Blockchain - the future of financial technology?

The words cryptocurrency and blockchain, a few years ago known only to a few, are now found everywhere. In this review article we will examine in detail the principle of the technology, consider the options for its use and outline possible ways of development of the blockchain.
In addition, we will share the experience of companies interested in a deeper study of technology, as well as tell you about the opportunities for developers to participate in the first NEO competition.

Such public attention can be explained by two factors: the high cost of Bitcoin cryptocurrency and the complexity of understanding the essence of the technology. The history of the emergence of the first digital currency and the underlying P2P technology will help us to understand these cryptojungles.

Story

Decentralized network

There are two definitions of the term Blockchain:
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• Replicated distributed database ;
• Continuous sequential chain of blocks containing information.

Both definitions are true in their essence, but do not give an answer to the question of what it is. For a better understanding of the technology, it is necessary to remember which computer network architectures exist and which of them dominates the modern IT systems market.

In total there are two types of architectures:

1. Client-server network;
2. Peer-to-peer (peer-to-peer) network.

Networking in the first way implies a centralized control of everything: applications, data, access. All system logic and information are hidden inside the server, which reduces the performance requirements of client devices and ensures high processing speed. This method has received the most widespread in our days.

Peer-to-peer or decentralized networks do not have a master device, and all participants have equal rights. In this model, each user is not only a consumer, but also becomes a service provider.

An early version of peer-to-peer networks is the USENET distributed messaging system, developed in 1979. The next two decades were marked by the creation of P2P (Peer-to-Peer) - applications in completely different fields. One of the most famous examples is the Napster service, the once-popular peer-to-peer file sharing network, or BOINC , a software platform for distributed computing, as well as the BitTorrent protocol, which is the basis of modern torrent clients.

Systems based on decentralized networks continue to exist, but noticeably lose out to the client-server in the prevalence and compliance with the needs of consumers.

Data storage

The overwhelming majority of applications and systems for normal operation require the ability to operate a data set. There are many ways to organize such work and one of them uses the peer-to-peer method. Distributed, or parallel, databases are distinguished by the fact that information in partial or full composition is stored on each device of the network.

One of the advantages of such a system is the availability of data: there is no single point of failure, as is the case with a database located on a single server. This solution also has certain limitations on the speed of updating data and distributing them among network members. Such a system will not withstand the burden of millions of users who are constantly publishing new information.

The blockchain technology assumes the use of a distributed database of blocks, which are a linked list (each next block contains the identifier of the previous one). Each member of the network keeps a copy of all operations performed for all time. This would not have been possible without certain innovations designed to ensure the safety and availability of the network. This brings us to the blockchain’s last “pillar” - cryptography.

Shifropanki (Cypherpunks)

At the end of the 20th century, a community was born that was interested in the development of anonymity and security online through the development of new cryptographic methods. They believed that the only way to keep online privacy is to encrypt data. The first attempts of cypropanks to develop a digital currency refer to the very beginning of the 2000s.

The first version of the digital currency was created by Wei Dai and received the name b-money . The next attempt was Bit Gold , developed by Nick Sabo. Both currencies had a big drawback - the imperfection of the decision-making system among remote subscribers.

The date of birth of a full-fledged cryptocurrency - Bitcoin, is 2008. It was then that Satoshi Nakamoto, gathered together the workings of like-minded people, laid out in open access a scientific work describing the main elements of the blockchain, the principles of operation and the mathematical model of the network. The author from the very beginning emphasizes the purpose of the work - the creation of a new method of irreversible transfer of funds (transactions) between people without intermediaries.

Blockchain

After studying the main components and the history of the creation of technology, it is time to finally dispel the myth associated with the word “blockchain”. Consider a simple example of digital currency exchange, the principle of operation of the blockchain technology without computers.

Suppose we have a group of 10 people who want to be able to perform currency exchange operations outside the banking system. Consider successively the actions performed by the participants in the system, where the blockchain will be represented by regular sheets of paper:

1. Empty box
Each participant has a box in which he will add sheets with information about all completed transactions in the system.

2. The moment of transaction
Each participant sits with a sheet of paper and a pen and is ready to record all transactions that will be made.

At some point, participant number 2 wants to send 100 rubles to participant number 9.

In order to complete a transaction, Participant No. 2 declares to everyone: “I want to transfer 100 rubles to No. 9, so make a note of this on your sheet.”

After that, everyone checks to see if Participant 2 has a balance sufficient to complete the transaction. If so, everyone makes a note about the transaction on their sheets.
After that, the transaction is considered completed.

3. Execution of transactions
Over time, other participants also need to make exchange operations. Participants continue to announce and record each of the transactions performed. In our example, 10 transactions can be recorded on one sheet, after which it is necessary to put the completed sheet in a box and take a new one.

4. Add sheet to box
The fact of placing a sheet in a box means that all participants agree with the validity of all the operations performed and the impossibility of changing the sheet in the future. This is what ensures the integrity of all transactions between participants who do not trust each other.

The last stage is a general case of solving the problem of the Byzantine generals . In the conditions of interaction of remote participants, some of whom may be intruders, it is necessary to find a winning strategy for all. The process of solving this problem can be viewed through the prism of competitive models.

Competitive models

Under the adversary models is the situation of being among the participants of a malicious group that would like to exploit the vulnerability of double spending (debit for two accounts and the subsequent cancellation of a fair transaction). The following categories of models can be distinguished:

• Threshold models . Stable network operation requires that the number of intruders be less than a certain value (one-half or one-third of all participants).
• Computational threshold models . Satoshi Nakamoto’s model of using the computational power of participants to select the right unit. In relation to the blockchain, such systems are based on the principle of Proof-of-Work (Proof of Work). These include Bitcoin, Ethereum and others.
• Share threshold model . Combining previous ideas, where computing computers are replaced by some object of value. For example, the cryptocurrency itself serves as a pledge object, which the participant uses to confirm the validity of the block. The next generation blockchain uses this method called Proof-of-Stake (Proof of Ownership). A prominent representative of such a model is NEO.

