What is Blockchain? Blockchain is a technical solution to manage data in a distributed infrastructure without a central authority in a traceable and tamper-proof way by consensus. With blockchain, it is possible to verify transactions (for example, in payment transactions with cryptocurrencies) without a central instance in a trustworthy and transparent manner.
The name blockchain is derived from the documentation type of the data: Blocks of data records are strung together and linked to form a constantly growing blockchain. In a consensus process, all nodes in the network agree on a uniform state of the blockchain. Cryptographic mechanisms ensure, among other things, that data once recorded in the blockchain can practically no longer be changed.
The most important goals of blockchain technology at a glance:
- Practically unchangeable data
- Transactions that are transparent and traceable for all users
- Distributed (rather than centralized) as well as consensual data storage
- Elimination of middlemen
What are cryptocurrencies? A cryptocurrency is a digital means of payment based on a blockchain system. Funds are transferred from one participant to another in the form of computer code. Such a transfer is documented by a cryptographically signed transaction in the blockchain. Verification of these transactions (signature verification) is performed by the computers located in the network. Only those who possess a matching secret signature key can set a valid transaction and thus dispose of the credit behind it. The keys are stored in a digital wallet.
Recipients of transactions are usually only represented by an abstract address (a kind of account number), so cryptocurrencies can ideally be used pseudonymously. The transactions are monitored and booked by so-called miners. Through huge computing efforts, miners buy the right to create new blocks and extend the blockchain. For this effort, the successful miners are rewarded with currency units.
The advantages of cryptocurrencies are that they can be used worldwide, pseudonymously and without intermediaries (banks). Within minutes, even large sums can be transferred worldwide. However, there is no state regulation of the currency, which can lead to various problems such as the exclusion of own transactions due to a majority decision of miners.
As a rule, cryptocurrencies do not represent a currency in the legal sense. Due to the complex mining process to manage the blockchain, cryptocurrencies are also often not very efficient. There are currently over 1000 different cryptocurrencies on the market, the best known of which is Bitcoin.
In the following video, Dr. Sarah Maßberg from the German Federal Office for Information Security (BSI) once again explains the connection between cryptocurrencies and blockchain and provides an insight into the security structure of this technology:
Where does blockchain technology come into play?
Certainly, cryptocurrencies are the most prominent and first example of blockchain technology applications. In addition, opportunities and potential for the use of blockchain technology are being discussed in many other sectors of the economy, as we show with individual examples:
In addition to its use in digital payments, Blockchain could be used in electronic trading systems such as post-trade or participation in the financial system for those parts of theworld’s population that have not yet had access.
Automotive and insurance industries
So-called smart contracts – computer protocols running on the blockchain that provide technical support for dealing with contracts – could complement the insurance market. For example, a contract could be made directly with a rental car that is not ready to be driven until the appropriate installment is paid.
Transportation and supply chain management
Here, there are proposals for the seamless efficient documentation of processes with the help of blockchain technology. Blockchains are secured by cryptographic processes such as hash functions or digital signatures. As things stand today, these are secure and proven concepts that can protect against manipulation and forgery. In addition, however, there are many other aspects – especially of practical implementation – that must be taken into account when considering the security of blockchains. In practice (for example, in the case of Bitcoin), problems are particularly evident in implementation errors, insecure network protocols or poorly secured end applications (for example, wallets).
For the BSI, the focus is primarily on technical design aspects for the secure use of blockchains. The BSI sees challenges in particular in questions of implementation security, data protection and long-term security. In the case of long-term security, it should be noted that advances are emerging in the field of quantum computing that could, in the longer term, jeopardize the cryptographic algorithms commonly used in blockchain applications today. These aspects are explained in more detail in the BSI’s cornerstones. In the future, these cornerstones will be expanded into a guideline.