With the price of Cryptocurrency Bitcoin gyrating wildly it is time to examine the technology and what industries may be impacted.  As it stands, if your industry transacts or uses a database it is likely to be disrupted by Bitcoin or its underlying technology Blockchain.

Table of Contents

What is the Blockchain?

Where might Blockchain be useful?

Does my business need Blockchain?

Critical success factors

Industries impacted by Blockchain

Is Bitcoin an unstoppable force?

The Genesis Block

What is The Blockchain?

The blockchain is a distributed ledger technology that underlies cryptocurrencies like bitcoin. It provides a way to record and transfer data that is transparent, safe, auditable.  Each block in the Blockchain effectively carries the digital signature of the previous block. Like the ‘Digital DNA’ of its parent block.  Picture of a strand of DNAIndeed, it contains the digital DNA of its entire lineage all the way back to the first ‘genesis’ block.   Any attempt to manipulate an earlier block will cause a vastly different digital DNA to be produced along the chain.  This effectively makes the system immutable.

 

The Blockchain may help organisations that use it become more:

  1. Decentralized,
  2. Transparent
  3. Efficient, and,
  4. Secure

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Where might Blockchain Technology be useful?

Broadly speaking distributed ledger technology can be useful to any business or organization that keeps a database.  More specifically:

  1. Anywhere value is exchanged
  2. Busy market ecosystems, comprising buyers, sellers and perhaps even regulators. Cases where your business is interacting with lots of people.  In such cases the Blockchain can be relied upon as a trusted source of information for all participants.
  3. In situations where the existing market is clumsy and slow. Markets where there is, no trust, no transparency and/or privacy concerns.  Transactional situations where there are many participants requiring a high level of verification before proceeding with a deal.  One example might be Real Estate – where bankers, agents and solicitors all require verified information.
  4. Where simple rules might be automatically implemented. Win/loss situations in betting and gambling are examples here.  (As are futures trading and forecasting).
  5. Where markets are experiencing transactional friction. Supply chains where buyers and sellers worry about payment and delivery.  In cases such as this a shared ledger of exactly what has happened and where the product/service is at any given instant can increase trust and transaction comfort.  Thus, speeding up commerce and lowering costs in terms of required working capital.
  6. Government Regulators may utilize the Blockchain to provide government benefits to those that are eligible. Also, data collection and storage for the purposes of planning may be an application.  For instance, the collection of data concerning rentals in a specific area may be useful in future town planning and resource allocation.

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Does my business need the Blockchain?

Having read all of the above you may be asking yourself if all of this is really necessary for your business –  Is the Blockchain just an emerging technology looking for a problem to solve?

Those are real concerns.  In addressing these concern, you should consider the following:

  1. Are you dealing with the most important problems for your business?
  2. Perhaps, not using Blockchain Technology if there is a better way to solve the problem using existing technology. I.E.  Asking yourself does this really need to be in a distributed ledger?

Dilbert blockchain cartoon

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Critical success factors

In order to successfully implement a Blockchain project, it is important to consider the following factors:

  1. Ensure that you are reducing transaction friction.
  2. How will you achieve a ‘critical mass’ of users to ensure that the project is beneficial to all?
  3. What will you charge and who might you subsidize into your system to ensure success?  Who are the most important users?
  4. How will you ensure a great user experience for all participants?
  5. How will you ensure the platform is properly Governed? E.  Clear, open and trusted.  Keeping the platform secure and stable, whilst adhering to any required regulations…and… operating within your specified platform ethics and principles?

Check out some of the industries it’s already impacting.

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Industries Impacted by Blockchain

  1. Banking and Payments

The blockchain technology holds great promise in this area. Providing equitable access to financial services Globally – including those in third world countries who don’t have access to traditional banking. Bitcoin allows anyone to send money securely across borders with relatively low fees. Abra is one startup that is working on a bitcoin-based remittance service.

Barclays are also working on adopting blockchain technology to make their business operations faster, more efficient and secure. IBM predicts that 15% of banks will be using the blockchain by the end of 2017.

