Intro to Cryptocurrencies and Blockchain Technology (Part 2 of 4)

An Introduction to Blockchain


Distributed Ledger

All digital assets are defined and governed by a protocol which acts as a peer-to-peer distributed ledger system called the blockchain. Bitcoin is considered the father of the digital asset class because bitcoin was the world’s first functioning application of the blockchain protocol.

To understand the fundamental elements of the blockchain protocol and how it operates in conjunction with Bitcoin, observe the illustration below:

Screenshot from 2018-07-22 03-12-56.png
Source: Goldman Sachs Global Investment Research

Public Key Cryptography

CRYPTO – CURRENCY

CRYPTO – Comes from the root word “cryptography”, which is the science of codes and encryption. Therefore, just as the word suggests, cryptocurrency is a form of money built upon the modern mathematically derived systems of encryption.

Public key cryptography was invented in 1970 by James H. Ellis, a British cryptographer at the UK Government Communications Headquarters (GCHQ). It is currently estimated, that if you used a modern supercomputer and attempted to “brute force” attack this cryptography, the attempt would take roughly 0.65 billion billion years to successfully complete.

For 38 years, this form of cryptography was used almost exclusively for communication purposes until Satoshi Nakamoto invented bitcoin in 2008. Public key cryptography is the foundation of blockchain technology and because of its secure foundation, Bitcoin has never been successfully “hacked” and likely never will be.

When a user creates a new bitcoin wallet, they are given two keys.

PUBLIC KEY

The bitcoin wallet address. It works similar to a bank account number, although unlike a bank account number, you can share it with anyone in the world and nobody can use it to steal your funds.

PRIVATE KEY

Essentially, this is the “password” to your bitcoin wallet. Every time you send bitcoin from your wallet to your friend’s PUBLIC KEY (or “bitcoin address”) your private key is used to authorize the sending operation.

Screenshot from 2018-07-21 03-05-53.png

This simple process is what makes blockchain possible.

Public key cryptography is what is used (behind the scenes) to authorize every single transaction that occurs on the blockchain around the world. When you “send” bitcoin, your key is used to authorize that “sending” action and no one else in the world is able to stop you or “fake” your private key.

Screenshot from 2018-07-21 03-10-25.png

Your PRIVATE KEY grants you access to subtract from the public ledger balance of your PUBLIC KEY. After doing so, the miners verify that your key is valid and then the global ledger is updated (usually within 10-40 minutes).

Fraud Prevention

Consumer Protection

Unlike traditional digital spending methods, you are not required to disclose your identity before being allowed to use, store, or transact with bitcoin. Upon bringing up the topic of bitcoin’s privacy provisions, many people initially begin thinking about the potential enabling of illegal transactions. However, upon closer examination, there is a major benefit to the anonymity of bitcoin that is often overlooked: Consumer protection.

Payment Processing

The increased level of consumer protection used by the bitcoin network would save billions of dollars if implemented in place of the American dollar. Most credit card and debit card users are unaware of the amount of information stored on the magnetic strip on their credit card. Every single time they swipe their card to make a purchase, they share every last bit of their private payment authorization information with the merchant and the 5-7 various intermediary entities which stand between their bank account and the bank account of the merchant. During CNP (“card not present”) transactions over the phone and the internet, all information required to authorize the spending of funds is also relayed in a similar (and often less secure) manner.

transaction_flow_01.png
Source: Wallet Hub

CNP Fraud

Hackers have come to learn about this high level of sensitive information exchange and, for quite a while now, have been cracking payment databases of countless thousands of merchant websites. Once inside, cybercriminals make off with customer data belonging to thousands of unsuspecting victims. After acquiring all of the necessary data to initiate transactions from the accounts of all the hacked merchant’s previous customers, the hackers use the data to carry out CNP fraud (“Card not present”: Transactions over the internet or by phone). Even worse, statistics show a dramatic 113% increase in an even more dangerous type of fraud called “new account fraud” in which hackers will open entirely new accounts in the name of the victims and then leverage that person’s credit score to borrow as much money as possible before making off with all of the money from that new ghost account.

EMV Chips

The recent implementation of EMV chips on credit cards has done little to reduce the level of fraud as this new shift only protects users from fraud during “card present” transactions using terminals equipped to handle an EMV transaction. All non-EMV terminal swipes and all online based purchasing remains just as vulnerable as before. See the conclusions of the report by Javelin below:

card-not-present-cnp-fraud-in-a-postemv-world-by-javelin-1-1024-copy.jpg
Source: Javelin Strategy & Research

The Upcoming “Cashless Society”

The gradual global shift to a “cashless society” will only further the fraud increase in the traditional centralized monetary system. The final conclusion is sobering: By simply using a debit or credit card, users put the funds of their financial accounts into the hands of every single merchant they make a purchase from which, as we have seen, presents a critical vulnerability in the traditional centralized digital payment system.

Data Breaches

The following graph from the Insurance Information Institute shows an overview of how large of a scale this kind of theft has become:

data-breaches-historical-data.png
Source: Insurance Information Institute

Identity Theft

A simplified breakdown of the total amount of money lost due to fraud:

how-serious-has-identity-fraud-become.png
Source: Javelin Strategy & Research

Screenshot from 2018-07-22 03-27-17.png

Money stolen every minute of every day – due to identity fraud!

A report in the Wall Street Journal also highlights the total amount of money lost due to card fraud and the results are staggering:

Screenshot from 2018-07-22 03-23-25.png
Source: The Wall Street Journal

The Ultimate Solution

Rampant financial fraud is enabled by the required transmission of private authorization information. The bitcoin network requires no such transmissions to be made for users to spend and send funds. The bitcoin network is immune to fraud resulting from any such credential attacks. This inevitably results in a safer financial transaction ecosystem and a dramatically lower cost of operation. As a result, many merchants are beginning to prefer bitcoin payments over traditional payment methods.

Screenshot from 2018-07-22 03-35-32.png

Thousands of Blockchains

The simple, powerful technology of blockchain has already been applied in thousands of ways. Almost every version of a blockchain brings another “token” or cryptocurrency along with it. These digital assets are all traded on global exchange platforms much like stocks and forex. Cryptocurrency trading takes place all day (24 hours) every day of the year.

Screenshot from 2018-07-22 04-04-01.png
Source: Coinmarketcap

Supply Chain Solutions

The Wall Street Journal explained how the blockchain is being implemented in the commodities markets with the help of IBM.

Screenshot from 2018-07-22 04-07-46.png

Results showed involvement reduction with supply chain reduce from 3 hours to only 25 minutes and supply chain costs were reduced by 30% during the testing of this new method.

Banking the Unbanked

According to research conducted by McKinsey & Company, 2.5 billion of the world’s adults don’t use banks or microfinance institutions to save or borrow money. Unbanked people remain at an economic disadvantage because they have no way to easily conduct business on a global level (among other things). Traditional banks have yet to provide a working solution for this problem. Because of blockchain technology, the unbanked finally have a solution. Users are not required to have identification documentation in order to exchange monetary value with cryptocurrency.

Global Remittance

As the world continues to globalize through the use of the internet, more people are sending funds across borders than at any other time in the history of the world. The current monetary system requires long waiting times and often outrageously high fees in order for one to remit funds abroad. Users are moving to cryptocurrencies in an effort to circumvent all the unnecessary fees and waiting times.

Sources

Intro to Digital Assets – https://willinspire.us/digital-assets/

Disruptive Presentation – http://disruptive.works

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