Blockchain technology

It is hard to understand initial coin offering’s without knowing anything about blockchain

technology. The technology behind the products, services or securities presented in an initial coin offering, as cryptocurrencies, rely on the blockchain technology. One way to define what

blockchain technology is, could be:

“… a decentralized transaction and data management technology that

enables data sharing across a network of multiple participants” (Arnold et al., 2018, p. 237)

Blockchain technology is the enabling of a decentralized digitally distributed ledger system in an encrypted system (Swan, 2015). The decentralization concept is referring to the spectrum from centralized authorities to decentralized peer-to-peer networks. In a centralized system based on authority where a client needs to connect to this specific authority in order to perform an action such as sending money to other users. Such a system can be developed to be highly centralized where only one authority that could be in charge for providing the service. It could also be

developed into a more decentralized system, with a few interconnected authorities taking care of their clients. Where in a peer-to-peer network, users might be still connected to authorities, although they are also directly connected each other around the central point, like in sharing systems (Domenico, De Domenico, & Baronchelli, 2019)

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Figure 9 Central vs Decentral (Domenico, De Domenico, & Baronchelli, 2019, p. 2)

A ledger has been a key element of commerce since ancient time. The way we use it, is to keep track and record of many things in example trades, exchanges and properties, but the way we do it has changed from through time. From writing it on clay, papyrus and paper, we have now come to a more digital age, where we use computers, applications and algorithms to keep track of our interactions. And now with the blockchain technology, we can in an encrypted environment share and synchronise the ledger globally on every device connected to the blockchain (UK Government, 2016). This way of synchronising a distributed ledger decentralized, is securing the data as it would not be possible to change the data within the ledger without hacking every single device

connected to the blockchain and change their data as well. This is a very secure way of storing, exchanging, and sharing data in a ledger.

The Bitcoin blockchain has been running since 2008 and has not been compromised or hacked yet, according to Arnold et al. (2018), which is an indicator for the security a blockchain technology brings. One could then wonder why all the fuss about people getting scammed and losing their investments. Theses hacks and cyberattacks that reach and become stories in mainstream media are not attacks on the ledger, but on the environment of systems and people surrounding the blockchain. It could be deliberate from the start, creators could be tricked, wallets passwords could have been stolen. It has also happened that central cryptocurrencies exchanges have been hacked and the user’s tokens has been stolen.

But all these negative situations are not grounded in the blockchain but everything around it, in fact all the blockchain characteristics are all related to security and to act as a trusted third-party, which is seen in a set common characteristic of blockchain systems (Arnold et al., 2018, p. 237).

• Data redundancy, to ensure persistence among the transactions and data

• Use of cryptography, to ensure data security and integrity

• Use of a consensus algorithm, to coordinate transactions among the network peers

• Decentralization, which enables trusted direct interaction among the network peers

• Auditability, transparency, and verifiability of network activities

Page 35 of 72 So, when consumers use blockchain technology and they are sending data to each other, the transactions are grouped in blocks that are cryptographically and chronologically chained together. Simultaneously there is a consensus algorithm that is running on all of the connected devises or nodes and continuously keeping track and guaranties the right order of transactions as well as correctness, which are all transparent (Arnold et al., 2018; Swan, 2015).

These characteristics and way of use illustrates the multiple opportunities to make new forms of distributed applications upon a blockchain. It could take form as many things, from distributed digital currencies also known as cryptocurrency to digital rights or digital asset management.

Since the publication of the first generation of blockchain in the article Bitcoin: A Peer-to-Peer Electronic Cash System under (Nakamoto, 2008), the interest for the blockchain technology has grown. This has also led to the development of new generations of the blockchain technology (Arnold et al., 2018).

The first generation that got attention was the introduction of the Bitcoin blockchain as distributed ledger technology. That was a breakthrough in computer science as it was the first-time different technologies for distributed network and cryptographic were combined to make the encrypted distributed ledger.

Second generation came with the Ethereum, which meant new possibilities in the distributed ledger. With Ethereum an infrastructure with general purpose programming is possible because of the inherent concept of contract in the Ethereum protocol into the public. So with smart-contracts built into a blockchain technology created the possibility of automatic executed

contracts in the blockchain (Arnold et al., 2018). The smart-contract concept is not new. Nick Szabi a cryptographer who was an associate of David Chaum, was the who interduce the idea of a smart-contracts. Nick Szabo defined smart contracts as “machine readable transaction protocols which create a contract with predetermined terms” (Lauslahti, Mattila, Hukkinen, & Seppälä, 2018), these processes are complicated and requires highly specialised knowledge to understand in terms of blockchain usage. But as an example, to illustrate the mechanism in its more primitive form a vending machine also makes the transactions based on simple mechanic automation. A vending mashing accepts coins, hands out the selected product, and gives back change. The physical design for the vending machine is like a safety box where it grades its products, cash and the set of rules and logic in the “contracts” it makes when a person, who puts a sufficient number of coins into the vending machine to buy the product. This means that the vending machine completes the transaction without need of any third-party, as long the prerequisites are met.

And we have yet to see what the third generation will bring, but it will somehow have to make it possible to make decentralized cross blockchain exchange, which would imply that there will be developed a way for different blockchains to interact with one and another, in a decentralized way (Arnold et al., 2018).

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