A prime example of disruption – Ripple:  Global Bank Transfers

Ripple is distributed financial technology that allows banks to send international payments across networks in real time.  It is a faster and cheaper option than the current transfer technologies.  They have experienced explosive growth, with some 75 banks having signed up to date.  From Ripple’s website:

“In a world where three billion people are connected online, cars drive themselves and appliances can communicate, global payments are still stuck in the disco era.”

Ripple also have a well performing Cryptocurrency.

Ripple’s XRP coin recently become the world’s penultimate cryptocurrency (by market capitalization).

Image of Ripple's Cryptocurrency

At day’s end banking digitization in a smart manner can not only impact direct cost savings for the bank by opening efficiencies, but more importantly, provide a far more frictionless experience for end customers. From individuals to global organizations, the impact of quicker international payments is staggering.

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  1. Cyber Security

Although the blockchain ledger is public, the data is verified and encrypted using advanced cryptography. This way the data is less prone to being hacked or changed without authorisation.Picture of an eye spying through Google logo

That said, the applications build on the blockchain are still young and there have been several hacks in recent months. This is something future applications will need to address.

 

 

  1. Supply Chain Management – Tracking Diamonds and Wine

Blockchain technology has been applied to the wine industry.  Everledger, announced last year that the intention of getting into the fine wine industry is to tidy up supply chain tracking. As an example, a 2001 Margaux bottle of wine was certified on the Blockchain with the help of fine wine experts.

4981xz-1630

The provision of permanent transaction, documentation, decentralization and 100% transparency, should…

“minimise counterfeiting and thereby increase confidence and activity in the collectible wine industry”… according to Anthem Blanchard CEO of Anthem Vault.

Experts broadly agree but there is more to the story.

Combined with IoT technologies the ability to collect data along the entire supply chain is now a reality.  This should have three very clear and distinct benefits:

  1.  Transaction transparency along the chain
  2. Guarantee of asset delivery
  3. Facilitation of insurance claims.

Blockchain streamlines companies supply chain management -asset transfer and insurance claims –  by feeding data directly into the distributed ledger.  The technology could also be applied to other high value items such as diamonds and works of art.

Picture of a Diamond

Indeed, Everledger also has been used for a new a new system that teams a private blockchain with a public blockchain to verify where diamonds come from. Transactions are recorded on the private ledger and then ‘time stamped’ for verification on the public ledger.  The system is designed to counter the infamous trade in conflict area diamonds or known as blood diamonds.

  1. Forecasting

The blockchain is set to change the entire approach to research, consulting, analysis and forecasting. Online platforms like Augur are looking to create global decentralized prediction markets. These technologies can be used to place and monitor bets on anything from sports to stocks to elections in a decentralized way.

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  1. Networking and the Internet of Things

Samsung and IBM are using blockchain technology for a new concept called ADEPT, which will create a decentralized network of IoT devices.2 Operating like a public ledger for a large number of devices, it would eliminate the need for a central location to handle communications between them. The devices would be able to communicate to each other directly to update software, manage bugs, and monitor energy usage.

  1. Insurance

The global insurance market is based on trust management. The blockchain is a new way of managing trust and can be used to verify many types of data in insurance contracts, such as the insured person’s identity. So-called oracles can be used to integrate real-world data with blockchain smart contracts. This technology is very useful for any type of insurance that relies on real-world data, for example crop insurance. Aeternity is one blockchain project that is building tools that are useful in the insurance industry.

  1. Private Transport and Ride Sharing

The blockchain can be used to create decentralised versions of peer-to-peer ridesharing apps, allowing both car owners and users to arrange terms and conditions in a secure way without third party providers. Startups working in this area include Arcade City and La’Zooz.

The use of built-in e-wallets can allow car owners to automatically pay for parking, highway tolls, and electricity top-ups for their vehicle. UBS, ZF and Innogy are some of the companies developing blockchain based e-wallets.

