BLOCK CHAIN TECHNOLOGY

Introduction to the topic:

Blockchain is a latest promising technology currently in the market attracting lot of attentions
from business houses, start-ups and media. It is essentially a decentralized database of records or
public ledger of all transactions or digital events that have been executed and shared among
participating parties in the network. Each transaction in the shared ledger is verified by
consensus of a majority of the participants in the system and added as a block. This chain grows
as new blocks are appended to it continuously. And, once entered, such data or records can never
be erased. The Blockchain contains a certain and verifiable record of each transaction ever
created.

A Blockchain is a digital, distributed ledger that records transactions in near real time on
chronological order. As each and every block added to the ledger is to be verified by all the
participants, this creates a continuous mechanism of control regarding manipulation, errors, and
data quality. Thus, Blockchain is a mode for exchanging value over the internet without an
middleman or an intermediary.

Current digital economy is based on a certain centralized body and information are disseminated
only across the areas under the control of such authority. A classic example is the use of a bank
which acts as a middleman between two trading entities. Blockchains, with the power of
decentralization, allows two trading parties to transact directly with each other without the need
for a trusted third party.

Bitcoin is the widely known example that is fundamentally tied to blockchain technology.
Bitcoin is a consensus network that enables a new payment system and a completely digital
money. It is the first distributed peer-to-peer payment network that is powered by its users with
no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for
the Internet.

History and Development

Wei Dai’s was one of the first noted researcher to introduce the proposal of b-money that
introduced the idea of creating money through solving computational puzzles and decentralized
consensus, but the proposal itself was low in implementation details.

In 31st October, 2008, an individual or group writing under the name of Satoshi Nakamoto,
whose identity is unknown till date, published a paper entitled “Bitcoin: A Peer-To-Peer
Electronic Cash System”. This paper described a peer-to-peer version of the electronic cash that
would allow online payments to be sent directly from one party to another without going through
a financial institution.

Now word cryptocurrencies is the label that is used to describe all networks and mediums of
exchange that uses cryptography to secure transactions-as against those systems where the
transactions are channeled through a centralized trusted entity.

Timeline:

– 2008
• August 18 Domain name "bitcoin.org" registered

• October 31 Satoshi Nakamoto introduces bitcoin and blockchain in a white paper

– 2009

• January 3 The first bitcoin transactions – the ‘Genesis Block’ – are mined

• January 12 The first bitcoin transaction takes place (between Hal Finney and Satoshi
Nakamoto)

- 31 October 2009 The first bitcoin exchange, the Bitcoin Market, is established
 2011
 9 February Bitcoin exchange value reaches parity with the US dollar

March 2013- Market capitalisation of bitcoin reaches $1bn

April 2015 NASDAQ begins a blockchain trial

September 2015 Blockchain tech company R3 is founded by a consortium of financial

institutions including Barclays, Credit Suisse, Goldman Sachs, JP Morgan and RBS

August 2017 The number of bitcoins in circulation reaches 16.5m

January 2018 Switzerland to begin accepting tax payments in bitcoin

How does Blockchain works

New transactions (e.g. A would like to send ten bitcoins to B) are grouped within blocks. Each
block is verified and validated by the “nodes” (network participants) or so-called “miners” using
complex cryptotechnics which will depend on the type of blockchain (in our bitcoin transaction
example: the miners will verify that A is indeed owner of ten bitcoins and once this is confirmed,
the transaction is validated and visible for B and the other network participants; B thus becomes
the owner of said ten bitcoins). Blockchain security methods use encryption technology.
Network participants are incentivized to perform the verification and approval tasks, mostly by
receiving fees or new cryptocurrencies. If a discrepancy is found, the block is rejected.
Otherwise validated transactions (in the block) are time-stamped and added to the chain, in a
linear and chronological order, making a chain of transactions (or a chain of blocks) that shows
every and all transactions in the history of that blockchain.

