Due to three factors, Kubernetes clusters will be the foundation for blockchain networks’ adoption in both the public and private sectors.

(1) Simpler Deployments

(2) Interoperability

(3) Upgradeability

We will take a deep dive into these factors later on.

Kubernetes as a tool:

A portable, adaptable, open-source platform, Kubernetes allows for declarative setup and automation of containerized workloads and services. Its ecology is vast and expanding quickly. The tools, services, and support for K8 are widely accessible.

The management environment offered by Kubernetes is focused on containers. The processing, networking, and storage infrastructure are coordinated in support of the user workloads. The convenience of Platform as a Service (PaaS) and the flexibility of Infrastructure as a Service (IaaS) enables mobility between infrastructure providers.

The Blockchain: 

A decentralized, unchangeable, and open database is essentially what the blockchain is. Due to the peer-to-peer network architecture of blockchain technology, transaction data is not under the control of a single centralized organization. All participants in the blockchain network have trustworthy public access to all transactions stored in a chain of blocks.

Blockchain ensures that connected blocks are resistant to changes and alterations by using consensus procedures and cryptography.

How can Blockchain applications utilize Kubernetes?

Blockchain is beginning to be adopted by businesses due to its many applications, like transferring cryptocurrency, information, agro blockchain, or purchasing and selling NFTs. Due to its streamlined pod, container deployments and, Kubernetes (or K8s) can assist enterprises in implementing blockchain.

Being cloud independent in business operations enables all parties participating in a service or product to access the same data stored on a blockchain without disclosing confidential and internal information. Kubernetes can configure, install, and maintain a company’s private blockchain with less manual labor while still providing the necessary components to keep the network secure, scalable, and fail-safe because of its distributed performance and pod deployments.

Although Kubernetes aids in the deployment of blockchains, a few configurations must be made by developers manually. These include choosing a protocol image and additional components, creating YAML manifests and Helm charts, and using Helm-install to test the Blockchain technology in Kubernetes clusters before it is made available to the general public.

Kubernetes clusters are being adopted by many companies in the blockchain space due to the following factors:

Simpler Deployments: 

The deployment and management of the network itself must be easy to use in order to create blockchain applications.

You must choose from a bewildering amount of options while creating a straightforward dApp on the Ethereum network: Will your main coding language be Solidity or Vyper?  What development framework should you use—Truffle Suite or OpenZeppelin SDK? The sheer number of developer tools is enough to put both newbies and seasoned programmers off.

With Kubernetes, It will be simple to deploy blockchains by selecting a protocol image and the required component images, creating YAML manifests and doing so using helm install. 

Interoperability:

Applications running in Kubernetes clusters are compatible with all forms of infrastructure, allowing service interoperability between enterprises with various architectural styles. The same application can be dispersed and hosted by various cloud providers. 

Blockchain applications are no different in this regard. Through their respective Kubernetes engines, IBM Cloud and AWS already offer comprehensive templates for creating blockchain networks.

Upgradeability: 

Helm charts offer a more subtle benefit of blockchains on Kubernetes. Organizations have the option to swiftly launch new networks with updated functionality, upgrade network artifacts, and backup/restore a network’s whole state by architecting networks using Helm charts.

Use Cases

Docker: 

By utilizing Docker, each blockchain node is guaranteed to be operational and running without requiring individual virtual machines to be configured. The Docker Hub offers Hyperledger, Ethereum, and Quorum images as starting points for swiftly and securely setting up the blockchain network.

Using Docker to set up a blockchain network allows for quicker software delivery and release, saving time, effort, and money.

Microsoft and Helm:

Helm is a package manager that enables you to discover, share, and use applications created for Kubernetes. The Kubernetes package management’s Helm charts, offer a higher-level construct that enables users to create, upgrade, and roll back entire applications without managing each Kubernetes resource separately (services, deployments, etc.)

Azure Kubernetes Services (AKS) gives users the ability to customize virtual machines and the number of nodes to use Hyperledger Fabric to make blockchains fail-safe, just like any other Kubernetes Managed services.

IBM Cloud: 

Businesses may deploy the development, testing, and production environments however they see fit using the IBM Blockchain Platform, which speeds up the release cycle for new blockchain technologies.

By controlling all blockchain nodes from a single dashboard and streamlining the deployment process, IBM’s Blockchain Platform enables businesses to deploy their blockchains in any cloud ecosystem, whether it be on IBM’s clouds or with another cloud service provider.

Additionally, using IBM Cloud Kubernetes Services and its current administrative technology enables developers to easily grow the ecosystems employed in a Blockchain.

Here is the guide to installing Blockchain on Kubernetes

Final Thoughts:

Even if blockchain is becoming more and more relevant every day, it has a long way to go before it is widely adopted. Its considerable complexity and integration with the current infrastructure architecture that enterprises utilize today will be one of the barriers to adoption. By using Kubernetes clusters to deploy blockchain networks and their individual components, these difficulties may be largely abstracted. But when examining significant infrastructure firms and case studies, the overall opinion points to Blockchain on Kubernetes as the preferred method for adoption.

Organizations can establish the following roles in order to successfully utilize Kubernetes in a blockchain service:

1. Kubernetes-based cloud administrator: provides and keeps an eye on the blockchain’s architecture.

2. Blockchain Administrator: uses Hyperledger Fabric to manage the blockchain platform.

3. Blockchain developer:  creates the apps that are used in a blockchain.

Looking for a Team who can easily help migrate your Blockchain infrastructure to Kubernetes?

Deqode’s Team as a service model provides specialists who can help you easily deploy complicated applications through Kubernetes.

Visit Deqode.com for more info

The post How is Kubernetes enabling Blockchain? appeared first on Deqode Blog.

What is an NFT (Non-Fungible Token)?

To understand what an NFT (Non-Fungible Token) is, we need to understand what Fungible stands for. Fungible is defined as anything that is replaceable by another identical item; interchangeable.

Anything you own like, a chair, your laptop, your phone, which you could sell, are all fungible tokens. The best example of a fungible asset is currency. Five dollars will always be five-dollar, be it anywhere. The ability to replace a five-dollar with another five-dollar bill or five one-dollar bills is what makes currency fungible. Or consider this, oil could be exchanged for gold which could be exchanged for US dollars. They are fungible assets.

On the other hand, Non-fungible items are the exact opposite. They’re unique or rare and cannot be replaced with other similar items. Domain names, event tickets, in-game items, digital artworks are all non-fungible digital assets.  

A non-fungible token (NFT) is a unique, individual token existing on a blockchain such as Ethereum. Unlike cryptocurrencies like bitcoin, each NFT token contains unique data. This means non-fungible tokens are not interchangeable with each other. That is, their use cases differ from their fungible counterparts. A cryptographic asset created using blockchain technology is non-fungible tokens.

Consider this digital art by Beeple anyone can copy, paste, view, and use the image, as I have.  But if you buy it as an NFT, then the ownership is yours, and it is non-fungible. For the Art pieces such as Mona Lisa by Leonardo da Vinci or Starry Nights by Vincent van Gogh. There can be copied versions of every art piece, but the original is only one. And it’s non-fungible.

