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«BlockChain Technology Beyond Bitcoin Abstract A  blockchain  is  essentially  a  distributed  database  of  records  or  public   ledger  of ...»

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BlockChain Technology

Beyond Bitcoin

Abstract

A  blockchain  is  essentially  a  distributed  database  of  records  or  public   ledger  of   all  transactions  or 

digital  events  that  have  been  executed  and  shared  among  participating  parties.  Each  transaction  in 

the  public  ledger  is  verified  by  consensus  of  a  majority  of  the  participants  in  the  system.  And,  once 

entered,  information  can  never  be  erased.  The  blockchain  contains  a  certain  and  verifiable  record of  every  single  transaction  ever  made.  Bitcoin,  the   decentralized  peer­to­peer  digital  currency,  is  the  most  popular  example  that  uses  blockchain  technology.  The  digital  currency  bitcoin  itself  is   highly  controversial but the underlying blockchain technology has worked flawlessly and found wide range of  applications in both financial and non­financial world.     The  main  hypothesis  is  that  the  blockchain  establishes  a  system  of  creating  a  ​ distributed  consensus  ​ the  digital  online  world.  This   allows  participating  entities  to  know  for  certain  that  a  in  digital  event  happened  by  creating  an  irrefutable  record  in  a   public  ledger.  ​ opens  the  door  for   It  developing  a  democratic  open  and  scalable  digital  economy  from  a  centralized  one.  There  are  tremendous opportunities in this disruptive technology and revolution in this space has just begun.     This  white  paper  describes  blockchain  technology  and  some   compelling  specific  applications  in  both  financial  and  non­financial  sector.  We  then  look  at  the  challenges ahead and business opportunities  in this fundamental technology that is all set to revolutionize our digital world.   Sutardja Center for Entrepreneurship & Technology Technical Report Date: October 16, 2015 Authors Michael Crosby, ​ Google Nachiappan, ​ Yahoo  ​ Pradhan Pattanayak,​ ahoo

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This  paper  was  created  in  an  open  classroom  environment  as  part  of  a  program   within  the  Sutardja   Center   for   Entrepreneurship  &  Technology  and  led  by  Prof.  Ikhlaq  Sidhu  at  UC  Berkeley.  There  should be no  proprietary information  contained  in  this  paper. No information contained in this paper  is intended to affect  or influence public relations with any firm  affiliated  with  any  of  the  authors.  The  views  represented  are   those  of  the   authors   alone  and  do  not  reflect those  of  the  University of California Berkeley. 

Sutardja Center for Entrepreneurship & Technology Technical Report

Introduction    A blockchain is essentially a distributed database of records or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made. To use a basic analogy, it is easy to steal a cookie from a cookie jar, kept in a secluded place than stealing the cookie from a cookie jar kept in a market place, being observed by thousands of people.

Bitcoin is the most popular example that is intrinsically tied to blockchain technology. It is also the most controversial one since it helps to enable a multibillion-dollar global market of anonymous transactions without any governmental control. Hence it has to deal with a number of regulatory issues involving national governments and financial institutions.

However, Blockchain technology itself is non-controversial and has worked flawlessly over the years and is being successfully applied to both financial and non-financial world applications. Last year, Marc Andreessen, the doyen of Silicon Valley’s capitalists, listed the blockchain ​ distributed consensus model​ the most important invention since the Internet itself. Johann Palychata from BNP Paribas as wrote in the Quintessence magazine that bitcoin’s blockchain, the software that allows the digital currency to function should be considered as an invention like the steam or combustion engine that has the potential to transform the world of finance and beyond.

Current digital economy is based on the reliance on a certain trusted authority. Our all online transactions rely on trusting someone to tell us the truth—it can be an email service provider telling us that our email has been delivered; it can be a certification authority telling us that a certain digital certificate is trustworthy; or it can be a social network such as Facebook telling us that our posts regarding our life events have been shared only with our friends or it can be a bank telling us that our money has been delivered reliably to our dear ones in a remote country. The fact is that we live our life precariously in the digital world by relying on a third entity for the security and privacy of our digital assets. The fact remains that these third party sources can be hacked, manipulated or compromised.





