About Blockchain Technology

Overall View
The block chain consists of ​blocks​ that hold timestamped batches of recent valid transactions.
Each block includes the hash of the prior block, linking the blocks together. The linked blocks
form a ​chain​, with each additional block reinforcing those before it, thus giving the database type
its name.

Blockchain technology can be seen as distributed ledgers, a list of transactions that is shared
among a number of computers, rather than being stored on a central server. Irrespective of the
area it refers to (bitcoin blockchain, digital tokens or smart contracts), it is a data store that has
some common characteristics:

● usually contains ​financial transactions

● is replicated across ​a number of systems​ in almost ​real-time
● usually exists over a ​peer-to-peer​ network
● uses ​cryptography​ and ​digital signatures​ to prove identity, authenticity and enforce
read/write access rights
● can be ​written​ by certain participants
● can be ​read​ by certain participants, maybe a wider audience, and
● has mechanisms to make it ​hard to change historical records​, or at least make it easy to
detect when someone is trying to do so
The Bitcoin Blockchain
It is a complex system, due to the fact that it has two aims:
● anyone should be able to write to The Bitcoin Blockchain;
● there shouldn’t be any centralized power or control
Replicated databases.​ The Bitcoin Blockchain ecosystem acts like a network of ​replicated
databases​, each containing the same list of past bitcoin transactions. Important members of the
network are called validators or nodes which pass around transaction data (payments) and block
data (additions to the ledger). Each validator independently checks the payment and block data
being passed around. There are rules in place to make the network operate as intended.
Bitcoin’s complexity comes from its aims.​ The aim of bitcoin was to be decentralized, i.e. not
have a point of control, and to be relatively anonymous. This has influenced how bitcoin has
developed. Not all blockchain ecosystems need to have the same mechanisms, especially if
participants can be identified and trusted to behave.

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Public vs Private Blockchains
There is a big difference in what technologies you need, depending on whether you allow ​anyone
to write to your blockchain, or known, vetted participants. Bitcoin allows ​anyone​ to write to its
ledger.

Public blockchains. ​Ledgers can be ‘public’ in two senses:

1. Anyone, without permission granted by another authority, can ​write​ data

2. Anyone, without permission granted by another authority, can ​read​ data

Usually, when people talk about ​public​ blockchains, they mean anyone-can-write.

Because bitcoin is designed as a ‘anyone-can-write’ blockchain, where participants aren’t vetted

and can add to the ledger without needing approval, it needs ways of arbitrating discrepancies
(there is no ‘boss’ to decide), and defence mechanisms against attacks (anyone can misbehave
with relative impunity, if there is a financial incentive to do so). These create cost and
complexity to running this blockchain.

Private blockchains.​ Conversely, a ‘private’ blockchain network is where the participants are
known and trusted: for example, an industry group, or a group of companies owned by an
umbrella company. Many of the mechanisms aren’t needed – or rather they are replaced with
legal contracts – “You’ll behave because you’ve signed this piece of paper”. This changes the
technical decisions as to which bricks are used to build the solution.

Data Storage
A blockchain is just a file.​ A blockchain by itself is just a data structure. That is, how data is
logically put together and stored. Other data structures are databases (rows, columns, tables), text
files, comma separated values (csv), images, lists, and so on. You can think of a blockchain
competing most closely with a database. Each block has:

● the contents​ of the block, for example in bitcoin is it the bitcoin transactions, and the
miner incentive reward.
System users create transactions that are passed from node to node on a best-effort basis.
The system implementing the block chain defines a valid transaction. In cryptocurrency
applications, a valid transaction must be digitally signed, spend one or more unspent
outputs of previous transactions, and the sum of transaction outputs must not exceed the
sum of inputs.

● a ”header”​ which contains the data about the block. In bitcoin, the header includes some
technical information about the block, a reference to the previous block, and a fingerprint

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 (hash) of the data contained in this block, among other things. This hash is important for
ordering.
Blocks are created by users known as "miners" who use specialized software or
equipment designed specifically to create blocks.
In a cryptocurrency system, miners are incentivized to create blocks to collect two types
of rewards: a pre-defined per-block award, and fees offered within the transactions
themselves, payable to any miner who successfully confirms the transaction.

Block ordering in a Blockchain

With blockchains, each block references the previous block, not by ‘block number’, but by the
block’s fingerprint, which is cleverer than a page number because the fingerprint itself is
determined by the contents of the block.
Internal consistency.​ By using a fingerprint instead of a timestamp or a numerical sequence,
you also get a nice way of validating the data. In any blockchain, you can generate the block
fingerprints yourself by using some algorithms. If the fingerprints are consistent with the data,
and the fingerprints join up in a chain, then you can be sure that the blockchain is internally
consistent. If anyone wants to meddle with any of the data, they have to regenerate all the
fingerprints from that point forwards and the blockchain will look different.

