Blockchain Gaps: From Myth to Real Life

This book analyzes the fundamental issues faced when blockchain technology is applied to real-life applications. These concerns, not only in the realm of computer science, are caused by the nature of technological design. Blockchain is considered the foundation of a wide range of flexible ecosystems; its technology is an excellent mixture of mathematics, cryptography, incentive mechanisms, economics, and pertinent regulations. The book provides an essential understanding of why such fundamental issues arise, by revising the underlying theories. Blockchain theory is thus presented in an easy-to-understand, useful manner. Also explained is the reason why blockchain is hard to adopt for real-life problems but is valuable as a foundation for flexible ecosystems. Included are directions for solving those problems and finding suitable areas for blockchain applications in the future.

The authors of this work are experts from a wide range of backgrounds such as cryptography, distributed computing, computer science, trust, identity, regulation, and standardization. Their contributions collected here will appeal to all who are interested in blockchain and the elements surrounding it.

• Language: English
• Publisher: Springer
• Release date: Apr 26, 2021
• ISBN: 9789813360525

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© Springer Nature Singapore Pte Ltd. 2021

S. Matsuo, N. Sakimura (eds.)Blockchain GapsFuture of Business and Financehttps://doi.org/10.1007/978-981-33-6052-5_1

Fundamentals of Blockchains

Masashi Sato¹  

(1)

Secom Co., Ltd, Tokyo, Japan

Masashi Sato

Email: [e-mail]

Masashi Sato

works for a security company, SECOM CO., LTD as a research engineer. He researched secure systems using electronic authentication and electronic signature. He served on standardization activities in the electronic signature field. He contributed to the drafting of JIS (Japanese Industrial Standards) and ISO standards related to electronic signatures, e.g. series of ISO 14533 and ISO 17090-4. He serves as a subleader of the electronic signature working group of JNSA(Japan Network Secruity Association), and an editor of the secruity working group of CGTF(Cryptoassets Governance Task Force).

1 Blockchain Types

Many platforms referred to as blockchains have been developed in recent years, and there is a growing expectation that these platforms will be expanded to cover various applications across different fields and new businesses. However, while the word blockchain is used in numerous situations, not all people share the same definition or concept of this term. Blockchain platforms are provided by different communities and each has its own objectives and design. Below are some examples:

(1)

Platforms and services implemented on Bitcoin

Example: Omni, Counterparty, ColoredCoins, Proof-of-existence

(2)

New crypto-assets derived from Bitcoin’s implementation and concept

Example: Litecoin, Monacoin, DASH, Zcash

(3)

New platforms generated through the execution of the so-called smart contract codes, in addition to the transactions of cryptocurrencies

Example: Ethereum, Hyperledger Fabric, NEM

(4)

Services implemented on the platforms of (3)

Example: Everleger, CryptoKitties, REX, uPort

(5)

Private blockchains designed for specific purposes and participants

Example: MultiChain, Hyperledger Fabric, Quorum

(*By the time this document is published, several of the projects or services above may still be at the conception or demonstration test stages or may already have been terminated.)

This book is intended to organize the topics involved in the discussion of blockchain. To this end, it is impossible to avoid summarizing the most common concepts concerning the main topic of discussion: blockchain itself. Hence, this chapter extracts the common elements of the most typical so-called blockchain mechanisms to organize its concepts.

It is justified to say that blockchain platforms, which take many different forms, can be classified from different perspectives. One of these perspectives is the concept of public and private blockchains. While its definition varies, a public blockchain can be roughly defined as a blockchain network that anyone can join and withdraw from. The best-known examples are Bitcoin and Ethereum. On the other hand, blockchain networks that place restrictions or conditions on joining are known as private blockchains. Some of these run a blockchain network within a closed network environment with limited external connections; others, like Hyperledger Fabric, use a platform equipped with an access control function. Because public and private blockchains operate using different environments and mechanisms, the issues involved often differ as well.

However, unless otherwise noted, this book focuses entirely on public blockchains.

2 Data Structure of Blockchains

For many readers, the first example of a blockchain that comes to mind is Bitcoin. Thus, let us briefly review the concept of blockchains in Bitcoin.

A Bitcoin sender creates a transaction containing the address of the receiver and the number of coins to be sent; then, they assign a digital signature to that transaction. This forms a chain of transactions that moves from the first to the next sender. Meanwhile, every transaction considered valid in the Bitcoin network is registered to a ledger (a blockchain), which is accessed by all participants. This ledger functions as the proof-of-existence for valid transactions. The chains of digital signatures associated with the transactions, as well as the chain of hash values in the ledger, protect the transactions from unauthorized rewriting and changes, thus preventing the unauthorized use of Bitcoin.

The transactions that take place in the Bitcoin network are consolidated into data structures called blocks, which are created at certain intervals. Furthermore, for each of these transactions, a hash function is used to generate a hash value, which in turn is used to create a hash tree (Fig. 1).

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Fig. 1

Hash chain of blockchain’s blocks

Then, the hash value of the root of that hash tree is stored in an area inside the block, called a block header, and a hash value for the block header is generated again. This is how a block is created.

The block header contains the hash value of the block header created immediately before it, thus creating a chain of blocks that extends back to the beginning of the Bitcoin network (hence blockchain). Thus, if the data of past transactions are rewritten without authorization, they can be detected via their non-conforming hash values; bundling the hash values as chains makes them more difficult to replace illegally.