The selected adversary blockchain model determines how to get remuneration for creating a new block. We have already sorted out that the blockchain is a distributed database consisting of blocks. The difficulty of adding new blocks is determined by the adversary model:

• The model of the proof of work uses the computing power of the devices of the network participants. The group of devices that first created the new block receives a reward in the form of cryptocurrency (this is mining).
• The ownership proof model implies the use of user assets as collateral to confirm the integrity of all transactions in the new unit. Remuneration is received by all participants in the amount proportional to the pledged assets.

In a broad sense, the key feature of the blockchain is the elimination of the human factor - responsibility for the reliability of operations falls on the shoulders of mathematics and computers, which are much more reliable.

More information about the principles of the blockchain technology can be found in the article WTF is the Blockchain?

Use cases

The crypto-banks initially pursued the task of creating a cryptocurrency that would not depend on a third party and possess the properties of cash currency in the electronic world: an instantaneous exchange of funds for a product or service. It is for this purpose that the blockchain technology was developed, which allowed to rethink the approach to solving problems in other areas.

Payments

The use of cryptocurrency as a payment instrument was the first use of blockchain technology and became widespread in the black and unregulated markets. The goal of the creators of the first digital currencies was achieved, but for the average consumer this is not the preferred method. Blockchain is by its nature much more convenient for sellers than for buyers:

• the inability to cancel the transaction and get back the money for a defective product or service;
• the only thing that provides security and access to an electronic wallet is a private key, in case of loss of which funds are lost forever .

Smart contracts

The blockchain technology allows you to create distributed applications on a basis, the code of which is executed on the machines of the network participants. The principle of operation of contracts is very simple:

If A happens, execute B.

This allows you to draw up contracts in the form of executable code that will be executed in any case: it is protected from human factors and violations of the rules. Errors in the development of an interpreter of smart contracts can be avoided using open source software.

Data storage

Since the blockchain is in essence a distributed database, you can store any information in it, not just transaction records. This approach will ensure the reliability and availability of information for all network participants at any time. However, in systems of distributed data storage on the blockchain, data is encrypted and distributed between network nodes, which makes the process of changing data very slow and unreliable.

Voting

The principle of eliminating the control device between remote subscribers allows implementing a fair voting model based on the blockchain, where it is impossible to juggle the results.

For example, the Ethereum website has detailed instructions for setting up a distributed autonomous organization based on its network. The resulting distributed application can be used to manage the assets of not only the Ether currency, but also any others.

Applicability of blockchain technology

It is important to understand when the blockchain is really necessary and not to try to use it absolutely in all areas. Although this desire is understandable - the technology itself is incredibly curious and carries great opportunities.

Original photo: dilbert.com/strip/1995-11-17

Many critics of the blockchain say that in 10 years of its existence, no one has invented a killer app - an application that would conquer the market and become universally used. Perhaps such a system using only blockchain will never appear, but its own niche and narrow scope of application will definitely be found.

Development and support by companies

VMware

Many companies are interested in studying and developing blockchain technology. For example, in VMware, an entire research department was created that studies the impact of the blockchain on the field of financial technologies in general. They formed their unique vision, which is based on five points:

• private distributed storage systems without using proof of work (PoW);
• high speed data replication;
• the world of many blockchains, not a single network;
• transaction support with cross-transaction capability;
• built-in membership management, not just authX / authZ.

We strongly recommend that you read the publications of VMware researchers to anyone who wants to learn more about the work of the blockchain and the future of this technology.

In addition, BlockChain on vSphere , a ready-made solution, is available to users of VMware services, which allows you to create your network in a few simple steps.

HyperLedger

In 2015, the Linux Foundation group founded an umbrella open source software project for the blockchain and related tools - HyperLedger , which is designed to support the joint development of distributed registry technologies based on the blockchain.

The HyperLedger project also has its own research center , which accumulates the experience of many companies: from the consulting and financial sector to the IT giants.

NEO

NEO is an open blockchain for smart economy. The creators aim to develop an ecosystem of smart contracts based on their network.

At the core of NEO is a proof-of-ownership model (Proof-of-Stake), which makes it possible to achieve up to 10,000 operations per second. NeoGPS cryptocurrency is used as a deposit, and NeoGas is used to pay transaction fees, which is created when new units are received and distributed among Neo owners.

Competition

At the moment, the NEO Developer Contest is being held with a prize pool of $ 490,000 in partnership with Microsoft. Participants are invited to submit a prototype of the application using the capabilities of smart contracts NEO.

Separately, it is worth noting the presence of support for several programming languages ​​(C #, Python, Java), which allows you to use the blockchain capabilities in existing systems and not waste time learning a new language.

Based on Neo, you can implement your private blockchain . The creator of the network immediately gets 100 million Neo at his disposal and can use them as a currency for applications or other purposes. For maintenance and initial launch of the network, a minimum of 4 machines are required, which can be created in one private cloud .

Future

In the field of financial instruments, Bitcoin, being the first mass cryptocurrency, has certainly shown how to play by the new rules without intermediaries and controls from above. However, perhaps even more important result of the emergence of Bitcoin was the creation of blockchain technology.

As we discussed above, the blockchain, by its very nature, is not an answer to the solution of all problems; therefore, the majority of newly-established companies introducing this technology will most likely disappear in the near future. But blockchain, as a technology, allows organizing the interaction of remote participants without a controlling authority and, where it will be in demand, the technology will find application.