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  1. Cloud Storage

The current cloud storage landscape is not without its faults.  Data on a centralized server is inherently vulnerable to hacking, data loss, or human error.  Using blockchain technology allows cloud storage to be more secure and robust against attacks. However, the most compelling issue is that one company has control over all of your important files.

Decentralising Cloud Storage Sia:

Sia splits, encrypts, and distributes stored user files across a decentralized network.  Thus wresting total control of your important files from Dropbox, Amazon, Microsoft and other cloud storage innovators. The value proposition here is that one single company no longer owns your crucial files and data, while also dragging down costs and spreading files across nodes, mitigating the risk of any singular point of failure.

Sia also allows anyone to potentially monetize their own hard drives. Hoping to be the storage solution of the future, they have seen massive growth already. The decentralized storage space is one to watch in general with plenty of action coming from other innovators such as Storj.

  1. Charity

Common complaints in the charity space include inefficiency and corruption, which prevent money from reaching those that are meant to have it. Using blockchain technology to track donations can let you be sure your money is going to end up in the right hands. Bitcoin-based charities like the BitGive Foundation use blockchain’s secure and transparent distributed ledger to let donors see that the intended party has received the funds.

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  1. Voting

Probably one of the most important areas of society that the blockchain will disrupt is voting. The 2016 US election is not the first-time certain parties were accused of rigging election results. Blockchain technology can be used for voter registration and identity verification, and electronic vote counting to ensure that only legitimate votes are counted, and no votes are changed or removed. Creating an immutable, publicly-viewable ledger of recorded votes would be a massive step toward making elections more fair and democratic. Democracy Earth and Follow My Vote are two startups aiming to disrupt democracy itself through creating blockchain-based online voting systems for governments.

  1. Government

Government systems are often slow, opaque, and prone to corruption. Implementing blockchain-based systems can significantly reduce bureaucracy and increase security, efficiency, and transparency of government operations. Dubai, for example, is aiming to put all its government documents on the blockchain by 2020.

  1. Public Benefits

The public benefits system is another sector that suffers from slowness and bureaucracy. Blockchain technology can help assess, verify, and distribute welfare or unemployment benefits in a much more streamlined and secure way. GovCoin is a UK-based company that is helping the government to distribute public benefits using blockchain technology. The blockchain is also a good contender for implementing a basic income. Circles is a project working on developing a blockchain-based technology for implementing a universal basic income.

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  1. Healthcare

Another industry that relies on many legacy systems and is ripe for disruption is healthcare. One of the challenges hospitals face is the lack of a secure platform to store and share data, and they are often victims of hacking because of outdated infrastructure. Blockchain technology can allow hospitals to safely store data like medical records and share it with authorized professionals or patients. This can improve data security and can even help with accuracy and speed of diagnosis. Gem and Tierion are two companies that are working on disrupting the current healthcare data space.1

  1. Energy Management

Energy management has been a highly centralized industry for a long time. Energy producers and users cannot buy it directly from each other and have to go through the public grid or a trusted private intermediary. TransactiveGrid is a startup using  Ethereum that allows customers to buy and sell energy from each other in a peer-to-peer way.

  1. Online Music

Several startups are coming up with ways for musicians to get paid directly from their fans, without giving up large percentages of sales to platforms or record companies. Smart contracts can also be used to automatically solve licensing issues, and better catalog songs with their respective creators. Mycelia and Ujo Music are two startups creating blockchain-based solutions in the music industry.

  1. Retail

When you shop, your trust of the retail system is tied to the trust of the store or marketplace. Decentralised blockchain-based retail utilities work differently: they connect buyers and sellers without a middleman and associated fees. In these cases, trust comes from smart contract systems, the1 security of exchanges, and built-in reputation management systems. One startup disrupting the retail space is OpenBazaar.

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  1. Real Estate

Some of the issues in buying and selling real estate are bureaucracy, lack of transparency, fraud, and mistakes in public records. Using blockchain technology can speed up transactions by reducing the need for paper-based record keeping. It can also help with tracking, verifying ownership, ensuring accuracy of documents, and transferring property deeds. Ubitquity, is a blockchain-secured platform for real estate record-keeping that is an alternative for legacy paper based systems.

