What is Blockchain?

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The blockchain is an innovative and revolutionary tool which, according to many specialists, is about to turn our lives upside down, as the printing press and the Internet did before it. It looks like a promise from the outset, that of profoundly changing the organization of transactions, and seduces governments, large companies, investment funds and entrepreneurs. But what is “blockchain”? Let’s go back to its origins to better understand the mode of operation of this new technology and its applications.

The origins of the blockchain

In the beginning was money. From primitive money to fiduciary and scriptural money, financial transaction instruments are based on trust, that which their users grant them as a unit of account, a means of exchange and a store of value. This trust is based on a principle of guarantee embodied by a centralized institution (States, banks or local authorities in the case of local complementary currencies).

The dematerialization of money, from the introduction of checks to the creation of payment cards, has accelerated over the past 25 years with the appearance of electronic transactions. It opens the way to a reflection on the creation of unconventional currencies, that is to say independent of traditional centralized authorities, which are called digital currencies.

Digital currencies differ from traditional money, that of coins, banknotes and their dematerialized version, because they are based on an encryption protocol. Each unit of digital currency is a unique string of numbers that users can send each other online during transactions.

The first attempts at digital currency fail, faced with a daunting challenge, that of securing the currency. This is because a string of numbers can easily be copied – and in the case of currency, spent multiple times – rendering its value null. In 1990, David Chaum, designer of the electronic money DigiCash, tried to solve this problem by creating a single central ledger that recorded the transactions of each user, thus ensuring that each unit of currency could not be in two places at the same time. weather. Thanks to this single central register, the integrity of the currency and transactions is guaranteed.

However, the solution provided by DigiCash has its limits because it is subject to the same hazards as any centralized register (such as databases of bank transactions, credit card transactions, title deeds, identity cards, driver’s license, reservations with an airline, etc.): it does not guarantee that the holder of the register is incorruptible and infallible. Indeed, the latter can for example modify the database, exclude transactions that he does not approve, or even lose recorded data.

In October 2008, Satoshi Nakamoto, whose identity of the person or the group hidden behind this pseudonym remains unknown to this day, published his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in which he proposed a new form of digital currency, Bitcoin. This overcomes this pitfall by relying on a new protocol, that of a chain of blocks or “blockchain”, allowing a decentralized verification system. Bitcoin no longer comes under a centralized authority but under a so-called “peer-to-peer” relationship, that is to say a computer network whose participants have freed themselves from a central server.

Inside Bitcoin

Bitcoin is a currency designed so that currency units are introduced gradually. Unlike conventional currencies, it is not issued by a central authority and the total quantity of units issued is fixed in advance. Around 15.25 million Bitcoins have been issued so far, and the last Bitcoin is expected to be produced in 2140.

Bitcoins are stored on Bitcoin addresses, the key to which is a unique string of letters and numbers, which can be stored on a computer, a smartphone, or even a piece of paper.

As soon as a user sends Bitcoin as payment, a record of the transaction is kept in memory. Transactions are grouped into blocks. Each block represents the equivalent of 10 minutes of Bitcoin transactions.

All network participants make their computing power available to check these blocks and confirm them in the system. This is called “mining”. The participants, who have previously been put in competition, are remunerated according to their participation in the calculation, receiving a percentage of the new Bitcoins issued by the system.

The system grouping all the blocks is what is called a blockchain. Blocks are ordered chronologically, and each block includes a digital signature (called a “hash”) of the previous block, which governs the arrangement of the blocks, and ensures that a new block can only join the blockchain where the block ends. the previous block.

A copy of the blockchain, i.e. a copy of the record of all transactions made since the origin of Bitcoin, is updated by everyone who has installed the Bitcoin software. To ensure that the system is working normally, the blockchains are constantly checked by the computers of those who installed the software. Thus, at all times, the system knows exactly how many Bitcoins each user has in their wallet. They cannot be copied or spent multiple times.

Below is a diagram summarizing the operation of a blockchain:

For the first time, ownership can be transferred without being duplicated, and without going through a centralized registry.

Bitcoin can be bought, sold and exchanged against real currencies (USD, EUR, etc.) on the foreign exchange market.

Below is the evolution of the Bitcoin price since its creation:

Chart

Satoshi Nakamoto creates the Bitcoin protocol in such a way that it is peer-to-peer, encrypted, and quasi-anonymous, which makes the link between a Bitcoin transaction and the natural person at its origin very difficult. It is thus said to be pseudonymous. In short, the Bitcoin blockchain records all transactions, but not their authors.

Below is an image of the network of transactions carried out (which can be found in the center of the graph):

Circles

The blockchain revolution

Many are those who today believe that what has been done for money, namely the transition from a centralized operation to a decentralized organization, can be applied to other areas.

Blockchain is a technology for storing and transmitting information that is transparent, secure, and operates without a central control body. By extension, it constitutes a public database, distributed – that is to say, shared by its various users, without intermediary – reliable and inviolable. Thus, it can be likened to a public, anonymous and tamper-proof ledger of accounts.

Blockchain could eventually replace all centralized “trusted third parties” (banks, notaries, cadastres, etc.) with a decentralized IT system.

A concrete case: the Ethereum project

From the various possible applications of the Blockchain protocol, an ambitious project was born, led by the programmer Vitalik Buterin, that of transforming the entire Internet. This is the project Ethereum.

Ethereum allows all users to create their own public, secure, tamper-proof database, and thus protect themselves against corruption, fraud or deletion of data. Defining itself as a “revolutionary new application development platform”, Ethereum is set to disrupt areas as diverse as voting systems, financial infrastructure, intellectual property, encouraging the creation of decentralized autonomous organizations.

The Ethereum blockchain also makes it possible to program “smart contracts”, the code of which is a replica of the execution of a classic contract. These contracts are accessible by all authorized parties, their execution is controlled and verifiable. They are designed to enforce the specific terms of a defined contract when certain conditions are met. “Smart contracts” make it possible to eliminate the risk of default by one of the counterparties and to reinforce equality between all parties.

In short, the blockchain is a decentralized way of controlling and storing information. It thus makes it possible to develop programmable and autonomous applications and contracts. It is a “new frontier” beyond which new technological breakthroughs await us.

Romain RouphaelRomain Rouphael is the co-founder of BELEM, a start-up exploring the applications of “blockchain” technology. A graduate of ESSEC, he specializes in FinTech and Data Science.

Come Jean JarryCome Jean Jarry is the co-founder of BELEM, a start-up exploring the applications of “blockchain” technology. Previously, he was an Executive Director at Daiwa Securities Group in Hong Kong.

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