiding this
problem, using an idea known as proof-of-work. The idea is counterintuitive and involves a
combination of two ideas: 1. to (artificially) make it computationally costly for network users
to validate transactions; and 2. to reward them for trying to help validate transactions. The
benefit of making it costly to validate transactions is that the number of network identities
someone controls can no longer influence validation, but only by the total computational
power they can bring to bear on validation. As a result, a cheater would need enormous
computational resources to cheat, making it impractical. For the proof-of-work idea to have
any chance of succeeding, network users need an incentive to help validate transactions.
Without such an incentive, they have no reason to expend valuable computational power,
merely to help validate other people’ s transactions. And if network users are not willing to
expend that power, then the whole system won’ t work. The solution to this problem is to
reward people who help validate transactions. In particular, suppose we reward whoever
successfully validates a block of transactions by crediting them with some Bitcoins. The
reward is used so that people on the network will try to help validate transactions, even
though that’ s now been made a computationally costly process. Provided the Bitcoin reward
is large enough that will give them an incentive to participate in validation. In the Bitcoin
protocol, this validation process is called mining. For each block of transactions validated, the
successful miner receives a bitcoin reward. Initially, this was set to be a 50 bitcoin reward.
But for every 210,000 validated blocks (roughly, once every four years) the reward halves.
This has happened just once, to date, and so the current reward for mining a block is 25
bitcoins. This halving in the rate will continue every four years until the year 2140 CE. At that
point, the reward for mining will drop below 10^{-8} bitcoins per block. 10^{-8} bitcoins is
actually the minimal unit of Bitcoin, and is known as a satoshi, after the Satoshi Nakamoto
mentioned earlier. So in 2140 CE the total supply of bitcoins will cease to increase. However,
that won’ t eliminate the incentive to help validate transactions. Bitcoin also makes it possible
to set aside some currency in a transaction as a transaction fee, which goes to the miner who
helps validate it. In the early days of Bitcoin transaction fees were mostly set to zero, but as
Bitcoin has gained in popularity, transaction fees have gradually risen, and are now a
substantial additional incentive on top of the 25 bitcoin reward for mining a block. One can
think of proof-of-work as a competition to approve transactions. Each entry in the
competition costs a little bit of computing power. A miner’s chance of winning the
competition is (roughly, and with some caveats) equal to the proportion of the total computing
power that they control. So, for instance, if a miner controls one percent of the computing
power being used to validate Bitcoin transactions, then they have roughly a one percent
chance of winning the competition. So provided a lot of computing power is being brought to
bear on the competition, a dishonest miner is likely to have only a relatively small chance to
corrupt the validation process, unless they expend a huge amount of computing resources.
2. Current and future uses of blockchain technology
Blockchain is regarded as a next-generation information technology with many potential
upsides in a number of fields beyond digital currencies (IEET). As said before, the first
application of the blockchain technology was the digital currency Bitcoin, but the blockchain
could be a much bigger opportunity than Bitcoin. The whole thing about blockchain-based
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architectures is that they allow trustless transactional activity. There is no third party; there is
no clearinghouse of identity information (Fred Wilson). So Bitcoin and blockchain
technology is much more than a digital currency, the blockchain is an information technology,
potentially on the order of the Internet (‘the next Internet’), but even more pervasive and
quickly configuring (Swan). Blockchain technology is one of the first identifiable large
implementations of decentralization models that have the potential to “reorganize all manner
of human activity” due to their ability to provide frictionless and trustless interaction between
people and technology. Below more information is provided both for Bitcoin as well as the
other possible uses of the blockchain technology.
