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2021 | OriginalPaper | Buchkapitel

2. Blockchain Technology: Key Features and Main Applications

verfasst von : Pierluigi Martino

Erschienen in: Blockchain and Banking

Verlag: Springer International Publishing

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Abstract

This chapter provides a general overview of the fundamentals of blockchain technology and how it works. The goal is to make it clear why this technology is considered disruptive. In particular, the chapter discusses the key features of blockchain technology and its various types and categories; it also highlights their different characteristics, advantages and risks. Moreover, it explores the two main applications of blockchain, namely cryptocurrencies and smart contracts.

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Vorheriges Kapitel Introduction: The Rise of Fintech

Nächstes Kapitel Blockchain Technology and the Banking Industry

Basically, there is only one version of the ledger, and each network participant owns a full and up-to-date copy of the entire ledger. As a result, every addition to the ledger by a network participant is propagated to all nodes; upon validation, the new transaction is added to all the relevant ledgers to ensure data consistency across the network.

The cryptographic hash function produces the hash value, which ensures the authenticity of each transaction before it is added to the block.

A public key is similar to a bank account number, that is, public and available for the counterpart in a transaction (e.g. in the transfer of money). Conversely, a private key is similar to a bank account password: it is known and allows access only to the account holder.

Specifically, the consensus process ensures that transactions are stored in a block for a certain time (depending on the blockchain—for instance, 10 minutes in the Bitcoin blockchain) before being transferred to the ledger. After this period, the information in the blockchain can no longer be changed.

This process is commonly referred to as “mining”, and the nodes that calculate the hashes are called “miners”.

This act of validating transactions is called “forging”.

Many of these problems relate to public blockchains, and most of them are solved with private blockchains, as explained in the next paragraph.

The “51% vulnerability” (or 51% attack) is one of the best-known risks in blockchain technology, where a participant may gain control of over 50% of a network’s hashrate in order to act to benefit themselves at the expense of everyone else.

Within this context, it is also worth mentioning decentralised autonomous organisations (DAOs), which are organisations that are run through smart contracts by encoding the rules for making decisions and managing groups of people. These DAOs represent a more complex form of a decentralised application.

To date, there has been no generally accepted definition of the term cryptocurrency in the regulatory space, although policymakers are trying to define it (see Chapter 5).

As mentioned in the previous paragraphs, Bitcoin is a typical example of an open, permissionless blockchain based on a PoW consensus mechanism. To use Bitcoin (and any other cryptocurrency), users need a digital wallet—a software program that stores private and public keys and interacts with various blockchains—to send and receive digital currency and monitor their balance.

Cryptocurrencies can be divided into categories, namely coins and tokens. According to Massey et al. (2017), coins are units of value that are native to a particular blockchain and whose objective is to exchange value. Other than that, they have limited functionality, whereas tokens can have functionality beyond an exchange of value, since they can represent any asset or functionality that the developer desires.

According to data available on https://coinmarketcap.com (data accessed in October 2020).

According to the Payment Methods Report (2019), Ether, which is used as a form of payment in the Ethereum platform, was the most-used cryptocurrency in daily transactions in the fourth quarter of 2018.

In an ICO, an organisation issues coins or tokens and puts them up for sale in exchange for traditional currencies (e.g. the euro) or, more often, virtual currencies (e.g. Bitcoin or Ether). The features and purpose of the coins or tokens vary across ICOs. For instance, some coins or tokens may serve to access or purchase a service or product that the issuer develops using the proceeds of the ICO; others may provide voting rights or a share in the future revenues of the issuing venture. Some may have no tangible value, while other coins or tokens may be traded and/or exchanged for traditional or virtual currencies at specialised coin exchanges after issuance (see ESMA 2017).

A new variant of ICOs has recently emerged, namely initial exchange offerings (IEOs). They rely on cryptocurrency exchanges to ensure the trustworthiness of potential projects and connect high-quality projects to potential investors (see, for example, Chen and Bellavitis 2020).

For an overview of the main risks of investing in ICOs, see Martino et al. (2019) and (2020).

The contracting parties agree on the code in advance and ensure that it takes their interests into account.

As mentioned in sub-Sect. 2.3, Ethereum is a prominent example of blockchain that supports the implementation of smart contracts.

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Titel: Blockchain Technology: Key Features and Main Applications
verfasst von: Pierluigi Martino
Verlag: Springer International Publishing
Buch: Blockchain and Banking
Print ISBN: 978-3-030-70969-3

Electronic ISBN: 978-3-030-70970-9

Copyright-Jahr: 2021
DOI: https://doi.org/10.1007/978-3-030-70970-9_2