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Blockchain, the future opportunity for trading progression?

Written by Tony Tran, Mats Levin

Paper category

Bachelor Thesis

Subject

Business Administration>Finance

Year

2017

Abstract

Bachelor Thesis: Blockchain technology Due to the rapid growth of cryptocurrency Bitcoin and its use of technology, blockchain technology has caused a great sensation worldwide, especially in the financial field. Blockchain is a distributed ledger system with the additional ability to read and verify transactions embedded in the system. As Nikola Bozic said, the blockchain takes a new approach to the traditional distributed database system by turning to the peer-to-peer (P2P) interaction between different nodes in the system [16]. Unlike traditional distributed systems, blockchains are constructed using different ways of thinking to meet different sets of requirements from traditional database systems. A simple way to understand the structure of a blockchain is to consider what is called a linked list. Each block contains some data, such as timestamps, random numbers, and transaction records. In addition, each block also carries a hash link from its predecessor, which constitutes the chain part of the blockchain. According to Nikola Bozic et al. [16], blockchain strives to meet the following requirements1. Ensure the authenticity of transactions and prevent problems such as double spending. 2. Transparent transactions, that is, each transaction should ensure traceability to make forgery as difficult as possible. 3. Maintain the integrity of the chain from attacks, etc., and does not include central authority. When talking about different database management systems, the terms ACID or BASE are often used. Both ACID and BASE systems can provide transactions. However, traditional database systems enforce the fact that users must trust what may look like a "black box" from the outside. This is because customers rarely control or even observe the execution of their transactions. Therefore, on the contrary, users believe that their bank or other system follows a specific set of rules. It is said that blockchain is an alternative to ACID and BASE, which solves this hypothetical trust problem, and proposes a system that allows transactions to be executed independently without a central party, that is, transactions are-come to "untrust" . The transactions performed on the blockchain are neither ACID nor BASE, but the blockchain introduces a new term called SALT [17]. The SALT alternative has two different perspectives, namely a transaction-based perspective and a system-based perspective. According to StefanTai et al. [17], "SALT" satisfies the following properties from the perspective of affairs. Sequence: In the blockchain, all transactions are processed sequentially, that is, no transactions can be executed in parallel in the SALT model. It combines the isolation properties retrieved from ACID transactions through the blockchain. Agree: Once the majority of the network can prove its validity, the transaction will be accepted and verified. 2.3.1 Permission and permissionless ledgers According to Adam Albertsson and Rickard Wendeberg [18], blockchain ledgers can be divided into two separate categories, namely permission and permissionless. The verification process of the permission ledger is performed by a selected group of participants, which can be government auditors or a group of financial institutions. The permission ledger constitutes a structure that can be adopted by different organizations in the near future. The main difference between permissioned and unlicensed is that when applying a permissioned ledger, every participant in the network must be identified. The permissionless blockchain is dedicated to creating anonymous transactions, where the verification process runs on a decentralized level by any participant in the network. Considering that financial institutions are regulated, permissioned ledgers may be more suitable because institutions can maintain control of the blockchain themselves. 2.3.2 Mining Aggelos Kiayias et al. [19] explained the mining process in the following way. Mining is the process of adding blocks to the blockchain. Miners need to solve a difficult cryptographic puzzle in order to include a new transaction in the block. In order to create some incentives for mining, every time a block is added to the chain, Bitcoin will generate a corresponding reward. In solving this cryptographic puzzle, miners are faced with the challenge of finding so-called random values. David Yermack [20] describes the nonce value as a one-time randomly generated number with additional properties. When connected with additional data from the block, it will generate a hash value with a specific number of leading zeros. In order to make the pending transaction work, the blockchain uses a digital signature that only the creator of the transaction can generate. In addition, no other users in the entire system should have the authority to change or block pending transactions. In addition, the chain is constructed in such a way that changes to the agreed transaction will invalidate the integrity of the entire chain. 2.3.3 Hash function Bitcoin takes the "one-way" property of the hash function as its key function of proof of work, which will be discussed later. In addition, the hash function is a key element of the foundation of the Merkle tree. The hash function is a function that can receive data of any length and generate an output of a predetermined length according to an algorithm. This output value is usually called a hash value, and for equivalent inputs, the value is always the same. Pedro Franco [21] pointed out that the goodhash function should be able to distribute the input tohash values ​​proportionally so that there is a one-to-one relationship between them. According to Pedro Franco [21], hash functions need to meet some additional requirements. Read Less