Four questions and answers to help you understand the principles and applications of blockchain in seconds

Starting with Bitcoin, the decentralized and data-unalterable features of blockchain technology are increasingly considered to have the potential to overturn the basis of human transactions for thousands of years. Although there are concerns that Bitcoin's network computing power is currently monopolized by a few people, blockchain technology has become a growing branch of Fintech with the active embrace of start-ups and banks in various countries. As a new generation of decentralized database, blockchain has great application imagination and development potential, and can be seen from the financial field to the Internet of Things and cloud computing.

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What is Bitcoin?

To explain that blockchain is inevitable, we must first talk about Bitcoin. Bitcoin is a new type of digital asset and transaction model invented by Satoshi Nakamoto. He proposed this concept in a cryptography discussion group on November 1, 2011. The most important thing is that he successfully used the concept of "blockchain" to make the account book public, so that the biggest problem of virtual currency, "duplicate deductions", can be solved. Users are willing to contribute the computing power of the CPU and run a special software to become a "miner". This will form a network to jointly maintain the regional chain, and new currency will be generated in the process. Transactions are also spreading on this network. Computers running this software compete to crack irreversible cryptographic puzzles, which include several transaction data. The first "miner" who solves the puzzle will receive a reward of 50 bitcoins, and the relevant transaction area will be added to the chain. As the number of "miners" increases, the difficulty of each puzzle also increases, which keeps the Bitcoin production rate of each transaction area at about 1 per 10 minutes. In addition, every time 210,000 areas are reached, the reward will be halved, from 50 bitcoins to 25, and then from 25 to 12.5, and so on. In this way, by 2140, bitcoins will reach the predetermined upper limit of 21 million. A decentralized, trustworthy virtual payment system for tracking transactions has been successfully established. The price of bitcoin reached a record high of $979.45 in November 2013 and is currently around $400.

What is the principle of blockchain?

Let’s take Bitcoin’s blockchain as an example. The blockchain can be considered as a public ledger with the following characteristics:

• Each node on the network has a complete ledger backup
• The ledger contains all the transaction records of Bitcoin from its birth to the present.
• The ledger itself is recorded in blocks. Each block contains a part of the transaction, and each block records the ID of the previous block, forming a chain-like data structure, so it is called blockchain.
• When a node wants to initiate a transaction, it will first broadcast the transaction to other nodes. At this time, all nodes can use the consensus algorithm to decide who can verify the transaction, which is called "solving the problem". Then a miner will help you package the transaction information into a new block and send it to the blockchain. At this time, the transaction is completed (blockchain.info can see the real-time information of the block)
• When one of the nodes solves the problem first, it will write the verified transaction into the blockchain and broadcast it to other nodes. Once the data is written into the blockchain, it cannot be tampered with.
• Each Bitcoin account has a public key and a private key. When initiating a transaction, you only need to sign with the private key, and then the miner can check the signature with the public key.
• If the Bitcoin balance in your account is insufficient, you only need to trace back the transaction records of the entire ledger to detect the difference and cancel the transaction.

Of course, the consensus algorithm and core mechanism on the blockchain still have security concerns, such as a 51% attack. If someone can control 51% of the computing power of the entire network, they have the opportunity to rewrite the entire blockchain and cause the system to crash. This crisis is more difficult to occur in larger systems. After all, it means that hackers have to capture the data centers of several giants before the incident.

What financial applications does blockchain include?

Blockchain technology integrates mathematics, encryption technology and economic models. Its purpose is to maintain a database of network relationships consisting of multiple participants without the need for third-party institutions to assist in verification and reconciliation. In simple terms, it is a secure distributed ledger.

At present, blockchain applications can be divided into three categories in terms of scale:

• Public Blockchain: Everyone can access all data, everyone can issue transactions, and participants in the consensus process can use cryptography and other methods to maintain the security of the database, such as Bitcoin.
• Federated Blockchain: The participating nodes are pre-selected, the blocks will not be expanded at will, and the network between the nodes will even be pre-defined to ensure security. The consensus algorithm on the network can be defined by oneself, such as R3, which has more than 40 banks joined worldwide.
• Private Blockchain: There is only a single user participating in the node, and all data usage is strictly controlled by permissions, such as Linq used by Nasdaq.

Bitcoin has been under attack from central banks since 2013. The biggest reason is its anonymity. Everyone can get all the blocks, but they cannot use the blocks to track the actual transaction users. To make the government and the public gradually accept it, it is necessary to add a recognition system to strengthen security and avoid money laundering concerns. After building a blockchain of sufficient scale, in addition to smart contracts, blockchain can also be used for crowdfunding, cross-border exchange, and issuance of valuable assets.

Currently, more and more software companies are joining the battle. IBM announced the Open Ledger Project based on the Linux Foundation, which will provide libraries for other organizations to build their own blockchains. The startup Openchain provides an open source distributed ledger technology, where ledger managers can quickly define the authentication rules of the ledger, and then users can transfer their digital assets to it at will, just like Bitcoin.

What other applications does blockchain have?

In addition to the innovation in finance, the two major features of blockchain: decentralization and data cannot be unilaterally tampered with (indelible ledger), can be used to combine with the current most popular "Internet of X" concept. The innermost circle M2M (Machine to Machine) is the most basic mechanism, using various communication methods to connect machines to share "data". The IoT (Internet of Things) on it begins to build a network of connected machines and use valuable data to build "services". Next, it develops into the IoE (Internet of Everything) concept proposed by Cisco. It contains elements such as data, things, processes, and even people. Unlike the Internet of Things (IOT), the Internet of Everything (IoE) concept focuses on establishing "human connections", and its methods include various Internet of Things, wearable devices, smart homes, social networks (Facebook, Instagram), etc. At that time, individuals will become a network node that cannot be separated from the Internet of Everything IoE with the help of physical connections (wireless transmission) and spiritual connections (interpersonal relationships, online communities).

Speaking of the recently buzzing IoV (Internet of Value), it can conceptually cover everything discussed above, because when data, computing power and even currency can be freely transmitted via the Internet, the currency pricing methods that humans have used for thousands of years, from barter to various metal-based methods, will be impacted. But to be honest, I don’t think this will happen in the foreseeable future, because it fundamentally impacts the human political and financial system, and the vested interests will definitely do their utmost to stop it.

Blockchain is a shortcut to IoV. It allows users to transfer ownership in a snap, without the risk of default or manipulation by a third party. It can automate transactions and create a perfect and reliable digital record. Blockchain technology does not require trusted middlemen (such as banks, governments, etc.), and can provide higher integrity, stronger auditing capabilities, and better supervision. Therefore, blockchain technology can be used not only in various financial transactions, but also in various public and private fields such as business contracts, taxation, voting, medical records, digital passports, and the issuance of digital currencies, covering almost every aspect of daily life.

Popular sharing economy platforms, such as Airbnb and Uber, rely on the reputation and quality of service providers to survive. Airbnb has also recruited blockchain experts to fill the loopholes in its trust mechanism, making the evaluation between landlords and tenants more objective and credible. Its block expansion mechanism can even be combined with deep learning to create more sparks.