2.1. Currency
Bitcoin was first described in a 2008 paper (written by someone under the pseudonym Satoshi
Nakamoto) as “A peer to peer Electronic Cash System”. In the beginning of 2009 the first
cryptocurrency became a reality with the mining of the genesis block and the confirmation of
the early transactions. The economic crisis in the Eurozone area and especially in Cyprus
forced the Bitcoin price to go up to $1216.73. Since then, its price has slowed down steadily,
thus the cryptocurrency was characterized by many as a financial bubble.. During 2013 and
2014, fraud incidents and hacking attacks made both investors and users question their trust to
the currency. At that time, the price was a little below $300 with the daily volatility being
around 3.5% when gold's volatility was 1.2% and that of other major currencies between 0.5
and 1%The reactions globally varied from country to country. Today most developed
countries allow the use of Bitcoin, but consider it “private money” (USA) or “property”
(Germany). However, there are some countries, most of which are in Asia and South
America, along with Russia where Bitcoin is considered illegal. Furthermore, the European
Central Bank has issued a statement that warns investors for the risks of Bitcoin.
You can acquire Bitcoins through mining, buy the firm another user or an exchange, receive
them as payment for work or even ask donations in Bitcoins. Other notable cryptocurrencies
are: Ripple, which was created by Ripple Labs and belongs to the category of pre-mined
cryptocurrencies, Litecoin, which is based on the same protocol as Bitcoin but it is much
more user-friendly in terms of mining and transactions, Darkcoin, a cryptocurrency that
provides real anonymity during transactions, and Primecoin, whose solutions during mining
procedure are prime numbers.
2.2. Contracts
An emerging use of blockchain during the last years is the creation of “smart contracts”. The
term “smart contracts” appeared in 1994 when Nick Szabo described a computer program
with if-then structure interacting with the real world. Different developers using Bitcoin
overlay protocols in order to integrate their activities further expanded this idea. More
specifically, they were created platforms where the users can buy derivatives with Bitcoin
(derivatives), issue their own currency (Colored Coins) and use the Bitcoin network as credit
for their exchanges (Blockstream). The real revolution on this sector came from the Ethereum
Project. The main purpose of this project is to create an independent platform where, using a
programming language, the users can create a virtual contract between them for any purpose
they want. A same project named Codius is also under developing from the Ripple Labs. The
contract is executed when the loop of the commands if and then is coming into a result from
real-world data. The range of the uses for these contracts is practically limitless. Every
procedure that needs a third trusted party to be completed can be codified and run in the
platform of their preference. That includes simple money transactions between privates,
selling and buying of tangible and intangible goods and the potentiality of securing financial
or not transactions that need hedging due to their instable nature. A fair example is the
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agricultural market because of the products' vulnerability. The use of the smart contracts is
not restricted to the financial and commercial sector though. A smart contract can be used to
confirm a real estate transfer playing the role of the notary. At the same time, a user can write
his/her own will on the platform and the contract will be executed after his death without the
intervention of a third party (notary, judge) to confirm it. The same technology can be used
for betting purposes as the need for a carrier that controls the bets does not longer exists. The
procedure of a betting using a smart contract is: The users put their money on a digital
account, they create a virtual contract that define the conditions of winning and losing and
when a result came up in the real world, the contract get updated from an online database and
execute the terms by transferring the money to winner's account.
2.3 Voting
Voting procedures remain in many countries a controversial topic, as incident of electoral
fraud (invalid or inaccurate vote, multiple registration) and the big percentage of abstention
often shape the final result. The adaptation of blockchain technology from any institution in
any country that wants to run a voting campaign seems as an effective solution. The members
could connect to a PC-based system through their computer, laptop or smartphone, using
open-source code that is open to editing using a kind of authentication (biometric, written)
prove their identity to the program. Then, they enter their private key to access their right to
vote and using their public key to select their preference and confirm it. So far, three projects
have been founded that promote voting through blockchain systems. The first is BitCongress
that uses the Ethereum platform to develop its idea based on the scenario that every voter has
access to one “votecoin” that enhances him to vote only one time and his vote will be
recorded on the blockchain after the system verifies it. Other similar projects are
Remotengrity, which provides every physical vote with a cryptographic code in order to
verify the authenticity of every vote, and AgoraVoting, which uses the Bitcoin network to
develop a voting blockchain-based tool that will be used in the procedures of Spanish
Congress. Generally, the transformation of the voting system from paper-based to digital will
increase its reliability and the convenience that offers to the voters.