History of NFT

Colored Coins are the very first NFTs to exist in the year 2012. In the year 2014, Robert Dermody, Adam Krellenstein, and Evan Wagner founded Counterparty. It is a peer-to-peer, open-source distributed financial platform built on top of the Bitcoin blockchain. Counterparty allowed asset creation and had many projects and assets, including a trading card game and meme trading. 

As NFTs picked up, two technologists John Watkinson and Matt Hall, created CryptoPunks. It traded 10000 unique cartoon characters called CryptoPunks, on the Ethereum blockchain. After CryptoPunks, there came CryptoKitties, which exploded a massive hype around NFT. On CryptoKitties, users could trade, collect and breed virtual kitties. Each kitty was one-of-a-kind and could not be replicated. This project raised a $12.5 million investment and, some kitties were sold for over $100,000. This interest continued to spike in 2021, and several prominent sales occurred in the next few months. Some notable sales of 2021 included NBA Top Shot’s video clip of LeBron James selling for $208,000, digital artist Beeple’s piece selling for $69.3 million.

The technology behind an NFT

Blockchains act as a coordination layer for digital objects and provides users with ownership and management permission. Non-fungible assets are given some unique properties by blockchains, which change the user and developer relationships with these assets.

Standardization

Developers can build common, reusable, inheritable standards relevant to all non-fungible tokens by representing them on public blockchains. There are some specific primitives such as possession, sale, and simple access control. 

Blockchain Standards: ERC20, ERC721, ERC1155

Internet Standards: TCP/IP, HTTP, HTML/CSS

Content standards: file formats, HTML/CSS, JSON

Interoperability

NFT principles make it simple for NFT to switch between habitats. When a developer releases a new NFT project, the NFTs are instantly viewable in millions of wallet providers, tradeable on marketplaces, and, most recently, displayable within virtual worlds. Since open standards include a simple, consistent, secure, and permissioned API for reading and writing data, this is possible.

Tradeability

Free exchange on open marketplaces is the most persuasive aspect allowed by interoperability. Users can now transfer products out of their initial worlds and into a platform where they can take advantage of advanced trading capabilities for the first time. Tradeability of assets marks a shift from a closed economy to an unrestricted, free-market economy for game developers.

Liquidity

Non-fungible tokens with instant tradeability would have more liquidity. NFT marketplaces will appeal to a wide range of audiences, from experienced traders to newcomers, allowing assets to be exposed to a larger pool of buyers.

Immutability and provable scarcity

Developers may use smart contracts to set hard limits on the supply of non-fungible tokens and enforce persistent properties that cannot be changed once the tokens are released.

Programmability

 NFTs are fully programmable. For example CryptoKitties, CryptoPunks, and all the digital assets. 

Non-Fungible token standards

Non-fungible tokens are efficient because of their standards. They provide developers with the assurance that assets can behave in a specific manner.

ERC721

ERC721 was the first standard for representing non-fungible digital assets. It is an inheritable Solidity Smart contract standard. Developers can create new ERC721-compliant contracts by importing them from the OpenZeppelin library. 

ERC1155

ERC1155 brings the idea of semi-fungibility to the NFT world. With ERC1155, IDs represent not single assets but classes of assets. The Enjim team has
pioneered ERC1155. 

Composables

This is led by the ERC-998 standard. It provides a template by which NFTs can own both non-fungible and fungible assets.

Why are NFT’s so valuable?

• Each NFT is unique
• They come with a copyright
• They are rare
• The items are collectible
• They can be resold
• Downloadable only by the owner
• They are immutable 
• They will be forever

This is what makes them very valuable!

How to create, buy, sell NFTs?

The first step is to decide on which blockchain you want to issue your NFTs to. Each blockchain has its own separate NFT token standard, compatible wallet services and marketplaces. For instance, if you create NFTs on top of the OpenSea, you will only be able to sell them on platforms that support OpenSea assets.

The next step will be to find a marketplace. The top NFT marketplaces are currently:

Mintable.app

Opensea

SuperRare

Rarible

Want to know how Bitcoin is different and better than fiat, click here.

The post The craze and rage of NFT | NFT explained appeared first on Deqode Blog.

Crypto is a volatile space – so, there are a few questions you should ask before investing in cryptocurrency projects. This article provides a quick framework for the same – so that you could verify if a cryptocurrency project is legit and worth investing in.

A lot of people do not understand the fundamentals of investing in new tech. It is too early to act as if we’ve already made correct bets and that nothing can happen to change the path of our favorite project – because what we’re talking about This is not a really a sports team or a passing fad. Crypto is a new asset class that can change our society.

So, there are a few questions you should ask yourself before supporting, or investing in any cryptocurrency project:

1. Does it even solve a problem?

2. How does the technology work? Is their whitepaper really a ‘whitepaper’, or does it just give out token details?

3. How is the dev team? Have they worked on something related to the industry of the cryptocurrency project you’re investing in?

4. Do they have a funding scheme? If yes, of what kind? Is it from venture capital, ICO, institutional investment, or community donation?

5. How are they organized?

6. How is the team’s track record?

7. Do they have any institutional backing?

8. How much competition does it face? Where does it stand in the competitive sphere?

9. How close to ready is it? Is there a POC?

10. What are its plans to create, stimulate, and maintain adoption?

11. Does it have a good media presence?

12. How is its mainstream visibility?

13. How about accessibility and liquidity?

14. What is its growth potential based on current price and supply?

15. Can it survive the regulatory hammer?

Regardless of how strong you feel the cryptocurrency you’re investing in is, these are the things you must know. Займ без отказа. This is because each of these questions is important in determining the value potential and sustainability of your coin. 

On the other end of things, cryptocurrency projects should think about answering these questions for their backers. It is important for an investor to know about the project they’re investing in – and you should definitely work on it. If you need any help with this, drop your email here and we’ll contact you soon.

The post 15 Questions You Should Ask Before Investing in Cryptocurrency appeared first on Deqode Blog.

In the bitcoin blockchain, a block is created every 10 minutes and the size limit of a block is 1 MB. This limits the total number of transactions possible in a particular period of time. As we know from our previous articles in the S-series, Ethereum has better throughput than Bitcoin, but it is limited by the block gas limit. Many different projects such as Plasma, Raiden and Lightning Network are trying to solve this problem, as explained in the previous part of this series. This article will take our discussion further, and talk about directed acyclic graph.

Directed Acyclic Graph (DAG)

Directed acyclic graph solves the issue of scalability by taking a totally different approach. There are no blocks and no concept of mining. In a directed acyclic graph, one transaction validates the other to get approved. So, instead of a miner validating all the transaction in a block as in the case of blockchain, each new transaction validates old transactions in DAG. Every new transaction adds to the security of the directed acyclic graph. This results in a graph like structure instead of a chain of blocks.

So, what is a directed acyclic graph ?

