WHAT ARE BLOCKCHAIN AND CRYPTOCURRENCYS?

Also known as distributed ledger technology, blockchain is certainly one of the greatest economic innovations in recent history. Blockchain is a new type of technology which makes it possible to store, process, share and manage any kind of information in a publicly accessible database. In a continuous list of data sets (known as blocks), these blocks are linked together using cryptography. Blockchain is an incorruptible digital ledger of financial transactions which can be programmed to record not only financial transactions, but virtually anything of value.

Blockchain technology is revolutionising how sensitive information and monetary values are handled in society and business. The technology is making the flow of information faster, more secure and more reliable. It operates anonymously and is decentralised.

THE KEY OBJECTIVES OF BLOCKCHAIN TECHNOLOGY AT A GLANCE

Digital currency

A cryptocurrency is a digital currency based on a blockchain system. Credit is transferred from one participant to another in the form of computer code. A transfer is documented in the blockchain by means of a cryptographically signed transaction. The computers on the network verify these transactions (by verifying their signatures). You can only enter a valid transaction and use the credit if you have the right private key. Your key is stored in a digital wallet.

Recipients of transactions are normally only represented by an abstract address (a type of account number) so cryptocurrencies can ideally be used pseudonymously. The transactions are monitored and recorded by so-called miners. By running computing operations on a massive scale, miners obtain the right to form new blocks and extend the blockchain. Successful miners are rewarded with units of currency for their efforts.

THE ADVANTAGES OF CRYPTOCURRENCIES

The advantage of cryptocurrencies is that they can be used anywhere in the world, pseudonymously and without mediation (i.e. banks). Even large sums can be transferred around the world in minutes. However, the currency is not subject to any government regulation, which can lead to various problems such as the rejection of some transactions on the basis of a majority decision by miners.

In the eyes of the law, cryptocurrencies are not normally considered a currency. Additionally, cryptocurrencies are often inefficient due to the extensive mining required to manage the blockchain. There are currently over 1,000 different cryptocurrencies in the market, with Bitcoin being the most well known.

WHERE IS BLOCKCHAIN TECHNOLOGY USED?

Cryptocurrencies are certainly a prime example of the applications of blockchain technology. The opportunities and potential of blockchain technology are also being debated in many other economic sectors, as we will show in a few individual examples.

THE FINANCIAL SECTOR

In addition to digital currencies, blockchain technology could be used in electronic trading systems such as after-hours trading or to enable parts of the global population who have so far not had access to participate in the financial system.

THE AUTOMOTIVE INDUSTRY AND INSURANCE SECTOR

So-called smart contracts – computer protocols which run on blockchain and technically support how contracts are handled – could be added to the insurance market. For instance, a contract could be concluded with a hire car directly which will only be ready to drive when the instalment has been paid.

TRANSPORT AND SUPPLY CHAIN MANAGEMENT

In these sectors, it has been suggested that blockchain technology could be used to document processes seamlessly and efficiently.

BLOCKCHAINS AND THE QUESTION OF SECURITY

Blockchains are secured using cryptographic methods such as hashing and digital signatures. These are currently secure, proven concepts which can protect against manipulation and falsification. However, there are also many other aspects, especially in terms of practical implementation, which have to be taken into account when considering the security of blockchains. In practice (using Bitcoin as an example), problems can occur due to implementation errors, unsecured network protocols or end applications (e.g. wallets) with poor security in particular.

For the German Federal Office for Information Security (BSI) in Bonn, the primary focus is on aspects of technical design when it comes to the secure use of blockchains. In particular, the BSI sees challenges in secure implementation, data protection and long-term security. With regard to long-term security, progress has been made with quantum computing which in the long term could threaten the cryptographic algorithms which are normally used in blockchain applications today. These aspects are discussed in more detail in the key points published by the BSI. In future, these key points will be developed into a set of guidelines.

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