  1. Crowdfunding

Crowdfunding has become a popular method of fundraising for new startups and projects in recent years. Crowdfunding platforms exist to create trust between project creators and supporters, but they also charge high fees. In blockchain-based crowdfunding, trust is instead created through smart contracts and online reputation systems, which removes the need for a middle-man. New projects can raise funds by releasing their own tokens that represent value and can later be exchanged for products, services, or cash. Many blockchain startups have now raised millions of dollars through such token sales. Although it’s still early days and the regulatory future or blockchain-based crowdfunding is uncertain, it’s an area that holds a lot of promise.

  1. Gaming

CryptoKitties is a brand-new start up (28 November 2017), that has taken the blockchain world by storm.  It simply allows for the purchase of ‘digital kittens’.  This is probably better explained using the tag from the CryptoKitties Webpage,

“Collect and trade CryptoKitties in one of the world’s first blockchain games. Breed your rarest cats to create the purrfect furry friend. The future is meow!”

Picture of a CryptoKittie

(Well beauty is in the eye of the beholder!)

But the concept is genius!  You purchase your Kitty for collection or breeding purposes.  If you are breeding then you select an appropriate mate, pay a siring fee, and your Kitten will produce offspring with a combination of the features of the parents.  This may seem trivial – but a CryptoKitten was sold for almost $US 120,000 recently!

Perhaps, the future truly is “meow!”

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  1. Marketing and Media

Blockchain has proven useful in finance — for currency transfers and secure data applications — as well as in tracking objects (as outlined above).  However, marketing applications may take some time to reach fruition. (There is little happening in the area yet, with the notable exception of BitTeaser, an advertising network that collects revenue in bitcoin!)

Some of the ways that the industry may make use of blockchain include:

  • Audit of Advertisement delivery
 Blockchain could be used to logue adverts to ensure they are being delivered on time and to the appropriate target audiences. Using expert Auditors such a Price Waterhouse Cooper or Deloitte is very expensive and time consuming.
  • Corporate social responsibility
 Accountability of CSR is a bit soft. CSR statements may be released, yet and subsequent meanings and interpretations may become blurred over time. The blockchain provides for the possibility of CSR accountability. Effectively creating “immutable digitized promises,” or contracts and publishing these on the Blockchain. Some areas a company might use this for marketing include:
    • Certified child labour free
    • Sustainable/Environmental production practices used
    • Conflict Zone Free

There are many possibilities.  In fact, anything the company deems as important to the consumer and be codified into a Blockchain “CSR social contract”.

Marketing
  It is possible to use Blockchain to let customers verify a product. Perhaps scanning a code with their phones to see the story behind the product – where it’s from, who designed it, what other colors it might come in etc.  The idea is that a customer can more readily identify and engage with the product.  This makes for more palatable marketing for the consumer, who now sees the product as ‘one of a kind, instead of one in a product line’.  A start-up in this area is VeChain.

  • Managing consumer data
 The blockchain gives marketers a way to maintain an individual’s anonymity. Many brands are now seeking direct connections to customers and are intent on removing the middlemen when it comes to data. The blockchain would be a way to maintain transaction data in a highly decentralized way so it’s both secure and massive.
  1. Renewable Energy – MyBit:

MyBit is designed to enable anyone to invest in any money-making machinery. They are achieving this goal starting with renewable energy. They created a blockchain using the Ethereum platform for granting landowners access to crowdfunding and investment sources for a decentralized power grid. (For example, solar power installations).  MyBit is looking to remove the financial barriers to entry in the alternative asset investments.  Effectively letting anyone worldwide to benefit from renewable energy.

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22.  Paragon and Medical Cannabis

With the medical benefits of Cannabis gaining wider acceptance and several states legalising its use it was somewhat inevitable that cannabis and the blockchain would be combined legally.