A directed acyclic graph is composed of vertices and edges. Vertices represent transactions. An edge is directed from the new transaction (child) to a transaction (parent) it has validated. The first transaction of the network is the Genesis transaction. A parent vertex will never validate a child vertex which makes the graph acyclic. Transactions that don’t have any child transactions are referred as tips.

The graph is directed and acyclic, and hence the name.

If there is a directed edge from transaction A to transaction B, then we could say transaction A directly approves transaction B. If the length of the path from A to B is more than one, we could say transaction A indirectly approves transaction B.

Directed acyclic graph is also based on peer-to-peer network similar to blockchain. In DAG, nodes are distributed throughout the world. Each of them maintain their own copy of the ledger. The transactions are added in a fraction of time in the network. Thus, the DAG network is asynchronous, which makes the system fast. In a directed acyclic graph, you can have a bunch of transactions in parallel and the degree of parallelism adapts dynamically to the current load.

In case of blockchain, the blocks are linked linearly. Their spacing in time and their size are optimized for near-synchrony among nodes. This leads to a cap on the block size which results in a cap on the throughput of the network. If we increase the block size as per traffic, it takes too long for a block to propagate to all nodes in the network. In such situations, there is greater uncertainty about which block is the last block to be added to the network. This leads to chain reorganisation, as discussed in the part one of S-trilogy. More resources are wasted on extending chains that would later be orphaned.

To understand the technology, we will go through two hot projects currently based on DAG – IOTA and Byteball. The mechanism behind these two projects will also help you understand how directed acyclic graph solves the double spending problem .

IOTA

IOTA is, by design, a cryptocurrency for the Internet-of-Things (IoT) industry. The importance of micro-payments is indispensable in the rapidly developing IoT industry, and to pay a fee that is larger than the amount of the value being transferred is not logical. This makes blockchain-based cryptocurrencies such as Bitcoin and Ether unsuitable for such transactions. IOTA is based on DAG which is referred as Tangle in their whitepaper.

Instead of a miner validating a transaction, in IOTA, each transaction must validate at least two previous transactions to get approved. This is analogous to an examination hall where, instead of an invigilator checking for cheating in an exam, each student is programmed in a way that he checks at least two unchecked students.

Weight of a Transaction

There are two types of weights associated with a transaction. First is the transaction’s own weight and second is the cumulative weight.

• Transaction’s own weight refers to the amount of work (POW) put in by the node in issuing that transaction. This weight can only be in the form of 3^n.
• Cumulative weight of a transaction is the sum of its own weight and the self weights of all transactions directly or indirectly approving it. Cumulative weight is very important term as it represents the importance of a transaction.  More the weight of a transaction, less likely for it is to get orphaned.

In above figure, each transaction has cumulative weight and its own weight. Cumulative weight is represented in bold and the self weight is represented in the bottom right corner of that transaction.

For example, Transaction B has own weight of three and cumulative weight of four. Cumulative weight of B = own weight of B + own weight of A, since, A is the only transaction approving it.

In the above figure, when a new transaction X with its own weight equal to three is added to the tangle it approves tips A and C. It directly or indirectly increases the cumulative weight of every transaction by three.

Score of a Transaction

The score of a transaction = Sum of own weights of all transactions approved by this transaction + Own weight of the transaction itself.

Score of transaction A = own weight of transactions D,B,F,G + A’s own weight = 9
Score of transaction C = own weight of transactions D,E,F,G + C’s own weight = 7

Height of a transaction

Length of the longest path from the transaction to genesis transaction of Tangle.

Depth of a transaction

Length of the longest path from some tip to the transaction.

Lazy tip

A node might not want to keep up to date with the current state of the ledger. It might approve same old two transactions for all of its own new transactions. Such new transactions are called lazy tips. Also, this behavior is not appreciated as no new transactions are getting validated by this node. New transactions from honest and hard working nodes must not approve such tips.

Tip selection algorithm

The strategy for determining the two tips to approve is very important, and is the key to IOTA’s unique technology. Since there are usually no ways to enforce a particular tip selection strategy, there must be a good reason for nodes to voluntarily choose to follow a common strategy. A possible reason is knowing that a good portion of other nodes are following the same strategy.

If we choose any 2 random tips then our problem of lazy tips will not be solved. To solve this problem IOTA uses weighted random walks as described below.

In this algorithm, we start a walk from the genesis transaction towards the tips. At each transaction, we choose one of the transactions directly approving this transaction. More the cumulative weight of a transaction more is the probability of choosing that transaction. In this way, we ultimately choose a tip for approval.

How does this solve the lazy tip problem?

In figure 6, when we arrive at transaction 3, two transactions approving it are transaction 5 and transaction 14. The cumulative weight of transaction 14 will be much less than that of 5 until and unless 14 has very high own weight. If the cumulative weight of 5 is much more than probability of choosing 14 will become very low. Hence, we will be able to avoid lazy tips.

So, why not choose the transaction with most cumulative weight with the probability of 1?  In figure 6, suppose 4 is the genesis transaction. Transactions 5, 6 and 7 are approving it directly. Assume that the cumulative weight of the transaction 6 is highest. The algorithm will always choose transaction 6. This will cause a problem as the tips 12 and 13 will never be chosen. Thus, some of the transactions may never get approved.

If the probability is too high that might leave transactions unapproved. If the probability is zero that might approve a lazy tip. Thus, the value of probability, represented by α needs to be chosen cautiously. This algorithm is known as Markov Chain Monte Carlo algorithm.

How are IOTA tokens issued? Can someone mine IOTA tokens?

There is no mining of IOTA tokens. All tokens are considered to be present at an address in the beginning which were then transferred to founder addresses in the genesis transaction.

If there are no miners, how are transactions validated? What happens if a conflicting transaction is added in a Tangle?

Each node checks if the approved transactions are conflicting. If a node finds that a transaction is in conflict with the tangle history or it double spends other transaction, the node will not approve the conflicting transaction in either a direct or an indirect manner. If it validates a conflicting transaction, it fears that the majority of honest nodes will not approve the new transaction.

The local ledger of every node stores the conflicting transactions. Nodes don’t have to come to a consensus to decide which transaction has the right to be in a ledger, all they have to decide is to not approve conflicting transactions. The fraud transactions will ultimately get orphaned. An orphaned transaction is not dropped from the ledger. It will still be stored in the ledger.

But no one directly or indirectly approves the orphaned transactions.

In an IoT network, nodes are devices with specialized chips and they all follow the same set of protocols. It is not suitable for an attacker to submit a conflicting transaction. To do so, he must first reconfigure all other nodes to follow different set of protocols. So, it is best for a node to follow the same set of protocols as the rest of the network.

Confirmation Confidence

Suppose A pays to a merchant M in IOTAs for buying shoes. A might have double spent this same transaction to some other merchant also. Fraud transaction will be ultimately orphaned as discussed above. But, it will take some more time after the initial confirmation. 

How will M decide when to deliver shoes to him? 

