Blockchain and its First Application, Bitcoin

Bitcoin is different from the paper currency issued by governments to facilitate trade. Specifically, Bitcoin, at the basic level, is just a ledger with account numbers and balances with its owner’s “private key.” It may sound like one’s online bank account, but the ledger of Bitcoin is owned by everyone in the Bitcoin network, not just one person’s bank systems. One may feel uncomfortable that others may know his account information; however, the design of Blockchain cleverly resolves such concerns with a pair of keys that generated by the Elliptic Curve Digital Signature Algorithm (Bos et al. 2014). A digital signature is a kind of one-way cryptographic puzzle that only the owner of the Bitcoin can solve because only she/he holds the key that generates the digital signature with hashing operation. This is so-called “private key” which should be kept secret by its true owner. The other half of the digital signature is called “public key”, which is calculated from its respective private key and such mathematical operation is not

reversible. It is used by others to check whether the signature is genuine. The public key can either be used raw in a transaction, or converted into a Bitcoin address by means of hashing and other operations to preserve anonymity. The combination of a hacker’s bounded rationality and the complexity of the underlying cryptography makes it practically impossible to crack one’s private key as long as the private key is randomly chosen.

There are three types of Blockchain infrastructures in current practice: public/open, private, and governmental (Mueller-Eberstein 2017). Private and government controlled Blockchain networks are closed to the public and participants must be approved. Accordingly, the speed of processing transaction is faster and typically the identities of involved nodes are known to the owners of the Blockchain infrastructures. For example, Citibank has been experimenting its own version of digital currency, CitiCoin, within its own controlled network (Popper 2015). Disney also invents its own Blockchain platform, called Dragonchain

(McKendrick 2016). The Dragonchain aims to create cost-efficient business networks where virtually anything of value can be tracked and traded. On the governmental side, Estonia is one of the earliest governments adopting Blockchain technology to facilitate citizen interactions with the state through the use of electronic solutions (Walport 2016). e-Estonia the Digital Society offers many e-services through its Blockchain network including i-Voting, e-Tax Board, e- Business, e-Banking, e-Ticket, e-School, and e-Governance Academy (Scott 2014). Its website states, e-Estonia “opens the door to all secure e-services while maintaining the highest level of security and trust”(Estonian 2017). In Asia, the People’s Bank of China also heavily invests in Blockchain technology including its own version of digital currency (Popper 2016a).

In contrast to closed networks, the public/open Blockchain embraces everyone who wants to join in the network through the Internet. It is permissionless and secured by proof-of-work, which is a piece of data that is difficult (costly and time-consuming) to produce but easy for others to verify and which satisfies certain requirements. Because all participants on the network need to verify transactions and update local copies of the ledger in a globally consistent way, public Blockchain transactions typically takes longer to process. Bitcoin is not only the first application of Blockchain, but also the most successful digital currency utilizing the public Blockchain infrastructure (Popper 2017). Ethereum is another well-known application of public Blockchain which focuses on embedding smart contracts into Blockchain system (Popper 2016b). In this paper, we focus on the public Blockchain mechanism as other types are just derivatives.

To illustrate how a fund transfer works in the Blockchain infrastructure, the transaction begins when the originator broadcasts to all network participants that funds are being transferred. The message includes the account numbers to be credited and debited, and the amount of the transfer. Then, other computers or nodes in the Bitcoin network apply that transaction to their copy of the ledger and pass on the transaction to other nodes that have not yet received the message from the originator. Eventually, everyone on the Bitcoin network will have the same copy of entire ledger; hence, it creates a system that lets a group of computers/entities maintain a ledger instead of a bank’s private network. Unlike at a bank where you only know about your own transactions, everyone in the Bitcoin network knows about everyone else’s transactions. In order for ensuring that the request of changing the transaction is authentic and only the rightful owner has sent the message, unlike a simple static password, a completely different digital

signature is required for every transaction (Driscoll 2013). The Bitcoin owner needs his private key to create a transaction signature and others need the public key to check the validity of the on-going transaction. The digital signature is unique among all transactions as it is generated by the owner’s private key with hashing the message itself. Any attempted changes to the original transfer message will result in a completely different digital signature and the attack is therefore detected. If the transaction is verified by miners (i.e., participating computers of processing Bitcoin transactions), it will add a new digital signature to the Bitcoins, which can be completed only by its new owner. All miners work independently on their own version of the Blockchain to make sure the signature is correct and have enough Bitcoin balance to make the transactions (i.e., prevent double spending issues in the digital world); then they bundle the new records into a block and add it to the end of the Blockchain (Peck 2015).

Hence, the ledger in a Blockchain is essentially a long-string of transaction records, each of which refers to an earlier record in the chain. The arrangement will only converge when the miners agree on what the most recent version of the Blockchain should look like (Peck 2015). Because the process of adding a new block of transactions to the Blockchain is very difficult and it is designed that anyone who participates is required to devote a large amount of computing power and electricity towards running the new data through a set of complex math calculations (e.g., hash functions). The complexity of the computations and the many copies of the ledger make it very difficult for an attacker to change the distributed Blockchain ledger without nearly complete collusion.