Beauty queen Jessica Versteeg, (Inspired by the painkiller overdose death of her New York Giants boyfriend Tyler Sash), started the CannabisCoin – Paragon – A cryptocurrency designed to facilitate cannabis transactions on the blockchain,

Picture of a Cannabis coin cryptocurrency
Cannabis Coin

Tyler had been battling an addiction to painkillers prescribed for him after sustaining a severe injury playing for the New York Giants.  He on multiple occasions requested cannabis as a form of pain control but Versteeg refused.  She believed cannabis to be a dangerous drug.  Sadly, Tyler Sash succumbed to his addiction to the painkillers.

The Paragon system is designed to maintain a patients ‘medical confidentiality’, by using different data access ‘permissions’ for different users.  Medical records are kept off the blockchain, but critical information like the prescribing doctors name and license number together with the patients prescription are verified on the blockchain.

Image of medicinal cannabis
Medicinal Cannabis

 

It is estimated that the Cannabis industry in the U.S. is a $US100 Billion industry.   Most of it illicit and cash based.

It is hoped that VerSteeg’s enterprise will bring some standardisation and  transparency to the industry.

 

 

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Is the Cryptocurrency Bitcoin an unstoppable force?

No lesser mind than Bill Gates has claimed ‘nothing can stop Bitcoin‘.  So, is Bitcoin really unstoppable?

Image of a bitcoin

Technologically: yes. Completely.

Politically: Well… sort of.

Bitcoin is a technology. Not a company or a specific currency.  It’s fully decentralized across about 10,000 computers worldwide, any one of which can fully restore the entire network.

In a way, it’s very similar to the internet. You can block specific people from using specific websites… but it’s pretty hard to stop “the internet.” With satellites flying around the world beaming internet, 3G networks in many countries, and phone lines that you can plug a modem into, it’s pretty damn hard to stop people from using the internet altogether.

Bitcoin is just like that… except even without the internet, you can still hold on to your Bitcoins in an offline way.

As such, it’s not something you can “close down.”

Even if governments make it illegal to use Bitcoin, they can’t ever actually “close it down” or stop it, unless they stop the internet.

With that said:

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If governments make it outright illegal to use or own Bitcoin, or outlaw exchanges, that’s going to put a BIG fork in the works.

Right now, Bitcoin is not stable or popular enough to be a standalone currency. In order to survive, it needs to be exchangeable to other currencies… In fact, most currencies need to be exchangeable. Imagine if it was illegal to exchange your Swedish Kroners to any other currency… You probably wouldn’t want to be paid in Kroners, would you?

If governments reduce the liquidity of Bitcoin, they make it less viable.

If they make it illegal, they push anyone using it into the fringe.

A great way to think about this is the Prohibition Era in the United States. Overnight, millions of people who enjoy a drink became outlaws, consuming alcohol in secrecy in their basements. Drinking didn’t stop (After all, Al Capone made millions as a result), but it certainly put a hamper on the industry.

A similar thing could happen to Bitcoin. It wouldn’t stop it altogether, but it certainly would negatively influence it’s ability to become a viable everyday currency, and would push people into the fringes, using and keeping Bitcoin secretly.

Fortunately, most liberal, democratic governments probably won’t try to outlaw Bitcoin entirely.

Doing so would be like blocking you from investing in startups, or buying gold. Some countries have done it, but the majority of them don’t mind too much.

Despite the fact that Bitcoin is an existential threat to the fractional reserve monetary system, I don’t think that governments are going to shoot it down… but now I’m just getting into conjecture.

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  • First block to be created at the beginning of the blockchain.
  • For bitcoin, it is numbered  block 0.
  • The genesis block is almost hard-coded into the software of the applications that utilize its block chain.

 Block #0 was created on 2009/01/03.

View the Genesis Block

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So, what is Bitcoin?  And is it the financial Road Ahead?

You may have heard of Bitcoin this month.  Its value has been gyrating wildly and heading toward$US20K.  Clearly it holds substantial value, but what is it?