Data Distribution
How is new data communicated?
Peer to peer is one way of distributing data in a network. Another way is client-server. You may
have heard of peer-to-peer file sharing on the BitTorrent network where files are shared between
users, without a central server controlling the data. This is why BitTorrent has remained resilient
as a network.
Client-server
In the office environment, often data is held on servers, and wherever you log in, you can access
the data. The server holds 100% of the data, and the clients trust that the data is definitive. Most
of the internet is client-server where the website is held on the server, and you are the client
when you access it. This is very efficient, and a traditional model in computing.
Peer-to-peer
In peer-to-peer models, it’s more like a gossip network where each peer has 100% of the data (or
as close to it as possible), and updates are shared around. Peer-to-peer is in some ways less
efficient than client-server, as data is replicated many times; once per machine, and each change
or addition to the data creates a lot of noisy gossip. However each peer is more independent, and
can continue operating to some extent if it loses connectivity to the rest of the network. Also
peer-to-peer networks are more robust, as there is no central server that can be controlled, so
closing down peer-to-peer networks is harder.

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The problems with peer-to-peer
With peer-to-peer models, even if all peers are ‘trusted’, there can be a problem of agreement or
consensus. If each peer is updating at different speeds and have slightly different states, how do
you determine the “real” or “true” state of the data?
Worse, in an ‘untrusted’ peer-to-peer network where you can’t necessarily trust any of the peers,
how do you ensure that the system can’t easily be corrupted by bad peers?
Advantages
The core advantages of the block chain architecture include the following:

● The ability for independent nodes to converge on a consensus of the latest version of a
large data set such as a ledger, even when the nodes are run anonymously, have poor
interconnectivity and have operators who are dishonest or malicious.
● The ability for any well-connected node to determine, with reasonable certainty, whether
a transaction does or does not exist in the data set.
● The ability for any node that creates a transaction to, after a confirmation period,
determine with a reasonable level of certainty whether the transaction is valid, able to
take place and become final (i.e., that no conflicting transactions were confirmed into the
block chain elsewhere that would invalidate the transaction, such as the same currency
units "double-spent" somewhere else).
● A prohibitively high cost to attempt to rewrite or alter transaction history.
● Automated conflict resolution that ensures that conflicting transactions (such as two or
more attempts to spend the same balance in different places) never become part of the
confirmed data set.

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Interest from Banks and other Financial Institutions
Banks and other financial institutions have also been active in investing (time and/or money) in
this space. The following are some of the banks and other FIs who have shown intent on
blockchain. The below timeline depicts the announcements by different FIs and their partners (if
any) along with the potential use cases they are exploring.

Blockchain: The new innovation for financial services

Blockchain has been one of the most awe-inspiring innovations since the Internet came into
existence. Blockchain technology basically allows everyone to hold and make transactions as
strangers but in a completely transparent manner. There is no mediator in between two people

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making the transaction, and the entire process becomes easier and cheaper. This concept can be
applied to the entire digital world making any kind of exchange/transactions secure (and not just
bitcoin).
The blockchain network consists of nodes, i.e., distributed servers. All the nodes can accept and
process the transaction. The nodes on the network share information about the candidate
transaction. As much as the logic/tech part of it sounds confusing, the business models are so
much easier to understand and are really impressive.
What you have already seen is that blockchain distributed ledger is an in-erasable record of
bitcoin transactions. The network of computers around the world running bitcoin software will
take care of the performance and maintenance of the blockchain network. About six times per
hour, a new group of accepted transactions (a block) is created, added to the blockchain and
quickly published to all nodes. This allows bitcoin software to determine when a particular
bitcoin amount has been spent.
It is this feature of Blockchain technology that has grown in its popularity amongst large banks,
developers and entrepreneurs. Santander Bank, the world’s 10th largest bank, has also been
investigating blockchain technology. They have announced that an internal team is working on
applying blockchain technology and distributed ledgers on various use cases in the bank. Other
international banks like Citi and JPMorgan have also been showing interest in Blockchain
technology.
Many startups are building their businesses around blockchain technology. Consequently, VC
firms like KPCB are showing interest in investing in these startups. While startups like
Coinometrics gather data and research on qualitative and quantitative behaviors on blockchains,
there are others like BTCJam who provide bitcoin-based loans. A number of other startups built
around blockchain technology include BlockCypher, BitPay and BitPagos. Another interesting
startup, Chain, helps companies build financial products around blockchain technology with its
bitcoin data API. NASDAQ has chosen Chain to run a pilot around blockchain technology on the
NASDAQ Private Market.
With growing applications of blockchain technology and triggers by VC firms like KPCB Edge
funds, the day is not too far when the blockchain might disrupt the entire FinTech industry.

Bibliography:
https://bitsonblocks.net/2015/09/09/a-gentle-introduction-to-blockchain-technology/
https://en.wikipedia.org/wiki/Block_chain_%28database%29
http://letstalkpayments.com/an-overview-of-blockchain-technology/
http://blogs.wsj.com/cio/2016/02/02/cio-explainer-what-is-blockchain/