The merchant can decide this, using the tip selection algorithm. Many iterations of tip selection algorithm are run and the percentage of tips that directly or indirectly approve the specified transaction is calculated. That represents confirmation confidence. If out of 100 tips 80 tips directly or indirectly approve the transaction, confirmation confidence is 80%. More the confidence more difficult to double spent that transaction. Merchant M can set his own criteria. He may fix a criteria that he will deliver only when confirmation confidence is more than 95%.

Byteball

Byteball is a decentralized system for storage and transfer of value. It can store arbitrary data and transferable values such as currencies, shares, property titles etc. All this data is stored in storage units. Likewise, transactions which transfer these values are stored as storage units. To make it easier to grasp, you should consider storage units as transactions for this blog, just as in case of IOTA. This article will also refer to ‘storage units’ just as ‘units’.

Each storage unit includes one or more hashes of earlier storage units. Hence, confirming them and establishing their partial order, i.e., which storage unit was stored first in the ledger. In IOTA , one transaction has to approve at least two other transactions, this is not compulsory in Byteball. A transaction has to confirm one or more storage units. This is discussed in detail ahead.

The set of storage units and their links form a directed acyclic graph.

Storage units are vertices and their links are edges in the graph. As more and more storage units are added older storage units get confirmations directly or indirectly just as in IOTA.

Everyone is allowed to add a new unit, provided that he signs it and pays a fee. Byteball charges fees, unlike IOTA. This fee plays an important role in keeping the system healthy.

Bytes

Bytes is an internal currency in Byteball network. To store 1 byte of data a user has to pay 1 byte. Anyone can issue their own currency which can then be transferred to any other user, just like the internal currency, bytes. All these transactions are stored as storage units. If we compare this with ethereum environment, bytes is similar to Ether and all these other currencies created by users on byteball platform are similar to tokens issued on Ethereum blockchain.

Blackbytes is another currency available on Byteball network. While bytes is easily traceable, it is much more difficult to trace blackbytes.

Fees in Byteball

As we have discussed before, to store some bytes of data a user has to pay equal number of bytes. This prevents spanning of the ledger with useless messages. The more space your unit takes, the more you have to pay.

For the purposes of calculating unit size, we assume that the unit has exactly two parents, irrespective of the number of the real parents. This is to prevent users who try to approve only a single unit to save fees. 

It is good for directed acyclic graph to be as narrow as possible. To achieve this, users are incentivized to confirm as many units as possible and as recent unit as possible. We can achieve this in two ways:

• Even if many parents are added, fees is same, as discussed above.
• A part of the fees that a new unit pays to store its data is payed to the units which include it first as parent. Other part of the fees is paid to witnesses as discussed later.

The total number of bytes in circulation is 10^15, and this number is constant. All bytes are issued in the genesis unit, then transferred from user to user.

Double Spending in Byteball

Two possible scenarios

There is a partial order between the two units that try to spend the same output, i.e. one of the units (directly or indirectly) includes the other unit, and therefore, comes after it. In this case, we can safely reject the later unit.

In figure 7 above, Red unit tries to double spent Green unit but ther is a partial order between these nodes as Red indirectly confirms Green. In this case, we reject the Red unit. There is no partial order between them. In this case, we accept both. We decide the total order between two units using the Main Chain. This is explained in the next section.

Witnesses

The DAG chain does not have a secure timestamp (or block number). The nodes need a reliable source of transactions that are guaranteed to be generated in a defined order. For this we need the help of the witnesses.

Witnesses are a list of users on Byteball who are non-anonymous and reputable people or companies, or their businesses depend on the health of the network. Part of the fees paid by all the users to get their transaction approved is allocated to witnesses. It is reasonable to expect them to behave honestly. It is also unreasonable to totally trust any single witness.

We have a fixed number of 12 witnesses. Even in case of hack or power out situation, Byteball network will be healthy. If anyone of these witnesses tries to cheat, it will be easy to identify which address cheated and as these addresses are non-anonymous everyone will know the deceiver, which will destroy his reputation as well as he will loose the incentive from Byteball. The task for these witnesses is to just post transactions serially i.e with a partial order and post these transactions frequently.

Main Chain

Based on the transactions posted by the witnesses, a single chain along child-parent links is chosen using an algorithm which can be referred from the Byteball whitepaper. We refer to this chain of transactions as Main Chain. All the units either lie on this chain or can be reached from this chain. This chain is like a highway connecting side roads.

The main chain is indexed from 0 (genesis) in an increasing order. The index number is referred as Main Chain Index (MCI). Units with higher MCI directly or indirectly approves all the units with lower MCI. Therefore, all the units lying on the main chain have their total order defined.

To solve the problem of double spent we need true order in all of the units in the DAG.

Total order needs to be defined for units that do not lie on the main chain. The total order of a unit which does not lie on the main chain is equal to the MCI of the unit (on main chain) which first includes the unit directly or indirectly.

The above figure shows two non-serial storage units (shaded in orange), both of these does not lie on the main chain. One of the transactions is first included by unit with MCI 5 and other is included first by unit with MCI 6. One with MCI 5 wins and is valid unit, the other unit is deemed invalid. In case if both the units have the same main chain index there is a tiebreaker rule that the unit with the lower hash value (as represented in base64 encoding) is valid.

Conclusion

This marks the end of S- trilogy. Thank you for diving deep with us into blockchain scalability issues. If you have any questions regarding this article, please contact the author at pgupta@deqode.com or drop your email here.

Sources

• IOTA Whitepaper.
• Byteball Whitepaper.
• https://medium.com/coinmonks/scaling-a-blockchain-vs-scaling-a-tangle-8b7182eda980
• https://hackernoon.com/a-hitchhikers-guide-to-consensus-algorithms-d81aae3eb0e3

The post S-Trilogy, Part Three: Direct Acyclic Graph, IOTA and Byteball appeared first on Deqode Blog.

State Channels

As we discussed in the previous part of the S-trilogy, layer 2 solutions try to squeeze in the maximum number of possible operations with currently available throughput. A second layer is built in layer 2 solutions, which hinges around the first layer.

State Channels – A Layer 2 Solution

State channels follow the same principle, and are a layer 2 solution. Firstly, a channel is created on-chain. Secondly, transactions are made off-chain, and finally, net result is settled on-chain. Even if you send millions of transactions off-chain, your gas fees is still very low, because only a small number of on-chain transactions is needed to secure the settlement . This opens up the doors for micro-payments using public blockchain.

Transactional capacity is increased dramatically as channels are net-settled on the blockchain.

Bitcoin is implementing this concept of state channels to make payments scalable and with a project called the Lightning Network. Raiden is Ethereum’s version of Bitcoin’s Lightning Network. Both of these projects are in the development phase. These projects are quite similar and discussing any one of these will be sufficient enough to understand the concept of state channels. We will be discussing Raiden in this blog. As these projects are focused on making payments scalable, we refer to these channels as payment channels.

Raiden

For understanding this section, you should have a basic understanding of what ERC20 tokens are and how they work. Also, you should have a basic understanding of what smart contracts are and how they work.

Raiden is a scaling solution for transfer of ERC20 tokens on ethereum blockchain.