Bitcoin is a “Cryptocurrency”.  A totally secure digital currency with the potential to remove middlemen and clearinghouses from the transacting landscape.   Utilizing a ‘Trust Machine’ – whereby opinions of a transactions validity are confirmed and reaffirmed by a network of independent computers.  Essentially, Bitcoin, (and its underlying platform, Blockchain), is a self-auditing ledger.  Allowing person-to-person transactions to take place with absolute security and transparency.  Imagine, loans without banks, internet trading without ebay and ridesharing without Uber…

Basically, it’s the Fin-Tech equivalent of leaning over your neighbor’s fence, and asking, “How much do ya want for the old Ford pick-up?”.

And that is the paradigm shift – the ‘Brave New World’ – envisaged by Bitcoin enthusiasts and supporters.  It is this perceived power that prompted no lesser Tech visionary than Bill Gates to quip,

‘Bitcoin is a Tour de Force.  Nobody can stop Bitcoin’.

Well, William Henry Gates III, has got my attention a little…  After all, Billy boy is the man that predicted the exponential growth of personal computers and envisaged a PC in every home. Similarly, he may have noticed that, Bitcoin and the Blockchain are fast growing acceptance within the financial and business worlds.

Blockchain Start-ups

Bitcoin and Blockchain start-ups have sprung up across almost all sectors.  Examples include,

  • Banking, (IBM predicts that 15% of banks will be using the blockchain by the end of 2017).
  • Insurance, (Aeternity is one blockchain project that is building tools that are useful in the insurance industry).
  • Medicine,
  • Forecasting,
  • Supply Chain Management,
  • Private Transport and Ride Sharing, (Startups working in this area include Arcade City and La’Zooz).
  • Even Charity, (BitGive Foundation use blockchain’s secure and transparent distributed ledger to let donors see that the intended party has received the funds).
  • And many more…

Cryptocurrency’s gaining wider acceptance

In Australia, you can now use your bitcoin to, buy your coffee, work-out, go para-gliding, design a website and even hit the Pub.  It seems Bitcoin is popping up everywhere.

Indeed, Crypto Industry luminary Mr. Peter Smith (CEO of Blockchain), claims 2018…

“… will be the first year we start to see central banks start to hold digital currencies as part of their balance sheet”

Peter even went further claiming Central Banks would ‘mint’ their own Cryptocurrencies.

It is also interesting to note that this month saw the world’s first Cryptocurrency Futures Exchange opened by CME Group.  Essentially trading a derivative security of a digital asset.  An asset comprising of some very clever computer code – but still consisting only of electronic 1’s and 0’s in a distributed computer database.

With Bitcoin gaining wider acceptance and commanding such high prices, you better buckle up for a wild ride, as it appears Bitcoin and Blockchain are here to stay.

 


2018 – The year of the Blockchain

The last 18 months has seen a phenomenal growth in the interest in Blockchain.  Businesses are moving quickly to embrace it.  This article will examine the technical aspects associated with a Blockchain.

So what is Blockchain?

Elliptic Curves and Blockchain Encryption

Blockchain Finite Fields and Hash Functions

Private and Public key Wallets

Digital signatures and the Blockchain

Bitcoin Mining and the “proof of work” concept

Playing with the SHA256 Calculator

The Bitcoin “Difficulty Parameter”

Blockchain: writing things down forever

So what is a Blockchain?

A blockchain consists of blocks that hold batches of valid and immutable transactions.

Picture of a strand of DNA
A ‘Hash’ is like digital DNA

Each block includes the hash of the prior block in the blockchain, linking the two. A “hash’ might be described as the mathematical DNA of a transaction or piece of information.  And just like DNA the hash of each block is passed down to the hash of the next block.  The linked blocks form a chain, all the way back to the first block – called the Genesis Block.  

Any minor change in any prior block will produce a vastly different hash and cause a major change in the hash of subsequent blocks.  This difference is obvious to other computers in the distribute network and is therefore penalised as per the scoring system described below.

In addition to a secure hash based history, any blockchain database has a specified algorithm for scoring different versions of the history so that one with a higher value can be selected over others. Peers supporting the database don’t have exactly the same version of the history at all times, rather they keep the highest scoring version of the database that they currently know of.  Whenever a peer receives a higher scoring version (usually the old version with a single new block added), they extend or overwrite their own database and retransmit the improvement to their peers.

