Blockchain Technology: Principles, Proof of Work and Proof of Stake, and Application in Banking Industry

Blockchain Technology
Name, Student ID
Emai Address
Abstract
Blockchain technology is a concern, mainly due to its
subversive nature of bitcoin. Bitcoin is revolutionary to a certain
extent because it proves that the digital cryptocurrency system can
operate independently of the "traditional" banking system. By
bringing together a set of technologies, it can bring trust to an open,
completely decentralized network—an untrusted environment. The
project evaluates the key principles of blockchain technology. It
will demonstrate how proof-of-work and proof-of-stake concepts
works. The project also identifies the application of the blockchain
technology in banking industry.
I. INTRODUCTION
Blockchain is a database that consists of certain chains of
transactional operations that obeys established rules and provides
access to stored information. This principle of operation
completely eliminates the possibility of fraud, theft of personal
information, and also protects private rights. For many, blockchain
is Bitcoin, however, this direct association is not entirely true. It is
only the basis on which such a cryptocurrency works (1).
Blockchain is an interesting topic to study because the world is
heading towards blockchain. More transparent and auditable, and
more difficult to attack. Blockchain can make organizations more
transparent, democratic, decentralized, more effective, and more
secure (2). In the next 5-10 years, the blockchain may subvert
many industries. It is therefore crucial to understand the principles
underlying this noble technology.
II. UNDERLING BLOCKCHAIN
Blockchain combined with cryptography technology can ensure
transaction traceability, irreparable modification, nonrepudiation
and unforgeability, support data security sharing and large-scale
collaborative computing, and privacy protection for user identity
and confidential data (3). It is more suitable for distributed
application scenarios that require high privacy and security.
Traceability means that every change of the transaction will be
recorded in the blockchain in chronological order, before and after
the association, and the transaction can be queried from the release
source to the latest (4). There are two mechanism in which
blockchain ensure security and nonrepudiation. These include the
principle of Proof of Work and Proof of Stake.
Proof of Work- POW
The proof of work (POW) is used to prove that a person has done
the job, and after getting everyone's approval, a new block is
created, and then the person who does the job has a certain bitcoin
as a reward. It was created to address denial of service and other
security abuse. Hash cash is a proof of work mechanism that was
invented by Adam Back in 1997 to resist denial of service attacks
and spam gateway abuse (5). Prior to Bitcoin, hash cash was used
for spam filtering and was also used by Microsoft for products such
as hotmail/exchange/outlook (Microsoft uses a format that is
incompatible with hash cash and names it as an electronic
postmark).
A hash function, gives an input x, which computes the
corresponding output H(x). For the hash function used by the
Bitcoin encryption system, the following requirements are
required: Collision-free, that is, avoid entering two different
numbers and get the same output (no input x≠y, but H(x)=H(y)). In
fact, this feature is not true in theory. For example, the SHA256
algorithm used by Bitcoin will have 2^256 kinds of output. By
performing 2^256+1 input, it will inevitably generate a collision;
even from the perspective of probability, 2^130 inputs will have
99% chance of a collision (6). However, it can be concluded,
assuming that a computer performs hash operations at 10,000 times
per second, it takes 10^27 years to complete 2^128 hashes! It can
even be said that even if all the computers made by humans have
been calculated from the birth of the universe to today, the
probability of collision is extremely small. Occult, that is, for a
given output H(x), it is computationally impossible to reverse the
input x.
The main feature of the workload proof system is that the client
needs to do a certain difficulty to get a result, but the verifier can
easily check whether the client has done the corresponding work
through the result. A core feature of this approach is asymmetry:
work is moderate for the requester and easy to verify for the
verifier. Unlike the verification code, the verification code is
designed to be easily solved by humans and not easily solved by
computers.
The figure below shows the process of proof of workload:
Fig. 1. Process of proof of workload
Given string such as Hello World, the first thing is to hash it. The
string is SHA256 hashed. If the resulting hash result (in
hexadecimal form) starts with "0000", the verification passes. In
order to achieve the goal of this workload proof. We need to
constantly increment the nonce value and perform a SHA256 hash
on the resulting new string. According to this rule, we need to
calculate 4251 times to find a hash hash with the first 4 digits being
0.
"Hello, world!0" =>
1312af178c253f84028d480a6adc1e25e81caa44c749ec81976192e2
ec934c64
"Hello, world!1" =>
e9afc424b79e4f6ab42d99c81156d3a17228d6e1eef4139be78e948a
9332a7d8
"Hello, world!2" =>
ae37343a357a8297591625e7134cbea22f5928be8ca2a32aa475cf05
fd4266b7
...
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