We have begun to hear many keywords such as “virtual currency,” “metaverse,” and “NFT.” Under these circumstances, the word “blockchain” has been frequently heard in connection with these keywords for several years. Blockchain is an encryption technology that plays an important role in virtual currency transactions. However, you may not know the details.
Therefore, this time, we will explain in an easy-to-understand manner how blockchain works and how it can be used.
What is blockchain?
Blockchain is a type of database technology that records information.
It is called a “blockchain” because it stores data by handling transaction history in units called blocks using cryptographic technology and connecting them like a chain.
Simply put, it is a technology for maintaining accurate transaction history.
Why is accuracy guaranteed? This is because even if one of the participants involved in the blockchain commits fraud or malfunctions, it would be extremely difficult to destroy or tamper with the data. The transaction mechanism does not stop due to failures.
With conventional cloud services, you could only trust one service provider. On the other hand, blockchain is a mechanism that allows many participants to hold the same data in a distributed manner, so there is no need to rely on a single company to continue using the service.
Blockchain is created by combining existing technologies, and is attracting attention as a technology that will bring about major changes, especially in industries where confidentiality is important.
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Background of the need for blockchain
We will explain the background of why blockchain technology was introduced.
Blockchain was born back in 2008. After the concept was announced, blockchain was used as the technology to support the virtual currency Bitcoin in 2009, and transactions began.
The creator of Bitcoin and blockchain is a person named Satoshi Nakamoto. His existence is shrouded in mystery, and although his name sounds like a Japanese person, there are various theories, including that he resides overseas.
Bitcoin is one of the virtual currencies (crypto assets). It is a currency that circulates through the Internet, and its biggest feature is that there is no centrally managed company or organization.
Naturally, virtual currency transactions require high reliability. Preventing identity theft, falsification, and double payments are important issues.
Previously, transactions such as currencies could not be conducted securely over the Internet unless they were centrally managed by a trusted service provider. In this respect, Bitcoin uses blockchain to keep a stable and continuous record of the history of fair transactions. Furthermore, we do not tolerate fraud or falsification.
Since then, many virtual currencies (crypto assets) have been traded using blockchain technology.
Blockchain can also be used in other fields, not only in general cases involving contracts and transactions, but also in traceability of food and other goods.
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Blockchain market size prediction
Due to its high reliability, blockchain is expected to be used in business in many fields. The market size is also predicted to expand significantly.
In 2016, the Ministry of Economy, Trade and Industry announced promising cases for the deployment of blockchain technology and a predicted market size of 67 trillion yen across five fields.
The following five areas were highlighted as possibilities for social change through blockchain technology.
1. Value distribution/point conversion Platform infrastructure [market size 1 trillion yen]
Example) Local currency, electronic coupon, point service
This is a usage method in which local currencies, electronic coupons, point services, etc. issued by local governments, etc. are distributed and managed on the blockchain. It is expected that the platform will become an infrastructure.
2. Realization of decentralization of rights certification activities [Market size: 1 trillion yen]
Example) Land registration, electronic medical records, various registrations (birth, marriage, relocation)
This is a usage method in which rights-related information such as physical status such as land registration status, various registered matters such as birth, marriage, and relocation, and electronic medical records in the medical field are registered, announced, and managed on blockchain. This allows for decentralization, unlike in the past.
3. Realization of zero idle assets and highly efficient sharing [Market size: 13 trillion yen]
Example) Digital content, ticket service, C2C auction
By recording information on the transfer of rights to use assets, etc., and evaluation information between providers and users of digital content and ticket services on the blockchain, it is expected to achieve zero idle assets and highly efficient sharing. .
4. Realization of an open, highly efficient, and highly reliable supply chain [market size: 32 trillion yen]
Example) Retail, precious metal management, authentication of works of art, etc.
By tracking the retail industry and the manufacturing process of products such as precious metals and works of art from raw materials to distribution and sales on blockchain, we can expect to realize an open, highly efficient, and highly reliable supply chain. It is something to do.
5. Realization of full automation and efficiency of processes and transactions [Market size: 20 trillion yen]
Example) Wills, IoT, electricity services
In fields such as wills and electricity services, recording contract conditions, performance details, future processes, etc. on blockchain will lead to full automation and efficiency of processes and transactions.
Source:
Ministry of Economy, Trade and Industry “FY2015 Infrastructure development related to informatization and serviceization of Japan’s economy and society (Survey on domestic and international trends regarding services using blockchain technology)”
How blockchain works
As mentioned earlier, blockchain was originally created to complete Bitcoin transactions and provide crypto asset services.
Let’s take a look at how this blockchain works.
Blockchain is based on several cryptographic technologies.
To put it simply, it uses a “P2P network” to share blockchain data among multiple people and maintain the system without the need for a central administrator.