There is never an absolute guarantee that any particular entry will remain in the best version of the history forever.  Blockchains are typically built to add the score of new blocks onto old blocks.  There are incentives to only work on extending with new blocks rather than overwriting old blocks.  The probability of an entry becoming superseded goes down as more blocks are built on top of it – eventually becoming very low.

In the context of bitcoin, the blockchain is a digital ledger that records every bitcoin transaction that has ever occurred.

A blockchain system consists of two kinds of records:

  • transactions, and,
  • blocks.

This short background will follow the The evolution of “Block Chain” technology.

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  1. Elliptic Curves and Blockchain encryption

    : Such as  (a Third Degree Polynomial) has a specific known solution.

Elliptic Curve for encryption purposes

And Elliptic curves have a unique property, in that you can to “add” solutions of an elliptic curve together to get another solution.

If you draw a line through the curve (that is not horizontal or vertical), it will always intersect the curve at a third point.  This is defined as adding Point P to Point Q.  As shown below:-

Finding unique related points on Eliptic Curve

The only exception is if a line is Tangential to the Elliptic curve.  In this case, the line intersects the curve at one other point only.  And this is defined as “Doubling” of point “P”.  As shown below:-

Unique points with tangential

In the above examples point R is found by reflecting R though the x axis

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  1. Blockchain, Finite Fields and Hash Functions

A finite field, in the context of Elliptical Curve Digital Signature Algorithm (ECDSA), can be thought of as a predefined range of positive numbers within which every calculation must fall. Any number outside this range “wraps around” so as to fall within the range.

The simplest way to think about this is calculating remainders, as represented by the modulus (mod) operator. For example, 9/7 gives 1 with a remainder of 2:

9 mod 7 = 2

Here our finite field is modulo 7, and all mod operations over this field yield a result falling within a range from 0 to 6.

A Hash function is simply a rule applied to data to give a result – in this case a number.  For example, SHA256 is a Hash function that takes an input and has a 256 bit output.  (SHA = Secure Hash Algorithm.  “See Playing with the SHA256 Calculator“)

File                  >

Password       >       SHA256    >    256 bit number

Data                >

In the case of SHA256 there are 2256 possible outcomes.

(Another important Hash algorithm is RIPMED160).

Block Chain technologies (such as Bitcoin), use very large numbers for their base point, prime modulo and order.  The security of the blockchain relies on these values being large, and therefore totally impractical to reconstruct.

In the case of Bitcoin:

Elliptic curve equation:  y2 = x3 +7

Prime modulo = 2256 – 232 – 29 – 28 – 27 – 26 – 24 – 1 = FFFFFFFF FFFFFFFF FFFFFFFF FFFFFFFF FFFFFFFF FFFFFFFF FFFFFFFE FFFFFC2F

Base point = 04 79BE667E F9DCBBAC 55A06295 CE870B07 029BFCDB 2DCE28D9 59F2815B 16F81798 483ADA77 26A3C465 5DA4FBFC 0E1108A8 FD17B448 A6855419 9C47D08F FB10D4B8

Order = FFFFFFFF FFFFFFFF FFFFFFFF FFFFFFFE BAAEDCE6 AF48A03B BFD25E8C D0364141

Private and Public Keys and Wallets

To produce a “Private Key”, the Block Chain protocol chooses a point on the elliptical curve, eg. Point “E”  i.e. The Base Point.

A Private Key is just a number – “N” (such that, 0 <= N <= 2256)

The Public Key associated with a Private Key is simply the Point “E”, added to itself “N” times.  I.E. P = NxE

For Bitcoin, the address associated with the key is the RIPMED160 Hash of the SHA256 Hash of the Public Key.

Wallets are simply files that contain the Private and Public Keys and the addresses.  Wallets usually contain many keys and may also contain labelling information for transactions, such as “Loan Payment” etc.