As we discussed before, it is built on the concept of payment channels. Instead of making thousands of on-chain transfer of these tokens, we can send these transactions off-chain with ultimate settlement on-chain leading to minimum fees and maximum throughput. It is actually a system of smart contracts built on Ethereum blockchain which allows these fast and cheap token transfers between two parties.

How does it work?

Suppose A and B want to make cheap and fast ERC20 token transactions using payment channels. They need to take the following steps:

1. A channel with a channel Id will be created on-chain where atleast one of them will escrow some amount of ERC20 tokens. Assume both of them deposit 10 tokens each, which means the initial state of channel is [10,10].
2. A transfers 4 tokens to B. They both sign a message which stores the current state of channel as [6,14] with the timestamp. This means that both of them agree to the current state of channel and they cannot refute their signature. These signed messages are just like checks – which once signed cannot bounce back. Signed message is not updated on blockchain instead both parties keep a copy of it. Let’s name this copy of message as SM1.
3. B transfers 8 tokens to A. Current state of channel becomes [14,6]. They both sign a message with current state and the timestamp and keep a copy of it with them. Let’s name this copy of message as SM2.
4. Any one of them can settle the channel by providing the channel Id and latest signed message to the Raiden smart contract. 14 tokens will be transferred to address of A and 6 tokens to address of B.

Challenge Period

Now, what if B submits the signed message, SM1? Raiden contract doesn’t know that there is another signed message SM2. So, B can cheat this way and get himself 14 tokens. This is why there is a challenge period where A can submit the copy of signed message SM2. As its time stamp is higher than that of SM1, Raiden contract will settle the channel in favour of A giving him 14 tokens. If A does not submit his proof before challenge period is over, channel is settled in favour of B. If both A and B are honest, channel can settle immediately as soon as both of them submit the same signed message.

Raiden Network

You don’t need to open a new channel with every new party you want to transact with. Raiden is constructed as a network. This means, although Alice in the figure above might not yet have an open payment channel with Dave, she is indirectly connected to Dave via Bob, or even using multiple steps in between. With the Raiden Network, users are able to transact with anyone who is connected to their network of payment channels through multiple hops. Bob cannot steal Alice’s funds, as he will only receive the sender’s incoming payment if he has already sent the outgoing payment to the recipient.

Let us understand this with another example. Suppose you have to receive a check from a person with whom you have no contact. It is entirely sufficient if you know someone who knows someone – who eventually knows someone – that knows this other person. They all pass checks on to each other until one finally reaches you. But all of them are only valid if you confirm to everyone that you have received yours in the end. None of the middle man can take away your check and this is achieved using cryptography tricks. These middle man can be incentivized with a fees for a healthy network.

Benefits of Raiden Network

Scalability

Most of the transactions are made off-chain, bigger the network the lesser number of on-chain transactions. This will make the system highly scalable.

Latency

It takes about 15–30 seconds to mine a new block in Ethereum. For the finality of transaction, we need to wait for some number of confirmations. Many exchanges wait for 32 confirmations before finalizing a transaction. In Raiden Network, once you have the signed message you can be certain that you hold the amount included in the message. There is no need to wait for any confirmations.

Transaction Fees

Transaction fees is much lower, as only a very small fraction of transactions is made on-chain. Combined fees on all transactions is greatly reduced in comparison to a case where all transactions are made on-chain.

Privacy

Privacy is improved as only net settled transaction is stored on public blockchain. All transactions are not visible to the entire world.

Plasma

Plasma is a scaling solution proposed by Joseph Poon and Vitalik Buterin. They have published a whitepaper on Plasma. Joseph Poon is also coauthor of Lightning Network whitepaper.

Plasma is blockchain within blockchains. Root blockchain, the main Ethereum blockchain, has many child plasma blockchains and each of those blockchains can have their own child blockchains. It is a series of smart contracts which runs on top of a root blockchain, this allows for many blockchains within root blockchain. Root blockchain contract processes only a tiny amount of commitments from child blockchains hence providing high scalability.

Separate plasma contracts can be deployed on root chain each working for different purposes such as private blockchain, decentralised exchange, social network, micropayments.

Private blockchains are a beneficial choice for institutions. Vitalik Buterin discusses in this blog about the comparison between private blockchain and public blockchain. He says that although private blockchain seems more feasible for institutions, public blockchain has its own advantages.

Plasma makes it possible to run a private blockchain over public blockchain hence providing benefits of both, making it perfect for private institutions. 

Now, that you have a understanding of state channels and plasma – a solution for the issue of scalability in blockchain, we will move forward to DAG in the next part of this series. Please click here to navigate to the next article in this trilogy.

To learn more about how Deqode is working towards solving the scalability issues of blockchain, drop your email here.

The post S-Trilogy, Part Two: State Channels and Plasma appeared first on Deqode Blog.

It all started with Satoshi Nakamoto’s whitepaper that was published in 2008. Before the now-legendary paper was published there was no known way to create an authentic digital currency without the help of a centralized authority.

The main issue here was the problem of double spending.

What is the Double Spending Problem?

Any digital currency is just another form of digital files. There is no authority stopping anyone from copying these files and sending them to multiple people. For instance assume that Peter has a file that has been saved locally to his computer. There is nothing preventing Peter from simply copying this file as many times as he wants and sharing the file with multiple individuals. This is known as the double spending problem. This same principle can be applied to digital currencies, which is portrayed in the image below.

The only solution to this issue, before Bitcoin, was to trust a central authority to manage these digital files. In such a system, if a single authority cheats – then the user is doomed and the only way for them to reinforce the breached contract is by taking help of the law, which we know is slow, expensive and uncertain. Another big issue was that this centralization makes the system prone to a single point of failure.

Satoshi Nakamoto’s whitepaper gave a solution for the double spending problem and made it possible to make digital payments without the need for a central authority, which was Bitcoin. The paper solved this problem by using a trustless peer to peer network. Instead of storing data only in a centralized ledger the data is broadcasted throughout the network using gossip protocol and every peer updates its own ledger. This way within a small period of time, the entire network has the same copy of ledger, or we can say that the whole network has the same state.

What is a transaction and what is a block?

A transaction is an exchange of assets between 2 users, for example, bitcoins are assets on the bitcoin blockchain. An exchange of bitcoins among peers is known as a transaction. A block is the collection of these transactions. Every single transaction is not propagated throughout the network, instead, a block once filled is propagated in the network. Every block has a fixed maximum size or the number of maximum number of transactions it can have.

All the blocks are lined up one after other and each block includes the hash of the previous block, in this way forming a chain. 

How is double spending prevented?

A network is composed of nodes (the peers). Some of the nodes are miners. Any node can become a miner, and no permission is needed because it is a public ledger. In simplest terms, miners compete with each other to solve a computational puzzle. One who solves it first broadcasts the block which has a collection of transactions – that miner validates and confirms that there is no double spending. He also broadcasts the solution of the puzzle so that everyone can verify that he has actually solved the puzzle. All nodes also verify the transactions in the block before adding that block in their own copy of ledger. In case a miner has added a double spent transaction in the block the nodes will reject that block and that block will be dropped.