By maintaining the blockchain’s uniqueness in this way, it is possible to prove the existence of past transactions and maintain the consistency of the entire Bitcoin system.

Bitcoin adopts proof-of-work (PoW) as a mechanism for the creation and approval of blocks. Despite differences in the mechanism, many blockchain platforms besides Bitcoin adopt similar hash trees and hash chains to prove the existence of past transactions. On the other hand, platforms such as IOTA, Ripple, and R3 Corda have not adopted a block-based chain structure like that of Bitcoin’s. These platforms are called distributed ledgers and are sometimes distinguished from blockchains. In platforms with distributed ledgers, verification and approval are performed for each transaction, which are then added to the ledger held by each node. Though they do not adopt a block-based chain structure, these platforms use digital signatures and hash values to ensure that all transaction history that has been registered is unaltered.

This mechanism of data falsification detection and proof-of-existence is not new, and it has already been implemented in previous technologies. An example of a technology that uses a chain of digital signatures to detect data falsification and ensure continuity is known as hysteresis signature. Furthermore, ISO/IEC 18014-3, which describes time-stamping services that produce linked tokens, is an example of a proof-of-existence of data, using hash chains and hash trees. Similar time-stamping services are offered by companies such as Surety and Guardtime.

Other technologies that use hash trees are Evidence Record Syntax of RFC 4998/RFC 6283 and Certificate Transparency (RFC 6962), although these differ from the time-stamping services mentioned above. Certificate Transparency implements hash trees in the mechanism that saves and publishes the issuance history of Transport Layer Security server certificates. Hash tree is an easy method of proving the existence of multiple pieces of data at once; as a result, it is used in a wide range of technologies. However, the use of a secure cryptographic hash function is an indispensable condition.

3 Characteristics of Blockchains

Thus, technologies that employ mechanisms similar to blockchain existed prior to blockchain itself, which makes it inaccurate, define as a blockchain every mechanism that uses hash chains and hash trees to prove the existence of data.

The two main characteristics of blockchain that differentiate it from conventional verification technologies can be summarized as follows:

Blockchain Characteristic No. 1: It offers an environment for transactions and the execution of codes.

Blockchain Characteristic No. 2: It aims for management that does not depend on third-party organizations.

Characteristic No. 1 is a functional characteristic common to all platforms.

Conventional digital signatures and time-stamping services are intended to ensure the authenticity and prove the existence of general data. For example, a series of documents stored as proof of an electronic contract, data pertaining to intellectual property rights, or healthcare records. The data classification also differs depending on its application. It can be human readable (such as PDF files) or machine readable (such as binary data, XML, or JSON). In contrast, blockchains are designed for the transaction of crypto-assets and smart contracts that feature executable codes; they also offer an environment that executes these processes. A blockchain is a platform equipped on each node with a function that manages a series of processes, from the generation of a transaction to its verification. Some services—such as proof-of-existence—provide similar functionalities as that of conventional time-stamping services by using the blockchain function.

Blockchain Characteristic No. 2 is one of the most typical features of blockchains and can be seen in the design concept of all platforms. The conventional time-stamping services that produce linked tokens assume a trusted third-party authority. The time-stamping service generates the hash chains and hash trees, and the hash values needed to verify them are published in newspapers and official gazettes. The time-stamping service relies on the trust that no illegal action takes place during the creation of hash chains and hash trees. To build up that trust, the time-stamping service asks the user to send only the hash value of the document, to make it impossible to alter the document with ill-intention. Other security measures include implementing a tamper-resistant device to prevent falsification during the creation of the hash value-containing timestamp data, and locating the servers in robust facilities such as data centers. Conventional timestamping maintains the immutability of hash chains using this relationship of trust. Meanwhile, in blockchains, the mechanism that ensures the authenticity of the transaction and ledger through multiple nodes was designed to avoid management from a trusted third-party authority. Blockchain nodes connect to each other and create blocks, they then verify each other with the data of these blocks. This ensures that, even if a single node stops functioning or an illegal action takes place, the consistency of the entire system is maintained, provided the other nodes continue to function correctly.

To keep such a system running, each participant of the blockchain network must fulfil their role and operate autonomously.

For this reason, particularly on the main public blockchain platforms, it is thought that the blockchain network continues owing to a combination of the motivations of gaining crypto-assets within the platform and the mechanism maintaining the chain of blocks uniquely without divergence. The mechanism designed to ensure the consistency of the chain is called a consensus algorithm. The best-known examples of consensus algorithms are the PoW, which has been adopted by many platforms (including Bitcoin); the Proof-of-stake, which is set to be introduced to Ethereum; and the Proof-of-importance, used in NEM.

These autonomous systems are likely to feature complex architectures and relationships between their participants. Therefore, it is necessary to consider not only just the relationships between the nodes of the blockchain network but also the software development of the platform and the applications and services built upon it.

4 Elements that Make the Operation of Blockchains Possible

For a blockchain platform to be managed and operated autonomously by its participants, without a third-party organization managing it, the policies and rules concerning the platform must be shared among and followed by all the parties involved.

In this context, the parties involved in a blockchain platform are categorized as follows:

1.

A community that defines the policies and rules concerning the operation of the blockchain platform

2.

A community that defines the specifications of the software used in the blockchain platform

3.

A community of developers that implement the software of the blockchain platform

4.

A participant that operates the software of 3. (above) and acts as a node (the participant can assume more than one role, including the ones below)

4.1.

The role of a client that creates