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Smart Property​ another related concept which is regarding controlling the ownership of a property is or asset via blockchain using Smart Contracts. The property can be physical such as car, house, smartphone etc. or it can be non-physical such as shares of a company. It should be noted here that even Bitcoin is not really a currency--Bitcoin is all about controlling the ownership of money.

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Financial​ institutions and banks no longer see blockchain technology as threat to traditional business models. The world’s biggest banks are in fact looking for opportunities in this area by doing research on innovative blockchain applications. In a recent interview Rain Lohmus of Estonia’s LHV bank told that they found Blockchain to be the most tested and secure for some banking and finance related applications.

Non-Financial​ applications opportunities are also endless. We can envision putting proof of existence of all legal documents, health records, and loyalty payments in the music industry, notary, private securities and marriage licenses in the blockchain. By storing the fingerprint of the digital asset instead of storing the digital asset itself, the anonymity or privacy objective can be achieved.

In this report, we focus on the disruption that every industry in today’s digital economy is facing today due to the emergence of blockchain technology. Blockchain technology has potential to become the new engine of growth in digital economy where we are increasingly using Internet to conduct digital commerce and share our personal data and life events.

There are tremendous opportunities in this space and the revolution in this space has just begun. In this report we focus on few key applications of Blockchain technology in the area of Notary, Insurance, private securities and few other interesting non-financial applications. We begin by first describing.  some history and the technology itself​ Section I: BlockChain Technology 

1. Short History of Bitcoin  Sutardja Center for Entrepreneurship & Technology Technical Report In year 2008, an individual or group writing under the name of Satoshi Nakamoto published a paper entitled “Bitcoin: A Peer-To-Peer Electronic Cash System”. This paper described a peer-to-peer version of the electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. Bitcoin was the first realization of this concept. Now word cryptocurrencies is the label that is used to describe all networks and mediums of exchange that uses cryptography to secure transactions-as against those systems where the transactions are channeled through a centralized trusted entity.

The author of the first paper wanted to remain anonymous and hence no one knows Satoshi Nakamoto to this day. A few months later, an open source program implementing the new protocol was released that began with the Genesis block of 50 coins. Anyone can install this open source program and become part of the bitcoin peer-to-peer network. It has grown in popularity since then.

– 2008 August 18 Domain name "bitcoin.org" registered •

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The popularity of the Bitcoin has never ceased to increase since then. The underlying BlockChain technology is now finding new range of applications beyond finance.

2. Blockchain Technology: How does it work?  We explain the concept of the blockchain by explaining how Bitcoin works since it is intrinsically linked to the Bitcoin. However, the blockchain technology is applicable to any digital asset transaction exchanged online.

Sutardja Center for Entrepreneurship & Technology Technical Report Figure 1. Traditional online financial transactions using third trusted party ( Banks, Paypal etc.) 1.

Internet commerce is exclusively tied to the financial institutions serving as the trusted third party who process and mediate any electronic transaction. The role of trusted third party is to validate, safeguard and preserve transactions. A certain percentage of fraud is unavoidable in online transactions and that needs mediation by financial transactions. This results in high transaction costs.

Bitcoin uses cryptographic proof instead of the trust in the third party for two willing parties to execute an online transaction over the Internet. Each transaction is protected through a digital signature. Each transaction is sent to the “public key” of the receiver digitally signed using the “private key” of the sender. In order to spend money, owner of the cryptocurrency needs to prove the ownership of the “private key”. The entity receiving the digital currency verifies the digital signature –thus ownership of corresponding “private key”--on the transaction using the “public key” of the sender.

