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Blockchain
A system that enables the recording of digital transactions packaged into blocks that form a sequence in a peer-to-peer network.
A type of disruptive technology.
All participants can view the blocks = distributed ledger.
No intermediaries in a transaction = peer-to-peer.
All transactions are approved by consensus.
Example 🡲 Bitcoin.
What are the characteristics of general blockchain?
Multi-party collaboration system.
Improves trust between participants using multiple verification points.
Verifies who did a transaction and when it was done.
Prevents double-counting of assets.
Transparent with network participants.
Nodes
A computer, laptop, or server of a participant in the network chooses to store, distribute, and update the blockchain data as a miner.
All nodes are always up-to-date 🡲 constantly communicate to exchange the latest blockchain ledgers.
Each one has an identical copy of the ledger.
Verifies each transaction using its hash 🡲 prevents changing previous blocks.
Miner
A person who uses their computer power (nodes) to create the ledgers of transactions in chained blocks by solving mathematical encryption puzzles to secure transactions.
Use their own computers to verify and add transactions to the blockchain.
How does a blockchain transaction occur?
Someone requests a transaction.
The transaction is broadcasted to a P2P network with nodes.
The nodes validate the transaction and user permissions.
Once verified, the transaction is combined with other ones to create a new data block.
The block is added to the existing blockchain in a permanent way.
The transaction is complete.
Cryptocurrency
A type of digital currency that has NO intrinsic value and NO physical form so it cannot be redeemed for other goods.
Has a decentralized network.
Example 🡲 Bitcoin is a type of cryptocurrency.
Wallet Applications
An application that allows blockchain participants to broadcast and receive transactions using smart contracts.
Smart Contracts
A computer program/code that acts as an intermediary to create, execute, and settle contracts automatically under certain conditions.
Translates all contractual terms into logic to reduce ambiguity.
Example 🡲 Ethereum, first platform to introduce these contracts.
What are the advantages of smart contracts?
Accelerate business processes 🡲 automate contract processing.
Reduce operational error 🡲 no human intervention to monitor & enforce contracts.
Improve cost efficiency 🡲 reduce settlement times.
What are the 2 underlying technologies of blockchain?
Cryptology - encryption, decryption.
Ledgers - centralized, decentralized, distributed.
Cryptology
The science of using a secret code for secure data communication where both parties might be completely anonymous.
Encryption.
Decryption.
Encryption
The process of using an algorithm to encode a plaintext message and converting it into ciphertext so that it can be transmitted confidentially across a network.
Decryption
The process of converting an encrypted message to its original so the receipt can read it, given a secret key that the authorized user owns.
What is the process of transmitting a message using encryption and decryption?
The sender who wishes to send a plaintext message.
Public key = Anyone who wishes to send a secure message can use it.
Private key = Only allows certain people to decrypt a message, helps prove sender’s identity.
The message is encrypted using a key, converting into ciphertext.
The ciphertext is then decrypted using another symmetrical private key.
The receiver can read the plaintext message, such as securely signing and transferring bitcoin to another person.
Centralized Ledger
A system where participants (nodes) have access to a central ledger that serves as a foundation for financial accounting and is the central repository for all transactions.
Requires trusted intermediaries 🡲 verify transactions & ensure validity.
Example 🡲 the general ledger.
Decentralized Ledger
A system where groups of users have access to hubs with copies of the same ledgers, requiring consensus to validate transactions.
No trusted intermediaries or central authorities for transactions.
Distributed Ledger
A system where all participants (nodes) receive an identical electronic copy of the ledger, which is distributed via networks of nodes.
A transaction added to the ledger can be viewed by all participants in the network.
All transactions are read-only 🡲 permanent and unalterable when added.
Example 🡲 Blockchain, uses encryption to prevent fraud.
Bitcoin
The first cryptocurrency that has been the most successful case of blockchain technology.
Provides proof of concept for blockchain 🡲 “proof of work”
Validates transactions with transparency and decentralization.
Proof of Work
A proven consensus protocol that replaces third-party intermediaries in a blockchain network to eliminate reliance on them for approval or entering transactions.
Bitcoin Blockchain
A type of blockchain where miners compete to solve the equation first and successfully add a block to the chain, receiving part of the bitcoin as a reward.
Uses a public network.
What are the 3 fundamental principles of blockchain?
Decentralization.
Immutability.
Transparency.
Principle of Decentralization
Eliminates the need for intermediaries or central authorities to process, validate, or authenticate transactions.
Leads to transparency and immutability.
Principle of Immutability
Provides blockchain users assurance that their assets and information are secure based on proof od work that secures it through powerful computer computations.
Principle of Transparency
Ensures that the most accurate and recent record of transactions are arranged in blocks only after they are approved by consensus from network participants.
