What is the Blockchain and how it work.

Blockchain

Blockchain is a decentralized transaction and data management technology developed first for Bitcoin cryptocurrency. The interest in Blockchain technology has been increasing since the idea was coined in 2008.

The reason for the interest in Blockchain is its central attributes that provide security, anonymity and data integrity without any third party organization in control of the transactions, and therefore it creates interesting research areas, especially from the perspective of technical challenges and limitations. Many other Blockchain scalability related challenges including throughput and latency.

Introduction to Blockchain and Cryptocurrency

Currency transactions between persons or companies are often centralized and controlled by a third party organization. Making a digital payment or currency transfer requires a bank or credit card provider as a middleman to complete the transaction.

In addition, a transaction causes a fee from a bank or a credit card company. The same process applies also in several other domains, such as games, music, software etc. The transaction system is typically centralized, and all data and information are controlled and managed by a third party organization, rather than the two principal entities involved in the transaction.

Blockchain technology has been developed to solve this issue. The goal of Blockchain technology is to create a decentralized environment where no third party is in control of the transactions and data.

Blockchain is a distributed database solution that maintains a continuously growing list of data records that are confirmed by the nodes participating in it. The data is recorded in a public ledger, including information of every transaction ever completed.

The real value of bitcoin and crypto currency technology - The Blockchain explained

Blockchain is a decentralized solution which does not require any third party organization in the middle. The information about every transaction ever completed in Blockchain is shared and available to all nodes.

The real value of bitcoin and crypto currency technology - The Blockchain explained

This attribute makes the system more transparent than centralized transactions involving a third party. In addition, the nodes in Blockchain are all anonymous, which makes it more secure for other nodes to confirm the transactions.

Bitcoin was the first application that introduced Blockchain technology. Bitcoin created a decentralized environment for cryptocurrency, where the participants can buy and exchange goods with digital money.

However, even though Blockchain seems to be a suitable solution for conducting transactions by using cryptocurrencies, it has still some technical challenges and limitations that need to be studied and addressed.

High integrity of transactions and security, as well as privacy of nodes are needed to prevent attacks and attempts to disturb transactions in Blockchain.

In addition, confirming transactions in the Blockchain requires a computational power.

It is important to identify what topics have been already studied and addressed in Blockchain and what are currently the biggest challenges and limitations that need further studies.

Blockchain Background

Blockchain, mostly known as the technology running the Bitcoin cryptocurrency, is a public ledger system maintaining the integrity of transaction data . Blockchain technology was first used when the Bitcoin cryptocurrency was introduced.

To this day, Bitcoin is still the most commonly used application using Blockchain technology.

Bitcoin is a decentralized digital currency payment system that consists of a public transaction ledger called Blockchain . The essential feature of Bitcoin is the maintainability of the value of the currency without any organization or governmental administration in control. The number of transfers and users in the Bitcoin network is constantly increasing .

In addition, the conversions with traditional currencies, e.g. KRW, EUR and USD, occur constantly in currency exchange markets . Bitcoin has therefore gained the attention of various communities and is currently the most successful digital currency using Blockchain technology.

Bitcoin uses the public key infrastructure (PKI) mechanism. In PKI, the user has one pair of public and private keys. The public key is used in the address of the user Bitcoin wallet, and the private key is for the authentication of the user.

The transaction of Bitcoin consists of the public key of the sender, multiple public keys of the receiver, and the value transferred. In about ten minutes, the transaction will be written in a block. This new block is then linked to a previously written block.

All blocks, including information about every transaction made, are stored in the disk storage of the users, called nodes. All the nodes store information about all recorded transactions of the Bitcoin network and check the correctness of each new transaction made by using previous blocks.

The nodes are rewarded by checking the correctness of transactions. This method is called mining, and it is confirmed with Proof-of-Work, which is one of the main concepts of Blockchain technology.

When all transactions are successfully confirmed, a consensus exists between all the nodes. The new blocks are linked to previous blocks and all the blocks are aligned in one continuous chain. This chain of blocks is the public ledger technique of Bitcoin, called Blockchain.

Blockchain is the decentralized managing technique of Bitcoin, designed for issuing and transferring money for the users of the Bitcoin currency. This technique can support the public ledger of all Bitcoin transactions that have ever been executed, without any control of a third party organization. The advantage of Blockchain is that the public ledger cannot be modified or deleted after the data has been approved by all nodes.

This is why Blockchain is well-known of its data integrity and security characteristics. Blockchain technology can also be applied to other types of uses. It can for example create an environment for digital contracts and peer-to-peer data sharing in a cloud service.

The strong point of Blockchain technique, data integrity, is the reason why its use extends also to other services and applications.

