Blockchain: Revolutionary Data Technology

Blockchains enable the transparent, secure, and traceable transfer of data to decentralized networks. Although the technology initially attracted attention as the basis for the cryptocurrency Bitcoin, it does also offer many more potential applications. But how does a blockchain actually work and what are the benefits of this technology?

What is a blockchain?

A blockchain is a decentrally organized database that continually registers information and stores it in data blocks. These have a block number. Cryptographic algorithms chain them to each other. Consequently, no one can retroactively modify or delete an established block. This is especially beneficial for digital currencies, known as cryptocurrencies:

Trust with decentralized management

Blockchains are managed by a network of individual computers. If someone wants to make a new entry, such as post a cryptocurrency unit, it has to be checked and validated by a specific number of network nodes. Only then can an entry be made in a new block. This creates trust in the validity of the transactions without the need for a central institution, such as a bank.

What role do blockchains play in Bitcoin mining?

In 2009, Bitcoin was the first known application of blockchain technology. The idea was to create a digital currency that could be traded reliably via a distributed network without the need for an intermediary, such as a bank. A universal, open ledger exists so that no one can chalk up and spend any given number of Bitcoin units they choose. This is the Bitcoin blockchain that contains all account balances and transactions.

Everyone can participate in the network and validate current transactions and contribute to block generation. Since regular updating of the data chain depends on the actions of the individual participants and the available computing power, the participants receive Bitcoins as remuneration. This is also the only way to obtain a cryptocurrency unit without buying it from another participant.

What is mining?

The value of a Bitcoin is calculated from the work required by a computer to keep the network running – this is known as mining.  Bitcoin mining is now carried out by large server farms, which does, however, entail high energy costs. According to a study by Cambridge University, Bitcoin mining currently consumes around as much energy as the whole of Switzerland.

Ecosystem of cryptocurrencies and fintech services

The idea of this decentralized and hence innovative currency spread rapidly. Cryptocurrencies promise unlimited, fast monetary transactions that are not and do not have to be controlled by central banks and countries. The software behind this is open source. This means that the information needed to create your own blockchains is freely available. However, the result of this is that, within a short time, hundreds of new cryptocurrencies have been created, such as Ethereum, Litecoin, Monero, and Ripple. Each has its own advantages and areas of use. In parallel to this, an entire crypto economy with exchanges, mining companies, analysts, and other financial service providers has also evolved. At the same time, there are also disadvantages, such as extremely volatile prices compared to statutory currencies in individual countries.

Blockchains in logistics, the automotive industry, and finance

As well as payment services, other areas also benefit from blockchain technology, such as logistics, the automotive industry, and finance. The focus here is on efficient supply chains, autonomous driving, and faster and secure claim settlement.

Transparency in transport

Major corporations in almost every industry are currently investing in the development of blockchain technologies. The applications are as different as the demands of the individual companies. Logistics processes, such as inventories, supply chains, and audits, are carried out on the decentralized data chains more reliably, faster, cheaper and, above all, more transparently.

Examples:

  • Transparency in refrigeration chains: Perishable goods are given an ID that is signed off on at every handover. In combination with motion, location, and temperature sensors, all the relevant data is stored on the blockchain. That allows the route taken by the product and whether the refrigeration chain has been interrupted to be checked in real time.
  • Transparency with service providers: A reputation system can be set up via a blockchain to ensure the reliability of intermediaries and carriers, for instance. If there are any deficits or irregularities, business partners can view these via shared ledgers and take appropriate action. A shared ledger is a decentralized technology that documents transactions.

In other words, blockchains in logistics ensure fewer obstacles in supply chains and hence greater efficiency.

Smart power grids become even smarter

Developments in the electricity market face major challenges. The growing Internet of Things (IoT) and the increasing number of electric vehicles raise the demand for electricity and efficient load balancing.