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Digital Signatures and the Blockchain

The Elliptical Curve is used to construct a Digital Signature , (or Signature Hash), to sign the data.  The data can be of any length.    The first step is to “Hash” the data to create a number containing the same number of bits as the order of the curve (256).  The mathematics is quiet involved, so for simplicity I will just outline the steps.  (If you require further information click here for a full worked example using small numbers.

  1. Hash the Data to create a number containing the same number of bits as the order of the curve i.e. 256 bits.
  2. Calculate the point (x,y) = k * G, using scalar multiplication.
  3. Find r = mod n (if r = 0 return to step 1). Modulo Arithmetic Calculator Here
  4. Find s = (z + r * d) / k mod n.  (If s = 0, return to step 1)
  5. The signature pair is (r, s).

To verify the signature with the Public Key, a third party would perform the following steps:

  1. Verify r and s are between 1 and n-1
  2. Calculate w = s-1 mod n
  3. Calculate u = z * w mod n
  4. Calculate v = r * w mod n
  5. Calculate the point (x, y) = uG + vQ
  6. Verify that r = x mod n. The signature is invalid if not.

You may verify that these steps work by  here

Blockchain transaction flow

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  1. “Bitcoin Mining” and “Proof of Work”

Miners are not so much solving a math problem as they are spending a lot of effort making guesses until they guess correctly.

Bitcoin works by having a linked set of “blocks” of transaction records that document who has what bitcoin. To make bitcoin work, they needed some way to ensure that the record of blocks is immutable, i.e. nobody can change it.

The way they accomplished this was to create the concept of mining. Miners take a current set of transactions, which includes a link to the last set accepted, and make many trillions of guesses, each time putting a number into the “nonce” field of the block header. The block, including the “header” and “Nonce” is then a “hashed”.  For Bitcoin, the SHA-256 hash function is used.  Then it is just a simple “IF” statement:

If the output of the hash is below a threshold value, then the block is valid…

And the block will be added to the chain and considered valid by other miners.  The miner who guessed correctly is paid with a freshly minted Bitcoin.  Hence, a new coin enters the system and other miners remain incentivised to process blocks.

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Playing with the SHA256 Calculator

You may test the above procedure by playing with the SHA256 calculator.  Just type in a line you want hashed – e.g.: Hello Dolly.  Note the hash produced.

6F813C0EEBC8AC32C0A84A7D6FA19985394516D55E5862B1AB6C541F1355EE96

Then add a number until the first digit of the hash is zero.

My inputs looked like this:

Hello Dolly

12342453

And the resultant Hash was:

04540EE2809F31C0B0DD30B8D9CF640EE8CA4F4F47638652B37CE34CCAE062FD

Essentially, this is what miners do.  However they are looking for a number that will produce many more leading zeros.  I.E. A much smaller number – or threshold value.    Try SHA256 for yourself.

The Bitcoin ‘Difficulty Parameter”

The “threshold value” above, is the “Difficulty Parameter”.  The lower this value is set the more difficult it is to provide a guess “Nonce” that will produce a Hash low enough to be accepted and agreed as valid by other miners.

Difficulty is adjusted every two weeks to ensure that a new valid block is produced approximately every ten minutes or so. Difficulty is based upon  how much time it took to find the last 2016 blocks (i.e. 60mins/10 * 24hrs * 14days). As an example:-   If it took only one week, then the “difficulty” should double – so that no matter how much mining is happening worldwide, a new block continues to be created every 10 minutes on average.

Blockchain:- Writing things down forever

The blockchain is a permanent and agreed, self auditing ledger.  Anything written to it is written in indelible ink.

Any attempt to change an entry will change the Blocks Hash (Digital Signature) and invalidate the block and every other subsequent block in the chain…

This would be immediately noticed by all the other computers in the distributed ledger.  (All of whom keep a full and current copy of the last agreed upon blockchain (or ledger).

Bitcoin is merely a currency that is tracked on the Blockchain. There are possibilities for many more.

Please see my subsequent articles on Blockchain and Bitcoin.

As always,please like and share this article if you found it useful.

And you may download  Satoshi Nakamoto original white paper here –

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