Blockchain technology has also some technical challenges and limitations that have been identified. Swan, presents seven technical challenges and limitations for the adaptation of Blockchain technology in the future:

Throughput: The potential throughput of issues in the Bitcoin network is currently maximized to 7tps (transactions per second). Other transaction processing networks are VISA (2,000tps) and Twitter (5,000tps). When the frequency of transactions in Blockchain increases to similar levels, the throughput of the Blockchain network needs to be improved.

Latency: To create sufficient security for a Bitcoin transaction block, it takes currently roughly 10 minutes to complete one transaction. To achieve efficiency in security, more time has to be spent on a block, because it has to outweigh the cost of double spending attacks. Double-spending is the result of successful spending of money more than once. Bitcoin protects against double spending by verifying each transaction added to the block chain, to ensure that the inputs for the transaction have not been spent previously. 

This makes latency a big issue in Blockchain currently. Making a block and confirming the transaction should happen in seconds, while maintaining security. To complete a transaction e.g. in VISA takes only a few seconds, which is a huge advantage compared to Blockchain.Size and bandwidth: At the moment, the size of a Blockchain in the Bitcoin network is over 50,000MB.

When the throughput increases to the levels of VISA, Blockchain could grow 214PB in each year.

The Bitcoin community assumes that the size of one block is 1MB, and a block is created every ten minutes . Therefore, there is a limitation in the number of transactions that can be handled (on average 500 transaction in one block). If the Blockchain needs to control more transactions, the size and bandwidth issues have to be solved.

Security: The current Blockchain has a possibility of a 51% attack. In a 51% attack a single entity would have full control of the majority of the network’s mining hash-rate and would be able to manipulate Blockchain. To overcome this issue, more research on security is necessary.

Wasted resources: Mining Bitcoin wastes huge amounts of energy ($15million/day). The waste in Bitcoin is caused by the Proof-of-Work effort. There are some alternatives in industry fields, such as proof-of-stake. With Proof-of-Work, the probability of mining a block depends on the work done by the miner.

However, in Proof-of-Stake, the resource that is compared is the amount of Bitcoin a miner holds. For example, someone holding 1% of the Bitcoin can mine 1% of the “Proof-of-Stake blocks”. The issue with wasted resources needs to be solved to have more efficient mining in Blockchain.

Usability: The Bitcoin API for developing services is difficult to use. There is a need to develop a more developer-friendly API for Blockchain. This could resemble REST APIs.

Versioning:  Hard forks, multiple chains: A small chain that consists of a small number of nodes has a higher possibility of a 51% attack. Another issue emerges when chains are split for administrative or versioning purposes.

Overall, Blockchain as a technology has the potential to change the way how transactions are conducted in everyday life. In addition, the applications of Blockchain are not limited to cryptocurrencies, but the technology could be possibly applied in various environments where some forms of transactions are done.

The research on the possibilities of Blockchain in applications is certainly an interesting area for future research, but at the moment Blockchain suffers from technical limitations and challenges. Anonymity, data integrity and security attributes set a lot of interesting challenges and questions that need to be solved and assessed with high quality research.

Scalability is also an issue that needs to be solved for future needs. Therefore, to identify and understand the current status of research conducted on Blockchain, it is important to gather all relevant research. It is then possible to evaluate what challenges and questions have been tackled and answered, and what are the most problematic issues in Blockchain at the moment.

Blockchain Security

Security is the one of the major issues  and limitations in Blockchain and Bitcoin security. We identified various topics in security, including trends and impacts of security incidents, 51% attack, data malleability problems, and authentication and cryptography issues.

Trends and impacts of security incidents: With the increasing use of Bitcoin as a way to conduct payments and transfers, security incidents and their impact on the economic losses of Bitcoin users have increased.

Some of the identified  security incidents that had occurred in the Bitcoin network, such as economic losses by several Bitcoin scams and distributed denial-of-service (DDoS) attacks on exchanges and mining pools.

Four types of Bitcoin scams (Ponzi scams, mining scams, scam wallet and fraudulent exchanges).

Some security countermeasures for individual users and safe Bitcoin transactions (e.g. a hardware wallet and a hardware authentication device). 

The most targeted service category was the use of anti-DDoS protection, influencing factors such as the mining pool size. The most often targeted service are currency exchange,  followed by mining pools and DDoS attacks had anti-DDoS protection.

Throughput: The potential throughput of issues in the Bitcoin network is currently maximized to 7tps (transactions per second). Other transaction processing networks are VISA (2,000tps) and Twitter (5,000tps). When the frequency of transactions in Blockchain increases to similar levels, the throughput of the Blockchain network needs to be improved.

51% Attack: The Blockchain mechanism is designed with the assumption that honest nodes control the network. If attacker nodes collectively control more computational power than the good ones, the network is vulnerable to the so called 51% Attack.

Bitcoin itself is designed as a fully decentralized network, market-based centralization of mining power by a few large mining pools increase the risk of a 51% Attack.