What is a “P2P network”?
Let’s check the meaning of P2P network here.
A P2P network is a network where many computers connected via P2P gather and communicate with each other. P2P means “Peer to Peer”, and Peer means “friend”. In other words, it refers to the friends who have joined the network. Here we are referring to the computer. This is a connection method in which computers communicate directly one to one. Peers, or computers, connected in a P2P network have equivalent functionality.
Image of “P2P network”
In a P2P network, the system is distributed, unlike a centralized network that relies on a central computer. Therefore, even if one computer fails and goes down, the entire system will not be shut down.
Realizing crypto assets with P2P network and encryption technology
Now, in order to look specifically at how blockchain works, let’s check what happens on this P2P network. Blockchain uses several cryptographic techniques.
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First, imagine a series of blocks. Each block contains important information such as timestamps, hash values, and transaction information (records of crypto asset transactions).
In a cryptocurrency network, a new block is created every time there is a transaction. Then, the “nodes”, which are computer terminals participating in the network, mutually approve the newly created block and add it to the chain. A feature of blockchain is that it can correctly form a consensus among an unspecified number of participants.
A “hash value” is information calculated using a certain algorithm, and is data that compactly summarizes a certain amount of information. If any information changes, the calculated hash value will be completely different.
In fact, the hash value on the blockchain contains the contents of the previously generated block.
Now, let’s consider a case where someone attempts to tamper with information in a block that was generated in the past. If the information in a block changes in any way, the hash value calculated from the block will be different than before. In a blockchain, the contents of the previously generated block are included, so unless the hash values of all subsequent blocks are also changed, consistency will be lost. It is virtually impossible to change the hash value of every block. This shows that blockchain has a mechanism that is extremely difficult to tamper with. And transactions in crypto assets can be completed without being tampered with by anyone, even without a central administrator.
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Features of blockchain
By combining existing technologies, blockchain has achieved something never seen before. So, let’s take a look at the specific features.
Very difficult to tamper with, no system downtime
The best features of blockchain are that it is extremely difficult to tamper with data, and that system failures do not occur, meaning that services do not stop.
As mentioned earlier, if a blockchain is tampered with, all blocks must be tampered with, so it is virtually impossible to tamper with it. In addition, blockchain is a system in which transactions are carried out by an unspecified number of users, but since all the users record a copy of their transaction history, even if some computers go down, the remaining users computers keep records, so the entire system never goes down.
Let’s compare this with things like cloud services. Suppose that a cloud service provider provides some kind of service. In this case, it is up to the cloud service provider to decide whether the system will go down or not. On the other hand, as shown above, blockchain is built on a P2P network, so it does not depend on a single computer such as a server. Everyone keeps copying their transaction history.
Transaction records cannot be deleted
No one can delete transaction history records. Once a transaction is recorded, it remains as evidence. In other words, even if someone wanted to erase their transaction history, they would not be able to do so. In that sense, it can be said to be safe from a trading perspective.
Transactions can be traced and transparent
All transaction data will be kept as a history. Since the data are connected in a chain over time, it is possible to trace how the values have changed. In other words, when you want to follow the history of transactions, all transaction history remains, making transactions transparent.
Not only can all transaction histories be kept individually, but also by keeping connections, making transactions transparent.
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Blockchain usage scenarios
As explained above, blockchain has excellent features. In particular, it is expected to be used in a variety of situations other than crypto assets, as it is difficult to tamper with, cannot be deleted, and makes transactions transparent.
The Ministry of Economy, Trade and Industry has listed the following 14 fields as use cases for blockchain technology.
1.Financial payments, exchange/remittance/savings, securities trading, Bitcoin trading, social banking, remittances for immigrants, remittances for emerging countries, remittances for Islamic countries/Shariah compliance)
2. Points/Rewards Gift Card Exchange, Artist Rewards, Prepaid Cards, Reward Tokens
3. Funding Artist Equity Transactions, Crowdfunding
4.Communication
SNS, Messenger, Trading
5. Asset management Asset management using Bitcoin, notarization of land registration, etc.
6.Storage data storage
7. Authentication digital ID, artwork ownership/authenticity proof
8. Sharing Ride Sharing
9. Commercial distribution management Supply chain, tracking management, marketplace, gold storage, diamond ownership, digital asset management and transfer
10. Content streaming, gaming
11.Future ForecastFuture Forecast, Market Forecast
12.Visualization of public municipal budget, voting, virtual nation/space development, basic income
13.Medical medical information
14.IoT
IoT, mining light bulb, mining chip
Source:
Ministry of Economy, Trade and Industry “FY2015 Infrastructure development related to informatization and serviceization of Japan’s economy and society (Survey on domestic and international trends regarding services using blockchain technology)”
Blockchain has already been adopted in virtual currency, banking/finance industry, real estate industry, etc. For example, in addition to common crypto assets, major banking groups and local governments have created their own crypto currencies and implemented blockchain.