Why would anyone want to be a miner? 

A miner who solves the puzzle and broadcasts the block gets a fixed number of native currency. For example: bitcoins in bitcoin blockchain, miner also gets the transaction fees paid by the user. Miner can choose the transactions that he wants to add in his block, generally miners choose transactions with high fees first, so as to maximize their profit.

Why do we need to waste all this energy to solve a puzzle?

Consider the following attack scenario to understand.

Suppose an attacker wants to double spend a transaction that is in block number 1000 and current block number is 1005. The attacker will make a change in block number 1000 but he can change it only in his own node, as the state of blockchain is same at all other nodes. Attacker forks his own chain from the main chain and adds new blocks to this forked chain and hopes that everyone in the network accepts his chain.

There can be two cases from here. 

• Attacker’s hashing power (computational power to solve the puzzle) is less then 50% of the total hashing power. The speed with which his chain size increases will be less than that of the honest chain.
• Attacker’s hashing power is more then 50% of the total hashing power. The speed with which his chain size increases will be more than that of the honest chain.

Longest Chain Rule

All nodes follow the longest chain rule i.e. the longest chain has most work done on it and so it is honest. 

So in the former case, attacker chain length will be less than honest chain, the probability of successful attack is less and hence attacker will not be able to double spend.

In the latter case attacker chain length will get longer than honest chain and suppose that after 2 hours, length of honest chain is now 1010 and that of attacker chain is 1011. All nodes will update to the chain of attacker and the blocks from 1000 to 1010 mined in honest chain will be dropped. The computational power spent to change a block increases with the depth of the block being changed. If the value of double spending exceeds the computational power cost, it is not sensible to perform such an attack.

Once many blocks are mined on top of a block the transactions in that block may be considered as irreversible.This attack scenario explains the importance of solving a computational expensive puzzle.

This requirement that expensive computations be performed in order to facilitate transactions on the blockchain is popularly known as Proof Of Work.

Scalability Issues with Blockchain

Bitcoin and Ethereum are based on the above explained technology and we all know how popular they are today. Despite the amazing technology there are some problems. The main issue that this technology is facing today is the problem of scalability.

The throughput is small, for bitcoin it is in single digits while throughput of Visa is in 1000s of tranactions per second. As more and more people start adopting bitcoin, the transaction fees will rise (demand is more than supply) thus making small value transactions in bitcoin futile (fees will be more than the value of transaction). 

Recently on Ethereum, a game named cryptokitties took off and the traffic became high thus increasing the transaction fees and number of pending transactions by many folds. The issue of scalability is the biggest barrier for mass adoption of these currencies.

Throughput of blockchain is limited by the fixed size of a block and the propagation time of a new block through the whole peer to peer network.

Solutions to the Scalability Problem

The scalability issue is the most prominent field of research in the blockchain world. Many different solutions are being proposed to solve the issue. These solutions can be classified into two types:

Layer 1 Solutions

These solutions change the blockchain protocols to deal with the problem of scalability. 

Segregated Witness (SegWit)

This is exclusive to Bitcoin. It is a small improvement in the bitcoin protocol which increases the throughput by fitting more transactions in a single block by re-weighing the signatures of transaction data. Signature data of every transaction is moved from the main chain to the parallel side chain which frees up space in the block. Still, the throughput will be in single digits and hence not a solution for mass adoption of bitcoin. SegWit is currently active in the present bitcoin blockchain.

Block Size Increase

Right now as per bitcoin protocol the size of the block is limited to 1 MB this limits the throughput of the bitcoin network. 

Why don’t we just increase the size of the block?

This is currently a topic of debate, a part of bitcoin community believes that increasing block size is necessary for mass adoption of Bitcoin. As it will prevent increase of gas price at times of high traffic. They also believe that SegWit is not a permanent fix and size of blocks must be increased. When SegWit was implemented this community forked a new blockchain ‘Bitcoin Cash’ which does not implement SegWit and has a block size of 8MB.

Other part of the community believes that increasing the block size will centralize the Bitcoin network. As the block size increases, the amount of processing power required to mine a block will increase. This will make it impossible for small scale miners to mine a block and all the power will shift to a handful of miners. Thus making 51% attack more possible. Some of them also believe that Bitcoin should only be used as a store of value like gold.

Increasing block size will cause other problems as well. Size of the block is related to the propagation time of a new block through the network. More the size of the block more time it takes for each node to validate transactions in it. A node propagates a block only after it has validated the block. Increasing block size will increase the propagation time of new block through the whole network.

Chain Reorganization

Suppose there are 2 honest miners A and B, in two different parts of the world. A solves the puzzle and broadcasts his block in the network. Before this block reaches B, B has also solved the puzzle and he also broadcasts his block. So some of the nodes in the network have added the block mined by A to their local copy of ledger and others have added the block mined by B. Ultimately one of these blocks is dropped. This is known as chain reorganization. 

Although the dropped block had honest transactions it got dropped. All the hashrate is wasted which could have been used to mine another block which would have made the network more secure. More the size of the block more the wastage of hashrate.

Sharding
Any transaction that takes place on the ethereum network has to be validated and stored by each node in the network so that every node has the same state. This puts a limit on the throughput on a protocol level. Hence, no matter what the implementation, without changing the protocol it is difficult to solve the scalability issue. 

What if all nodes don’t have to process each transaction? The network is divided into some sections which can work semi-independently. Each section could process a different batch of transactions and hence increase the throughput by many folds. Each of these sections is termed as ‘shard’. This is the idea behind sharding.

Layer 2 Solutions

Layer 2 solutions don’t change anything on the protocol level. They are built on top of the same protocols, a kind of a second layer on top of Layer1.

The purpose is to make maximum possible use from available throughput. We try to squeeze in maximum possible number of operations. This works by creating a second layer which is hinged around first layer. All the transactions in Layer2 take place off chain, those transactions need not to be included in Layer1 instantly. All the transactions are recorded off chain. The net result is finally pushed in the Layer1 thus giving them security of Layer 1. 

Although the finality of the transaction is less in Layer2 transactions than Layer1 transactions. Layer2 transactions are also secure and final enough for many practical purposes.

State Channels and Plasma are a few examples of the proposed Layer2 solutions. We will discuss them here.

Must read: “Victory Royale: How Blockchain Could Fix Fortnite“

The post S-Trilogy, Part One: Understanding Blockchain, Its Scalability Issues, and their Solutions appeared first on Deqode Blog.

“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.”

Vitalik Buterin

The concept of decentralized systems

Decentralized systems enable us to store assets in a network that can be accessed over the Internet. These assets can be anything – ranging from a small data entry to meticulously prepared documents. Through decentralized systems, the owner has direct control of them via their private key, which is directly linked to the assets. The owner can transfer the assets whenever desired, and to anyone.