The centralization factor of Bitcoin has been continuously increasing In this context, 0 means purely decentralized and 1 means fully centralized.

Propose applications built on the core of the Bitcoin protocol focusing on the Byzantine agreement (BA), which is the fundamental scientific problem for decentralized transaction agreement in the Bitcoin network.

The suggested application presents a simple BA protocol with the assumption that the adversary’s hashing power is bounded by 1/3. A Selfish Mine attack where colluding miners obtain a revenue larger than a fair share by keeping their discovered blocks private.

The more recent Blockchain-based systems, such as Ethereum, allow users to specify scripts in transactions and contracts to support applications beyond simple cash transactions.

In this case, the required computational resources for verification could be larger, depending on the user-specified script size. present a security attack called the versifier's dilemma, which drives rational miners to skip verification where the verifying transactions require significant computational resources in Bitcoin and especially in Ethereum.

A consensus model to give incentives to miners by limiting the amount of work required to verify a block. How to support security and privacy in the Ripple system, which is one of the consensus-based distributed payment protocols.

The basic difference between the protocol of Ripple and Bitcoin-focused Blockchain fork. A fork can occur if two conflicting ledgers get a clear majority of votes, and could lead to double spending attacks, the propagation delay in the Bitcoin network is the primary cause for Blockchain forks and inconsistencies among replicas, which was done by analyzing Blockchain synchronization mechanism.

Data malleability problems: Data integrity is an essential issue in the Blockchain environment. It is necessary that when data gets sent and verified, it has not been altered or tampered with.  Data integrity that studied malleability attacks in Blockchain. Malleability describes the fact that the signatures that prove the ownership of Bitcoin being transferred in a transaction do not provide any integrity guarantee for the signatures themselves.

Therefore, in a malleability attack an attacker intercepts, modifies, and rebroadcasts a transaction, causing the transaction issuer to believe that the original transaction was not confirmed.

malleability attack caused incorrect balance computing, application crashes, and a deadlock which stopped new transactions in several well-known Bitcoin wallets.

A deposit protocol with a timed commitment scheme to enable a malleability-resilient refund transaction as a solution to the malleability problem.

Authentication and cryptography issues: In Bitcoin, the private key is the major authentication element. Authentication in cryptocurrency controls self-certification.

There are  a number of issues in the Bitcoin authentication process. Bitcoin hardware token, the Bluewallet. The device communicates by using Bluetooth Low Energy, and is able to secure and sign Bitcoin transactions. A propose a certification system for Bitcoin that offers an opt-in guarantee to send and receive Bitcoins only to/ from certified users, and control of the creation of Bitcoins addresses by trusted authorities.

These approach improves the trustworthiness of real-world entities into the system, which mitigates the existing reservations to the adoption of Bitcoin as a legitimate currency.

Two factor authentication for a Bitcoin wallet. The used of a smart phone as the second authentication factor. The solution can be used with hardware already available to most users, and the user experience/interface has similarities to the existing online banking authentication methods.

Wasted Resources

The energy efficiency problem is not handled in the computer engineering field at the moment. However, in special domains like mobile cloud computing, it might be one of the major issues in the future.

Mining Bitcoins requires a high amount of energy to compute and verify transactions securely and with trustworthiness. However, for the efficiency of mining and Proof-of-Work, it is important to decrease the amount of wasted resources.

We identified some papers related to the wasted resource problems in Bitcoin. The evolution of Bitcoin miners in terms of volume of solo and pool miners and their productivity.

In the early stages, the computation power was evenly distributed among the solo miners. As the Bitcoin network evolved, the computation power of some pool miners increased.

Miners play a zero-sum-computation race game: each miner increases their computation power, and then the total computation power in the network increases; consequently the system increases the difficulty value to maintain a steady Bitcoin creation speed, which in turn reduces the Bitcoin mining rate of individual miners.

Proposed solutions for the wasted resources problem in Blockchain and Bitcoin. is an economic model for getting high economic returns in consideration of the use of mining hardware with high computation-over-power efficiency and electricity price.

The new scheme can lead to an energy-efficient Bitcoin. By modified the present block header by introducing some extra bytes to utilize the timestamp more effectively. The suggested scheme uses less computing power, and thus the mining is more environment-friendly. 

Proposes methods of achieving contextually higher speeds of Bitcoin mining, involving simultaneous usage of CPUs and GPUs in individual machines in mining pools.

The results show how standard hardware miners in large mining pools could quite significantly add to the overall hash rate.  The describe the architecture and implementation details of a CoinTerras first-generation Bitcoin mining processor, Goldstrike 1, and how this processor was used to design a Bitcoin mining machine called Terraminer IV, especially about how high power density issues were solved and energy efficiency increased.

Usability

The original definition of the challenges and limitations in the usability of Blockchain describes Bitcoin API as hard and difficult to use. This definition can be viewed mainly from the developer’s perspective, where Bitcoin API is hard to implement and use in and with other services and applications.