2.4 Intellectual property rights.
Blockchain could be used to enforce to prove intellectual property rights. A good
example of this is “Proof of Existence”, a service created by Manuel Araoz, a 25-
year-old developer in Argentina. The site allows you to upload a file to certify that you
had custody of it at a given time. Neither its contents nor your own personal
information are ever revealed — rather, all the data in the document gets digested
into an encrypted number. Proof of Existence is built on top of the Bitcoin blockchain
(there's a 0.005 BTC fee), so the thousands of computers on that network have now
collectively verified your file.
2.5 Smart Property
A less known field that the blockchain technology could have a major impact is that of “smart
property”. The Internet of Things (IoT), a technology that connects every home device in the
global network, is constantly growing. “Smart property” is a combination of IoT and the
Bitcoin infrastructure that is defined as a physical asset whose ownership is controlled via
blockchain with the use of contracts. The most famous example was described by Nick Szabo
(1997) when he said that in case the debtor misses a payment in a car loan, a smart contract
could revoke the digital keys to operate the car. Other examples are keys for cars (leased and
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rented), homes, apartments, hotel rooms, lockers and safety deposits. A smart contract that
includes physical property is easily updated when the owner changes without the need for
notary's contribution.
2.6 Finance
The most widely accepted application for the blockchain technology is in the field of finance,
as it ensures the much valued transparency between the trading parties. Every transaction in
public or private equities, stocks, bonds or derivatives could be transcripted in the blocks and
afterwards be confirmed by the local authority for its legitimacy. From this point, it's easier to
detect fraud cases or money laundering through stock exchange moves. Apart from finance in
the traditional form, the blockchain could also improve the contemporary forms of financing.
Crowdfunding can also be improved through blockchain adaptation. Instead of a platform that
collects donations and distributes them to the campaign runners, it could turn to a
decentralized platform that manages the money from the benefactors and if the campaign is
successfully completed gives the money to the runners or otherwise returns the donations
back. This solves the trust problem that many newly established crowdfunding sites face.
2.7 Blockchain technologies in the Greek economic environment
2.7.1 Shipping management
Another service that could be redefined by the blockchain technology is the control of the
containers that arrive in the Greek ports. The moment a container arrives at the port it could
be labeled with a cryptographic hash that would match the last received container. The value
of a system like that is that is automatically keeps track of all the containers and therefore
prevents scams or mistakes like changes in specific information or incidents of industrial
espionage. The most important fact it that due to the decentralized nature of the system, no
information is going to be lost. In case of labor disputes or a natural disaster, the normal
operation of a port is detuning due to bad control of the previous information. This can be a
heavy cost for the managing port organization as the economic processes are delayed and
create paralyzing effects to the port that may need several months to recover. The most recent
example in the international market is the port of Oakland where the labor disputes cause a 2-
month delay to complete the necessary procedures for the plain operation of the port. A
system based on the blockchain technology can continue to serve the needs of the port even in
extreme cases for the reason that it is independent from the labor force of the port.
2.7.2 Land titles
The digitalization of the land titles can be beneficial for a society as it reduces the
bureaucracy and the corruption that is connected with the real estate industry. The users of a
blockchain-based system could inspect any property record in real-time without any cost.
Apart from this, the authentication of the holders would be easier and land transfer would
require considerably less capital. The most important part is that the open-source system
would allow its users to build applications in order to improve the way of accessing the
records.
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Conclusion
From this researh it is clear that the blockchain technology is yet unexplored and has
much to offer in many fields. With potencial application ranging from wider banking
and business to voting and international trade, blockchain could redefine many
aspects of our life. Further research suggestions would include the economic
implications and impact of such non-Bitcon blockchain applications.
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