The core idea of decentralized systems is to remove the control of a single entity like a government, a bank, or a multinational company in the network. Decentralization could help us in the following way:

• Empowered users: Decentralized systems allow the users to keep control of all their information and transactions.
• Fault tolerance: Decentralized systems are less likely to fail accidentally because they rely on many disparate components.
• Durability and attack resistance: Because blockchain does not have a single point of control and is able to survive malicious attacks, the decentralized systems make it extremely hard to attack and destroy, or manipulate data.
• Free from scams: It is much harder for users in decentralized systems to indulge in ways that will benefit them by causing harm to other users.

Other benefits include

• Removing third-party risks: This technology enables users to make an exchange without the intermediation of a third party, thus eliminating risk.
• Lower transaction costs: By eliminating third-party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction fees
• Transparency: Changes to public blockchains are publicly viewable by all parties creating transparency, and all transactions are immutable, meaning they cannot be altered or deleted.
• Authenticity: Because of the decentralized system the blockchain data is complete, consistent, timely, accurate, and widely available.

The Internet transformed our lives by decentralizing the access and flow of information. The next phase has now begun. Causing the paradigm shift, blockchain technology can truly influence industries and make the processes more democratic, secure, transparent, and efficient.

Suggested Reading: An Introduction to Blockchain for FinTech

The concept of distributed ledger

Blockchain in its simplest form is a public ledger that provides information of all the participants and all digital transactions that have ever been executed. A block is the prevailing part of a blockchain which is supposed to keep the record of the recent transactions, and once they are completed, it goes into the chain. Blocks are added in a sequential manner with the next block containing the hash of the previous block. A new block is generated as soon as the previous block gets entered in the blockchain database.

This process helps in recording of each transaction and sharing it across the network. Every user in the network can validate transactions and has an identical copy of the ledger to which the encrypted transactions can be added. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds. Through the use of keys and signatures, the security and accuracy of assets is maintained cryptographically and are controlled by the participant. The end result is a highly efficient and secure method of performing transactions and it serves as an online ledger keeping record of transactions that can’t be changed.

Additional benefits that this concept provides is:

Fraud protection

Firstly, nothing can be changed on blockchain – and as the ledger is present across multiple nodes, it is easier to track.

Management

Secondly, with all transactions being added to a single public ledger, it reduces the clutter and complications of multiple ledgers.

Ownership

Thirdly, distributed ledgers can provide new ways of assuring ownership and provenance for goods and intellectual property.

Removal of mediator

Blockchain removes the need of a mediator and replaces it with a network. In this way, it can also decrease the settlement times of many payments transactions.

The two concepts discussed above show how blockchain provides a tamper free environment for the participants in the network. Blockchain network automatically checks and updates itself every few minutes. This helps in providing a self-reviewing and a robust system, and results in:

Transparency

All data is embedded within the network which makes it public.

Immutability

If anyone tries to alter the block data on the blockchain, it would require a huge amount of computing power to get ahead of the entire network. Hence, it proves that the system cannot be corrupted easily.

No single point of failure

All the data is linked and verified at every block.

The nodes, together, create a very powerful network. Every node is an administrator of the blockchain. Nodes have incentives for participating in the network. They compete in order to have the chance of winning digital currencies by solving computational puzzles. This way, these specific nodes are said to be mining for the recent blocks which contain all the details of the recent transactions.

The following two concepts complement these features:

The concept of hashing

There are many cases where authenticity of data and documents is very important. Many organizations have very sensitive documents, assets, or contracts that need to be protected. When data, a file, or a document is stored, a hash is created for each file. A hash is like the fingerprint that through an algorithm, turns data into an output of fixed length which is unique for every single transaction.

Every block can be divided into two parts, namely the header and the transaction part. The header includes the previous block’s hash and it references the previous hash it is building upon. It also stores the hash of the current transaction which is meant to be connect the next block when added. The blockchain is distributed and updated with the new block added. In this way, other locations can continue to maintain it if any of the copy of blockchain is compromised. This makes the blockchain immutable. By comparing the hash of the data the authenticity of the data can be verified which helps in achieving an independently verifiable system.

The concept of minting

There are many ways through which one can mint coin. As mentioned above, the most observed method is mining, but other methods have also been proposed. Let us take the case of one of the most popular cryptocurrency: Bitcoin. The Bitcoin community uses mining. Now, every network uses a ‘consensus’ algorithm for facilitation. Bitcoin uses an algorithm called ‘Proof of work’. It is a protocol by which somebody can effectively prove that they have engaged in a significant amount of computational work.

The idea behind mining is that it requires solving a computational puzzle.

The role of the miner is to create the block containing a number of latest transaction, it has to encrypt data by all the computational process and thus provide the proof of work. The miner gets rewarded financially by doing it. The miners compete with each other in order to be the first one to add the recent block on the top of the blockchain. The added block is then verified by other nodes when other blocks are added on top of it.

Let us try to understand another algorithm for better clarity: Proof of stake.

It does not involve any computational work at all. The idea is that traditional mining seems to have an unnecessary step – the miners earn monetary rewards in the form of Bitcoin using which they have to spend money – in order to buy power and equipments in order to operate their mining rigs – which will again be used to solve puzzles and in turn the get earn reward. In Proof of stake, the process of achieving the same goal is quite different. The creator of new block is chosen depending on the stakes. This helps in removing the external step of having to use the actual power and actual hardware. It would also help in lowering the overall cost of the mining process.

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

Don & Alex Tapscott, authors Blockchain Revolution (2016)

Must read: Why it’s time for automotive industry to take a leap of faith into blockchain

It is worth noting that a blockchain can also be private.

They could be made accessible only to invited members and validated by administrator(s) or a semi-autonomous guiding algorithm. Public blockchains are truly open disintermediated networks, but private blockchains are often used to coordinate closed networks holding sensitive information. These private blockchains will likely be the prevailing means for storing disintermediated energy information like meter and payment data.

One of the major uses of blockchain that has popularized the technology is smart contracts. A smart contract is similar to a contract in the physical world. But, it’s digital and is represented by a computer program stored inside a blockchain. Smart contracts are pretty important to understand to get a deeper look at the utility of blockchain technology.

Smart contracts

The classic example used to demonstrate smart contracts in the form of code executing automatically is a vending machine. Unlike a person, a vending machine behaves algorithmically; the same instruction set will be followed every time in every case.
When you deposit money and make a selection, the item is released. There is no possibility of the machine not feeling like complying with the contract today, or only partially complying (as long as it is not broken). A smart contract similarly cannot help but execute the prespecified code. As Lessig reminds us, “code is law” in the sense that the code will execute no matter what. This could be good or bad depending on the situation; either way, it is a new kind of situation in society that will require a heavy accommodation period if blockchain-based smart contracts are to become widespread.

Melanie Swan

Blockchain: Blueprint for a New Economy

A smart contract is a piece of software that stores rules for negotiating the terms of an agreement. It also automatically verifies fulfillment, and then executes the agreed terms. Since a smart contract removes reliance on a third party when establishing business relations, the parties making an agreement can transact directly with each other.

A smart contract is stored inside a blockchain – where all data is stored in a distributed manner, so no one is in control of the data.