An important factor in Blockchain usability from the user’s perspective is the ability to analyze Blockchain. In Blockchain, new blocks are created constantly and confirmed by miners, which creates an interesting environment of transaction flows. It is therefore essential to have supporting tools to help users analyze the whole Blockchain network to improve the usability.

We found applications that had been developed for this purpose. BitConeView  is a system for the visual analysis of Bitcoin flows in Blockchain. Blockchain clusters addresses that are likely to belong to the same user or group of users, classifies such users and labels them, and finally visualizes the complex information extracted from the Bitcoin network.

Both these systems were tested successfully with experiments and cases, and showed effectiveness in analyzing and detecting patterns in the Bitcoin network. These systems can help also in improving security and privacy -related issues.

Bankruptcy and the closure of Bitcoin exchanges can cause economical damage to the customers  propose an audit software to improve usability in Bitcoin exchanges. The goal of the software is to prove the exchange participants’ solvency without publishing important information.

Privacy

In a Blockchain network, a distributed consensus network without a trusted party, all the transactions are transparent and announced to the public. Therefore, privacy in Blockchain is maintained by breaking the flow of information. The public can see all transactions, but without information linking the transaction to identities. 

A framework of anonymity focusing on the ownership of the coin. There are also studies that show experimental evidence on the lack of anonymity in the Bitcoin network.   To analyzed a traffic pattern in Bitcoin and conclude that some subset of Bitcoin addresses can be mapped to an IP address simply by observing the transaction relay traffic.

Smart contracts, new cryptocurrencies, botnet, broadcast protocol, trustworthiness.

A smart contract is a solution that utilizes Blockchain technology to create contracts between two or more participants. Similarly to the use of Bitcoin Blockchain, smart contracts are done in a decentralized environment, where contract terms are executed by the Blockchain system when the terms are fulfilled.

A decentralized smart contract protocol  and that validated the feasibility of the protocol based on the protocols of Bitcoin. The approach is a combination of the game theory and formal models.

 An electronic signing protocol between two parties using the Bitcoin network as a way of providing a time-stamping service. In addition, smart contracts can be possibly used in various environments and industries for different purposes.

For example,  a Blockchain-based digital content distribution system and show a prototype of the concept. The idea was presented to one hundred people including creators, content owners and digital content stake holders.

The feedback showed that the most impressive point was the decentralized mechanism for Digital Right Management. However, the proposed system has no incentive mechanism for mining calculation, which can make it a challenge to adopt at the moment.

Even though Bitcoin is the most famous and commonly used cryptocurrency adopting Blockchain technology, there has also been research on developing other cryptocurrencies.

Blockchain for Botnet networks, a P2P broadcast protocol, and a trustworthiness improvement.  Zombiecoin, which runs in Bitcoin networks and offers a Botnet C&C (command-and-control) mechanism. Botnet networks include a number of computers communicating in an effort to compute representative tasks. However, the weak point for botnet is the C&C infrastructure.

The Bitcoin transaction can be used as a communication vehicle.   Peer-to-peer communication and a Proof-of-Work concept used in Bitcoin, and based on the model, propose a broadcast protocol which is more secure against an adversary with arbitrary computational power.

Bitcoin technology to enhance the Pretty Good Privacy (PGP) mechanism. In this mechanism, a Bitcoin address, Bitcoin identity verification transactions, and a Blockchain key server are used to improve the user’s trustworthiness.

What applications have been developed with and/to Blockchain technology?

We originally defined a Blockchain application as a solution that has been developed with Blockchain technology. By this definition, we identified some prototype applications developed and suggested for using Blockchain in other environments, such as IoT, smart contracts, smart property, digital content distribution, Botnet, and P2P broadcast protocols.

This shows that Blockchain technology is not limited to applications in cryptocurrencies. Instead, the idea of a public ledger and a decentralized environment can be applied to various other applications in different industries, which makes the whole Blockchain research more interesting.

However, we also found a set of different applications developed for the Bitcoin environment, rather than using Blockchain technology in some other environment. Some of the applications were developed for Bitcoin analysis.

Applications can help to understand the essence of Blockchain, and how a decentralized transaction environment actually works. Analysis applications can also help to identify frauds and possible security issues by following the flows of transactions.

Conclusion

Blockchain technology runs the Bitcoin cryptocurrency. It is a decentralized environment for transactions, where all the transactions are recorded to a public ledger, visible to everyone.

The goal of Blockchain is to provide anonymity, security, privacy, and transparency to all its users. However, these attributes set up a lot of technical challenges and limitations that need to be addressed.

Source:  Lawrence Cummins, Jesse Yli-Huumo, Deokyoon Ko, Sujin Choi, Sooyong Park,Kari Smolander