To satisfy this demand, old, centralized power grids must be replaced by smart grids. These are infrastructures equipped with software and sensors (smart meters) that measure electricity data in real time and automatically reroute as required. As a result, smaller generators of electricity from renewable energies can make their surplus available to a decentralized grid and be paid for it. It is blockchains that enable such complex energy transactions to be implemented and managed efficiently in the first place.

It would be hard to find a better management structure for distributed charging of electric vehicles than the blockchain. With the logged flow of electricity owners of charging stations could make their electricity available to other vehicles and, by doing so, fund their infrastructure and vehicles.

Autonomous driving on the data chain

Autonomous vehicles need information to be processed instantly so that they can respond to their environment in real time. Central data processing that first routes the environmental data to a server and then back to the vehicle would be too slow.

By contrast, in a decentralized blockchain network all participating vehicles and IoT sensors on the road would communicate with each other directly. This would have the advantage that vehicles not only reach their destination by the fastest route but also know where other vehicles are. This would optimize traffic flows and largely prevent traffic congestion, improving road safety.

Blockchains would also expand possibilities in the area of car sharing. The technology could enable owners of connected, autonomous vehicles not only to transport themselves but also other passengers. Instead of parking the car in the garage, this model offers a simple source of income for the owners, and fewer people would need their own cars and driver’s licenses.

Smart contracts for insurance companies

Insurance companies assume that their customers pay their premiums regularly. Customers, on the other hand, expect their insurance company to settle their claims as quickly as possible. All of this entails considerable administrative effort. Blockchains are able to simplify these processes by entering complex insurance algorithms in smart contracts. Instead of calculating each case individually, smart contracts automate complex claim settlements. That saves time and money for both the insurance companies and the customers. If all insurance companies were able to access the blockchain, this would also make scams, such as double settlements, impossible.

Redesigning the future with blockchains

With the exception of the Internet, there has never been a technology that has been adapted by global players as quickly as the blockchain. Decentralized networks have the potential to fundamentally change industry and the economy. They give the players the opportunity to lower their costs, increase efficiency, and create more transparency. In addition, applications such as smart energy grids and   routing can make a big contribution to the energy transition. Used properly and responsibly by companies, blockchains are a true revolution that can benefit society and the environment.

FAQs:

Stuart Haber and W. Scott Stornetta developed a prototype blockchain in 1991. They were the first to come up with the idea of encrypting documents in data blocks with the help of hash values and timestamps and chaining them to each other. It was not until 2009 that this principle attracted wide interest: The ideas of blockchain and Bitcoin were first mentioned together in the whitepaper ”Bitcoin: A Peer-to-Peer Electronic Cash System”. To date, it is not clear who is behind the author pseudonym Satoshi Nakamoto.

A hash function is a computation process in which a random string is created from a piece of information. This is known as hash value or hash. A hash value is unique and acts as a digital fingerprint. In the blockchain, hashes act as keys against forgeries. Each new block is given a timestamp and is sent by a hash function. The value of this is added to the start of the following block as a check digit. If someone was to subsequently change something on a block, the hash value would also change and hence the entire following data chain. In the Bitcoin blockchain, the miners carry out this writing and control work and thus validate the entire system.

A blockchain stores data aggregated and decentralized in encrypted blocks. In other words, there are as many copies of the same information as there are nodes in the network. You cannot therefore simply delete or retroactively change data on the blockchain.  Accordingly, in the case of currencies, there is no individual Bitcoin file that you can retain. There is just one single accounting file that is continuously updated and distributed. To carry out transactions, you need a Bitcoin address and access data.

A Bitcoin wallet is software with which you can manage your Bitcoin balance. It shows the account balance and enables access to Bitcoin addresses for transactions. Bitcoin or crypto wallets are usually password-protected and come in various formats. There are wallet apps for smartphones and desktop computers in which the information is kept safe. Web services, such as crypto exchanges, offer wallets that are called up within user accounts. Wallets are also available as hardware, such as special secure memory cards. Required access data can also be printed as paper wallets.