What is the biggest risk to a blockchain system?
The biggest risk is the possibility that a single entity or malicious colluding party will gain control of more than 50% of the network’s computing power, creating monopoly over consensus.
As network size increases, the risks are decreased 🡲 harder to gain consensus when there are more participants.
Public Blockchain
A network that is open to all without restrictions to access or leave the network, making all transactions open to the public.
Users can remain anonymous.
Anyone with internet access can verify transactions and set themselves up as nodes.
What are the characteristics of public blockchain?
Decentralizes power since no single entity has control.
Has full transparency of transactions.
Faster, more secure systems.
Less expensive than traditional systems.
Private Blockchain
A network where a single entity (the business) controls the network and predetermines the nodes and includes an intermediary.
Users must have permission to join.
User identity is known.
Ideal for maintaining privacy while replacing traditional blockchain.
What are the characteristics of private blockchain?
Users enter & validate transactions by consensus 🡲 more efficient and speedy.
Has different levels of access and encryption for confidentiality.
Miners have NO economic incentive to validate transactions with proof of work.
Only entities participating in transactions have knowledge of it.
Consortium Private Blockchain
An association of companies that collaborate and leverage information to improve workflow, accountability, and transparency.
Has select groups of users who can control the network & set rules.
Each group operates and node to validate by consensus.
More complex permissions than private systems.
Hybrid Blockchain
A network that allows participants in public and private networks to communicate and enables transactions between them.
How does blockchain impact accounting functions?
Eliminates need for trusted intermediaries 🡲 i.e. independent auditors, banks, government, etc.
Automates processes for transparency & immutability without violating regulations 🡲 reduce need for external auditors.
What are the advantages of blockchain?
Data integrity 🡲 immutable, cannot be changed or deleted.
Data retention 🡲 nodes can backup an entire ledger with multiple copies, can be readily accessed.
Data validity 🡲 miners use majority consensus to verify transactions, no single party controls the chain.
Data transparency 🡲 widely distributed, parties can directly communicate with a single ledger and no intermediary.
Data security 🡲 many participants must collude for fraud.
Consensus Algorithm
A mechanism designed to check that a transaction is valid through nodes communicating by combining multiple transactions into a single block before being added to the ledger.
Each block is linked to the previous ones.
No participants can alter blocks added to the chain.
Permissionless (Public) Blockchain
A classification of blockchain that is shared publicly with anyone who has access to the internet, allowing users to join by downloading software and ledger.
Includes bitcoin.
What are the limitations of public blockchain?
Transaction volume and size are set to the best available at the time of creation 🡲 can become outdated and slow processing.
Transaction history for all users is available to anyone 🡲 privacy risk.
Permissioned (Private) Blockchain
A classification of blockchain that is shared only with certain participants who have permissions from agreed-upon administrators.
Often created by a consortium of parties that collectively benefit.
More likely to be adopted.
What areas is blockchain likely to have the biggest impact?
Transferring assets is hard to manage.
Transferring assets is expensive.
Transferring assets requires more than one centralized organization.
What are the 5 areas where blockchain technology benefits are high?
Financial services.
Consumer/Industrial products.
Life sciences & healthcare.
Public sector/government.
Energy resources.
What are the risks of blockchain replacing auditors?
Can still have unauthorized, fraudulent, or illegal transactions.
Can be executed between related parties.
Can be linked to “off-chain” side agreements.
Can be incorrectly classified in financial statements 🡲 values are estimated costs, not historical values.
What are the limitations of blockchain?
Volume and size capacity is limited to transactions that are less than 900 bytes 🡲 proof of concepts cannot work with more data.
Can NOT delete transactions, preventing correction or modification of errors.
All information is available to anyone with access to the blockchain.
Scalability issues can make searching the chain time-consuming.
Lack of industry standards.
Can NOT alter chain for technological advancements.
What are the challenges of blockchain?
Technical details are important so it can be difficult to understand what impacts sustainability.
Designed to meet the specific needs of cryptocurrency but other proposed uses significantly differ from bitcoin & crypto.
Regulatory and legal issues make physical transfers NOT guaranteed.
What are the key factors for successful mass adoption of blockchain?
Widespread understanding of its function and benefits.
Maturity of blockchain technology, compatibility, and standardization.
Integration with legacy systems.
Regulatory and legal frameworks on where to use it.
Increasing number of participants to streamline implementation.
Overcoming decentralized technology challenges.
Hashing
The process of taking a message of any length and mathematically transforming it into a digital hash of shorter and fixed length of 64 digits.
Irreversible.
Has 2^256 possible hashes.
Makes collusion unlikely.
NO shortcut to obtaining hashes.
Hash String
A part of encryption that is created using an algorithm to ensure that third parties can NOT access records, ensuring that all unmodified records have a string.
