Blockchain Term Paper

  • Length: 13 pages
  • Sources: 13
  • Subject: Technology
  • Type: Term Paper
  • Paper: #45547792

Excerpt from Term Paper :

Introduction



One of the most talked-about emerging technologies is the blockchain. Originally developed for Bitcoin, blockchain shows a tremendous amount of promise in terms of reducing certain types of friction, especially in business (Marr, 2018). Over the past couple of years, blockchain has been unpacked from cryptocurrency and a wealth of applications using the technology are in development. Many observers predict that blockchain technology will revolutionize a wide range of businesses (Marr, 2018).



What is Blockchain?



The heart of blockchain is the concept of the distributed ledger. The original idea behind Bitcoin was to develop a peer-to-peer currency, in the sense that a store of value and unit of exchange could be created without the intermediary of a central bank. The value of this currency would be determined by the forces of supply and demand, based strictly on its users, without the influence of interest rates and other monetary policy tools that are used by central banks to influence the value of their currencies. The way to resolve the issue of trust that naturally arises from a lack of a central bank, or any underlying asset, is the concept of the distributed ledger.



The value of Bitcoin could not be established on a peer-to-peer basis. The counterparties, even if known to each other, would have no legal basis for establishing that value, and in any case there would be not dispute resolution mechanism between them. The distributed ledger concept was developed to work around this problem. A distributed ledger is where all of the participants in the blockchain have copies of a transaction. Trust is based, therefore, on having a large number of records of any given transaction. These records are immutable, and the distributed nature means that there is a large number of people who can define the value of the transaction. This enforces honesty – it is very difficult to challenge the value and terms of a transaction when there are hundreds of people who have access to it.



Trust is therefore developed on the principle that counterparties are not to be trusted. Consider how this works for a blockchain contract. The contract will be recorded by dozens or more members of the blockchain. In a normal, paper contract the counterparties sign the contract, but those copies are the only public record. If there is a dispute, the original document is taken along with the nature of the dispute to court, and resolved through interpreting the meaning of the contract and whether the conditions have been fulfilled. In blockchain, it is understood that the counterparties cannot trust each other, but there are hundreds of others who have access to that same contract. There can be no dispute, in theory, about what the contract contains. This is obviously an oversimplification of how blockchain contracts would work, but it shows the potential of the technology to perform everyday functional business tasks in a complete different way, basically crowdsourcing trust.



What are the Benefits of Blockchain?



The reason that blockchain technology holds so much promise in business is because it offers certain benefits that are of interest to those in the business community. The three main ones are transparency, immutability and efficiency. The argument that blockchain is more transparent than other technologies relates to the public nature of the transaction. While the identities of the participants are hidden behind cryptography, the transaction itself is not. The idea is that a participant's transaction history is visible, so that a counterparty can view this history prior to entering into the transaction. Identity may not be known, but transaction history is, and that creates transparency that often does not exist outside of blockchain (Lisk, 2018). This transparency has been touted as especially valuable in supply chain applications, in that when goods move through the supply chain, the buyer can see the entire history of those goods, and know that the quality and authenticity of those goods has been verified at each step. Some benefits are a reduction in counterfeit goods, higher levels of quality assurance even in complex supply chains, and lower legal risk because of the transparency and immutability of the information (Lisk, 2018).



The immutability factor is also one of the benefits of the blockchain. The
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distributed nature of the ledger means that there are multiple records of any given transaction, and these are accessed. If someone wants to change a transaction after the fact, they would have to change all of the records of that transaction. Hacking one or two might be possible, but hacking all of the records, in order to create a false record, is much more difficult. This is why blockchain is considered to be immutable – cryptography makes altering completed transactions nearly impossible (Comben, 2018).



The immutability question, however, has been raised. While blockchains are touted as being immutable, the consensus nature of a blockchain means that 51% attacks occur – where only 51% of the records need to be altered in order for the false transaction to become the accepted one within the blockchain by virtue of simple majority (Comben, 2018). Another means of altering transactions in a blockchain is forking, where the blockchain agrees to rewrite history, as occurred when Ethereum was hacked and the entire blockchain re-written to omit the hack. If a majority of participants in a blockchain agree to forking, then the altered transaction will be allowed, again illustrating that the immutability of blockchain is more conceptual than actual. The point about immutability is that blockchain may not be 100% immutable, but that it is a significant improvement over existing ledgers, which often are bilateral, and relatively insecure.



The final benefit touted for blockchain is the efficiency. This is rather illusory. The reason blockchains are deemed to be efficient is that the distributed ledger system cuts out the middleman in transactions. The role of the middleman is often related to facilitating a transaction between two parties, and for this there is a fee. Blockchains rely on a different system of trust, and many transactions that rely on a middleman no longer require that intermediary. Thus, the counterparties save money on transaction fees, commissions or other mechanisms by which the middleman gets paid.



The problem of course, is obvious. There might not be transaction costs in the sense of fees and commissions for recording blockchain transactions, but there are costs. Those costs – notably the use of power to record a transaction hundreds more times than it usually would be recorded – are offloaded onto power grids, public utilities and the people participating in the blockchain. This inefficiency is a negative externality that allows blockchains to have the appearance of efficiency but actually means that they are less efficient (Miller, 2018). That said, this is a known issue in the blockchain community, and there are many companies working to resolve the efficiency problem (Miller, 2018; Zhao, 2018). If the energy consumption issue can be resolved, the transactional efficiency afforded by blockchain will be tapped more effectively.



Consensus



The consensus nature of blockchains means that the rules governing each blockchain are established according to the participants in the blockchain. This was most in evidence when Ethereum re-wrote history after the hack, as the participants decided that the platform would be better if that dispute resolution mechanism was utilized. The consensus must also be established between the different participants, even though the identities of those participants is not known. This may give rise to interesting situations where the consensus view is not aligned with being a good idea, but nevertheless many participants prefer the consensus attribute to the singular authority that many legal systems have. Right and wrong can be defined by the members of the blockchain.



This actually has tremendous advantage in countries where legal mechanisms are either difficult to access or cannot be trusted. There are also countries with relatively trustworthy legal systems that just happen to be very slow and expensive. The consensus nature of any transaction on a blockchain means that participants, for example in a supply chain contract, do not need to rely on determining legal jurisdiction in a dispute, nor about the costs of dispute resolution through a single court system. The blockchain serves as evidence of a contract and disputes go on the record of the participant.



Smart Contracts



One of the most promising uses for blockchain technology is the smart contract. Smart contracts are a way of utilizing a blockchain to cut out the intermediaries in a contract, such as lawyers (Rosic, 2016). Smart contracts are standardized forms of contracts. Once signed, the contracts are stored on the blockchain as a means of making them official and binding, through the consensus mechanisms. The contract can determine for example, when…

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