Every type of crypto wallet has advantages and disadvantages. For instance, while an online wallet is convenient, the crypto coins are gone if the website server is down or hacked. The same applies if you lose the access data for your personal wallet.

Mining is the computing work required to maintain a blockchain, for example, to create Bitcoins. If a user wants to carry out a transaction, this information has to be written in a new data block of the chain. The miners use hash functions to prevent forgeries within the chain and to check the account balances of the addresses. Since the network is decentralized, one miner is not sufficient for checking the data. The transaction is not written in a new block until it has been validated by a specific number of miners. The person who completes a block receives a certain number of Bitcoins as remuneration for the complex computing process.

Bitcoin miners solve algorithms to write new blocks in the chain. Those who first achieve this for a new block prove that they have carried out the work. They receive a defined number of Bitcoins for this proof of work.

In the initial days of mining, a notebook was sufficient to carry out the computing work. In the meantime, it takes entire server farms with special mining computers (ASICs). These are organized in increasingly larger mining pools, which runs counter to the original idea of decentralization. Because of this, alternatives were developed to secure blockchains – the most well-known is proof of stake.

With proof of stake you receive the right to a new block – and hence a reward – but no longer just through computational work. Instead, those who validate a blockchain can use cryptocurrencies. The more someone deposits in a depot, the more likely they are to be chosen to complete the work. If they do this correctly, they will be credited with a certain amount. If they attempt a fraudulent transaction, which would be quickly discovered by the other validators, they will lose their stake.

An increasing number of objects are becoming smart. In other words, they connect to the Internet. These range from smart home devices like thermostats to items of clothing that are equipped accordingly. However, the current systems, in which devices communicate via the cloud, are at risk of becoming overloaded. Decentralized solutions would ensure that demand for storage and computing power could be distributed among all the devices. This would prevent individual outages or attacks from paralyzing the entire network. Blockchains allow the individual devices to be better connected and, as a result, easier to control and secure.

Smart contracts are digital agreements between two or more parties that come into force automatically once the conditions are fulfilled. A smart contract within a supply chain, for example, could state that the value of a perishable good falls as soon as the container has exceeded a set temperature over a defined period time. Smart contracts could also be useful in the area of mobility. For example, parking lots equipped with sensors could charge fees on their own according to how long they are used by vehicles – without parking attendants or ticket systems.

In the crypto world, the terms coin and token are often used interchangeably. Both are tradable digital units that function via blockchains. Coins function via a blockchain created especially for them. The Bitcoin blockchain, for example, was developed exclusively for commerce with Bitcoins. Tokens, on the other hand, are units that are added to an existing blockchain.

In addition to this technical difference, there are also differences in how they are used: While coins are used mainly as a currency, tokens often have other purposes. For instance, in initial coin offerings (ICO), new blockchain projects often distribute tokens to investors as a stake in the project. Tokens are also used to activate functions of the underlying blockchain, such as usage rights within a decentralized service.

What are the challenges of blockchain technology?

Every decentralized network incurs usage costs – these can be higher than with central networks. In addition to monetary expenditure, generating consensus through proof of work can result in disproportionately high energy consumption.

A decentralized network must keep all participants up to date. As the network becomes larger and the blockchain file longer, there is increased risk that the system will become paralyzed. Previous proposed solutions have had to compromise on security or decentralization.

Operation in blockchain projects, such as mining, is not intuitive. However, this challenge will continue to improve as the technology develops. But, by implication, intuitive solutions are less secure because they can be used by a larger group. In addition, to date they exist primarily only for central networks.

Transparency has advantages and disadvantages. With private blockchains, companies can use their networks to the exclusion of the general public. However, many applications, especially in the field of smart cities and mobility, are tending very much toward the transparent citizen. This demands the creation of a regulatory balance.

Last update: May 2020

Further topics