Each transaction is broadcast to every node in the Bitcoin network and is then recorded in a public ledger after verification. Every single transaction needs to be verified for validity http://www.coindesk.com/blockchain-lottery-miners-rewarded/ Sutardja Center for Entrepreneurship & Technology Technical Report before it is recorded in the public ledger. Verifying node needs to ensure two things before

recording any transaction:

1. Spender owns the cryptocurrency—digital signature verification on the transaction.

2. Spender has sufficient cryptocurrency in his/her account: checking every transaction against spender’s account (“public key”) in the ledger to make sure that he/she has sufficient balance in his/her account.

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http://www.ft.com/intl/cms/s/2/eb1f8256-7b4b-11e5-a1fe-567b37f80b64.html#axzz3qe4rV5dH Sutardja Center for Entrepreneurship & Technology Technical Report However, there is question of maintaining the order of these transactions that are broadcast to every other node in the Bitcoin peer-to-peer network. The transactions do not come in order in which they are generated and hence there is need for a system to make sure that double-spending of the cryptocurrency does not occur. Considering that the transactions are passed node by node through the Bitcoin network, there is no guarantee that orders in which they are received at a node are the same order in which these transactions were generated.

Figure 3. Double spending due to propagation delays in peer-to-peer network.

This means that there is need to develop a mechanism so that the entire Bitcoin network can agree regarding the order of transactions, which is a daunting task in a distributed system.

Sutardja Center for Entrepreneurship & Technology Technical Report Figure 4. Generation of Blockchain from unordered transactions.

The Bitcoin solved this problem by a mechanism that is now popularly known as Blockchain technology​ Bitcoin system orders transactions by placing them in groups. The called blocks and then linking these blocks through what is called Blockchain. The transactions in one block are considered to have happened at the same time. These blocks are linked to each-other (like a chain) in a proper linear, chronological order with every block containing the hash of the previous block.

There still remains one problem. Any node in the network can collect unconfirmed transactions and create a block and then broadcasts it to rest of the network as a suggestion as to which block should be the next one in the blockchain. How does the network decide which block should be next in the blockchain? There can be multiple blocks created by different nodes at the same time. One can’t rely on the order since blocks can arrive at different orders at different points in the network.

Sutardja Center for Entrepreneurship & Technology Technical Report Bitcoin solves this problem by introducing a mathematical puzzle: each block will be accepted in the blockchain provided it contains an answer to a very special mathematical problem. This is also known as “proof of work”—node generating a block needs to prove that it has put enough computing resources to solve a mathematical puzzle. For instance, a node can be required to find a “nonce” which when hashed with transactions and hash of previous block produces a hash with certain number of leading zeros. The average effort required is exponential in the number of zero bits required but verification process is very simple and can be done by executing a single hash.

Figure 5 Mathematical race to protect transactions-I3.

This mathematical puzzle is not trivial to solve and the complexity of the problem can be adjusted so that on average it takes ten minutes for a node in the Bitcoin network to make a right guess and generate a block. There is very small probability that more than one block will be generated in the system at a given time. First node, to solve the problem, broadcasts the block to rest of the network. Occasionally, however, more than one block will be solved at the same time, leading to several possible branches. However, the math of solving is very complicated and hence the blockchain quickly stabilizes, meaning that every node is in http://www.imponderablethings.com/2013/07/how-bitcoin-works-under-hood.html Sutardja Center for Entrepreneurship & Technology Technical Report agreement about the ordering of blocks a few back from the end of the chain. The nodes donating their computing resources to solve the puzzle and generate block are called “miner” nodes” and are financially awarded for their efforts.

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The network only accepts the longest blockchain as the valid one. Hence, it is next to impossible for an attacker to introduce a fraudulent transaction since it has not only to generate a block by solving a mathematical puzzle but it has to at the same time mathematically race against the good nodes to generate all subsequent blocks in order for it make other nodes accept its transaction & block as the valid one. This job becomes even more difficult since blocks in the blockchain are linked cryptographically together.



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