In a decentralized business model, smart contracts replace any other trusted third party. Smart contracts are implemented within blockchain, therefore they inherit some of its features:

• Immutability: A smart contract can never be changed, therefore no one can tamper with or break a contract
• Distributed: Just like any transaction on a blockchain, everyone in the network validates the outcome of the contract. Distribution makes it impossible for an attacker to force control to release funds, as all other participants would detect such an attempt and mark it as invalid

Blockchain technology could provide the infrastructure for sophisticated networks that manage payments, sales, trading, and distribution. Given their potential to streamline transactions and cut costs, blockchains and smart contracts could help to remove pain points and friction throughout the power value chain. To learn more about how blockchain could help your business, drop your email address here.

You may also like: Forecasting blockchain’s impact on SMEs in coming five years.

The post Key Concepts of Blockchain: The Very Basics of Blockchain Technology appeared first on Deqode Blog.

Blockchain has emerged as the best long term investment in the financial services industry. The technology is garnering attention for all the right reasons. It is clearly a game-changing, disruptive innovation that holds the capability of shaking up the traditional financial markets. But its specific meaning is getting diluted along the way. Businesses need to understand the core value of blockchain technology for fintech and shape their strategies accordingly. This article discusses how blockchain could fit the current financial services ecosystem.

The fintech ecosystem

Before understanding blockchain’s impact in financial services, we need to discuss the ecosystem it could transform, and establish a general understanding of the same. Here are the roles of the various participants in the fintech ecosystem and the various challenges faced by them.

Participants
Governments, financial services companies, and fintech startups together form an ecosystem. All the participants of this ecosystem face different challenges and opportunities. With the advancement in technology every day, this landscape is becoming more dynamic and complex than ever.

Financial Institutions
Traditional financial institutions are trying to add layers of modern technology to their existing legacy systems. Holland FinTech (2015) forecasts that approximately $660 billion in revenue may migrate from traditional financial services to fintech services in the areas of payments, crowdfunding, wealth management, and lending. Banks are also investing heavily in innovation. However, these institutions haven’t yet fully diffused these innovation strategies to all their processes. Because of cyber attacks, institutions are wary of the threats to their systems.

Startups
The global investment in fintech startups has increased from around $3 billion in 2013 to $8 billion last year. While the disruption opportunity for fintech startups is massive, they are still looking for a way to scale their business – while facing increased regulations and higher costs.

Governments
Governments have an important role in the evolution of fintech. They need to balance their activities carefully – encouraging innovation without inhibiting evolution. As governments develop policies and programs, there needs to be an active engagement with stakeholders. This could be in the form of formal feedback mechanisms or ad hoc opportunities and conversations.

Blockchain driving disruption in the fintech landscape

It’s a very interesting space to watch. It’s clear that blockchain has the potential to make finance more efficient, but the big players are well-established. And establishments don’t tend to favor innovation. I’d keep an eye on startups who want to disrupt, but also know how to play nice with the institutions.

Jeff Koyen

Now that we have established a general fintech ecosystem, we can talk about its relation to blockchain. It is evident that blockchain is the cornerstone of the next revolution in the fintech industry. As the financial service industry is moving from exploration phase to application phase of blockchain, it is very important for the financial institutions or experts to understand the role of blockchain in fintech if they want to take advantage of this.

Why fintech needs blockchain?

The biggest challenge a fintech company faces is trust. Banks and financial institutions have huge cash reserves using which they create secure networks on which banking transactions take place. Fintech companies lack funds which restrict them from developing or procuring a high-security system.

Enter blockchain. Blockchain, for the most part, is cheap in terms of developing – and also highly secure and trustless. It allows companies to track the complete lifecycle of a financial transaction. Blockchain has given the opportunity to create secure and safe financial products and bring innovation in the financial sector.

Blockchain has the potential to truly disrupt multiple industries and make the processes more democratic, secure, transparent, and efficient. This leads us to another obvious question.

What Makes Blockchain So Powerful?

The answer to this question lies in the two inherent properties of a blockchain – decentralization, and distribution.

For centuries we have trusted a third party for carrying out all our transactions. The entire data has been centrally stored and these central parties majorly formed the way economies work. Have you ever wondered what would happen if one or all of these third parties went corrupt? It would create huge chaos in society. With blockchain, the data is decentralized and there is no single authority. Blockchain potentially cuts out the middleman, giving back the power to the owner of the assets – data or tokens carrying some financial value.

Suggested Reading: Understanding blockchain and its scalability issues

The distributed infrastructure provides blockchain with an ability to share information that is secure and provide for the unalterable transfer of data. This ensures data integrity. It makes blockchain technology an important tool in building trust among business and consumers. A distributed ledger can take over many of the functions performed by central third parties. This is particularly relevant for the financial services industry which trusts these third parties to build trust.

If you are running a business or are a part of leadership, then you must seriously start re-imagining your business model and explore how you can integrate blockchain to remain viable. To learn more, drop your email address here.

Now that you know about blockchain and fintech – and the way blockchain is driving disruption in the fintech industry, let us take a look at the current use cases of blockchain technology in the financial services. It is clear that there are a number of major areas for applying the blockchain technologies emerging but, right now, it seems to me these are the major ones:

General Blockchain Use-Cases

1. Agreement automation via smart contracts: A smart contract is a computer code running on top of a blockchain containing a set of rules under which the parties to that smart contract agree to interact with each other. When these predefined rules are met, the agreement is automatically enforced. The smart contract code has the ability to facilitate, verify, and enforce the negotiation or performance of an agreement or transaction.
2. Digital payments: The transfer of value or assets has always been a slow and expensive process. Imagine you have to send $100 from the USA to your friend in your Europe, who have an account with a local bank, it takes a number of banks and institutions to finally collect the money. With Blockchain, this process is simplified and faster at a cost much less than the traditional banking institutions.
3. Digital identity: When identity management is moved to blockchain technology, users are able to choose how they identify themselves and with whom their identity is shared. Users still need to register their identity on the blockchain of course. But, a new registration for every service provider is not needed, provided they are also connected to the blockchain.
4. Trading: Buying and selling stocks and shares involves many middlemen, such as brokers and the stock exchange itself. A blockchain is a decentralized and secure ledger that gives every stakeholder a say in the validation of a transaction and eliminates some of the ‘middlemen’ while changing the role of others. Eliminating the middlemen from the share trading process speeds up the settlement process and allows for greater trade accuracy.

To learn about more financial services use cases of blockchain, please click here.

Conclusion

Given the use cases, it is evident that companies should start shaping their blockchain strategies to future-proof their organizations. It is equally important to research and keep up with new developments to make the best use of blockchain for fintech.

Now that you have an idea where blockchain could fit in the financial landscape, you could check out our in-depth article on blockchain in banking, have a look at how blockchain could disrupt auditing, and how it could help in supply chain finance. To discuss the possibilities of blockchain for your organization, please drop your email address here, or directly email the author of this article at latha@deqode.com.

The post The 101 of Blockchain in Fintech Industry: An Introduction to Blockchain in Financial Services appeared first on Deqode Blog.