Another real estate tech company has started using blockchain technology to build a real estate digital platform that digitizes contracts, registration, settlement of accounts, and asset movement.
In this way, it is used not only in crypto assets but also in a variety of fields, and it is expected that it will have the potential to develop in other areas as well.
Blockchain challenges
Blockchain will continue to become a technology that supports new services. On the other hand, blockchain has the following challenges:
Data cannot be deleted or hidden
In blockchain, once data is created, it cannot be deleted. While this is a strong security measure and is recommended, it does create problems for scenes you want to delete.
For example, if you want to delete your personal information. In Japan, there is an obligation to delete personal information if the person requests it, and this is stipulated by the Personal Information Protection Act.
With blockchain, once information is recorded, it cannot be deleted, even if it is personal information, making it difficult to operate in accordance with the law.
Additionally, even personal information that you do not want to be shared will be shared with all participants on the network. Naturally, since it is encrypted, personal information cannot be viewed by other users, but it is certain that the information remains.
In order to solve this problem, one possible method would be to prepare a separate database etc. so that personal information can be deleted.
There are limits to transaction volume, number of nodes, etc.
Considering the way blockchain works, it can be said that it has less scalability in terms of data processing than traditional databases.
This is because blockchain operates while forming consensus among nodes, so as the number of nodes increases, the amount of transactions that must be processed simultaneously increases, and calculations cannot keep up. Every database has a limit on the amount of transaction records it can process simultaneously, but blockchain reaches that limit faster than other databases.
It is also said that as the number of nodes increases, there are concerns about processing speed.
Building consensus takes time
With blockchain, it takes time to form a consensus. In the blockchain of crypto assets, it is the time it takes to complete a payment. In terms of payment, it can be compared to a credit card. I think many people have experienced that payments can be completed in an instant with credit cards, but this is not the case with blockchain.
Regardless of crypto assets, this is a disadvantage in fields where speed is required.
Future outlook for blockchain
What prospects does blockchain have in the future? Among the various possibilities, we will introduce two topics here.
Impact on industrial structure
Blockchain is said to have the potential to impact not only the market but also the industrial structure.
The Ministry of Economy, Trade and Industry has stated that, for example, point-based platforms may become infrastructure. Blockchain allows points to be used for transactions with parties other than the issuer. As a result, the circulation of points will allow them to be used in a manner similar to currency, and will have an economic ripple effect that exceeds the amount of points issued.
In terms of general commercial distribution, there are also expectations for the realization of open, highly efficient, and highly reliable supply chains. For example, inventory information has traditionally been separated between downstream retailers, midstream wholesalers, and upstream manufacturers. In addition, by sharing information on commercial flows that was concentrated downstream upstream, it is believed that the entire supply chain will become more active and efficient, and that it will lead to stronger upstream negotiating power.
Realization of smart contracts
Blockchain is said to lead to the realization of smart contracts.
Simply put, smart contracts refer to the automation of contracts and transactions. By setting up automation, such as automatically executing such processing when certain conditions are met for a certain contract or transaction, you can achieve any kind of automatic processing.
Automation itself is technically easy to do, of course, but if it involves contracts or transactions, its security must be ensured. In such cases, blockchain can be used to achieve reliable and highly transparent processing.
In this way, in the future, many of the various transactions, contracts, and procedures are expected to become more efficient as they are based on blockchain and combined with AI, IoT, etc. Reducing the number of man-hours needed to deal with security issues can also be considered a by-product.
We have introduced the overview and mechanism of blockchain, its features and issues, and its future prospects. Blockchain is expected to become more and more familiar to our business and daily lives in the future.
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summary
Blockchain is a type of database technology that records information. It is called a “blockchain” because it stores data by handling transaction history in units called blocks using cryptographic technology and connecting them like a chain. In 2009, blockchain was used as the technology to support the virtual currency Bitcoin, and transactions began. Its creator is a person named Satoshi Nakamoto.
The mechanism uses a “P2P network” to share blockchain data among multiple people and maintain the system without the need for a central administrator. Each block contains important information such as time stamps, hash values, and transaction information (records of crypto asset transactions), and each time a new block is created, computer terminals participate in the network. “nodes” mutually approve each other and add to the chain.
Features of blockchain include “it is extremely difficult to tamper with and will not cause a system down”, “records of transactions cannot be deleted”, and “transactions can be traced, achieving transparency”.
Issues with blockchain include “data cannot be deleted or hidden,” “there are limits to transaction volume and number of nodes,” and “consensus building takes time.”
In the future, it is expected to be used not only in the crypto assets and financial industry, but also in various fields such as retail, communication, asset management, points, and storage.