Source: https://www.ft.com/content/eb1f8256-7b4b-11e5-a1fe-567b37f80b64#axzz3qe4rV5dH
Business Impact

Blockchain is regarded as a next-gen technology with several potential uses in a variety of fields
beyond digital currencies. As mentioned earlier, the first application of the blockchain
technology was the digital currency Bitcoin, but the blockchain could be a much bigger prospect
than Bitcoin. Below are the more information is provided for other possible application of
blockchain technology apart from Bitcoin.

a. Digital assets:
In the finance sector, issuance of share certificates can be digitalized and immortalized in
the Blockchain. These are referred as digital assets. In 2015 the NASDAQ unveiled Linq:
the very first platform for the issuance of private equity managed entirely using the
Blockchain. Through this new system, private investors can trade in the stock of private
companies.

b. Digital identity & security

With the use of blockchain. there will no longer be any need to memorize numerous user
names and passwords: only a single digital identity will be needed. oneName is an
American start-up using the Blockchain to generate a digital identity which only the user
will be able to use to log on for their various Web services.

c. Insurance

Assets such as real estate, automobiles or any other valuables which can be uniquely
identified by one or more identifiers can be entered in blockchain. This helps to verify the
ownership of the assets and also find out the transfer history if necessary.

d. Smart Contracts

Any agreement between contracting parties can be digitalized. These so-called self-
executing contracts give the various parties the assurance that, once the conditions have
 been fulfilled, the contract will be honoured, with no possibility for there being any fraud,
bad faith, or interference with a third party.

e. Health Sector

Another use is in the area of healthcare is for medical records. By digitally recording
them, information about the patient can be transferred more easily from one professional
to another. For example: A person doesn’t need to take multiple X-rays when he goes
from one health professional to another.

f. Supply Chain

Using blockchain in the supply chain help the parties involved in any business provide
relevant information like price, date, location, quality to manage the chain more
effectively and efficiently. For example: Diamond giants De Beer through use of
blockchain ensures that the consumers are buying the genuine item by tracking stones
from mining to sales.

Success Stories

One business venture that has been in tremendous rise is Bitstamp. Bitstamp is a

Bitcoin exchange company. It facilitates instant buy-sell orders USD/BTC pair with

withdrawals available in currencies other than dollars as well. The company was founded by

Nejc Kodric and Damijan Merlak in 2011. Currently they are registered in Luxembourg and

are the world’s first nationally licensed Bitcoin exchange. It is the third largest Bitcoin

exchange and now is licensed across all 28 European Union countries. Similarly, other

Bitcoin exchange companies such as Bitfinex, Coinbase and Cryptsy have been really

successful.

Cryptocurrency such as bitcoin is further treated as commodity. So, the success story

of many individuals who made investment in bitcoin can be found. One such case is of Mr.

Kristoffer Kroch. Working on his thesis regarding Cryptocurrencies in 2009, Kroch came to
know about the benefits of Cryptocurrencies and invested in one. He purchased 5000 bitcoins

at a price of $26. He then forgot about his investment until he heard about the rapid increase

in bitcoin price in 2013. He fetched his password and accessed his account. He was shocked

to find out his initial investment of $26 had grown to $85,000. (estakex, 2017)

Failure Story

Mt. Gox is a Bitcoin exchange based in Tokyo, Japan. Launched in July 2010, it was

one of the first bitcoin exchanges. By 2013, it was handling 70% of all bitcoin transactions

worldwide and established themselves at the market leader in bitcoin exchanges.

However, in February 2014, Mt. Gox declared bankruptcy. The company’s server was

hacked and almost 745,000 bitcoins belonging to customers, and around 100,000 of its own

bitcoins were stolen. This was 7% of all existing bitcoins and worth around $473 million.

Some 200,000 bitcoins were later found. The Chief Executive of Mt. Gox, Mark Karpeles, is

still facing multiple charges from customers as well as Japanese government.

The reasons for such disappearance are thought to be theft, fraud, mismanagement or

combination of these. This highlights the security issues and risks Cryptocurrencies face.

Benefits of Blockchain

In summary, blockchain has following key characteristics.

• Decentralization. In conventional centralized transaction systems, each transaction needs to be

validated through the central trusted agency (e.g., the central bank), inevitably resulting to the
cost and the performance bottlenecks at the central servers. Contrast to the centralized mode,
third party is no longer needed in blockchain. Consensus algorithms in blockchain are used to
maintain data consistency in distributed network.

• Persistency. Transactions can be validated quickly and invalid transactions would not be
admitted by honest miners. It is nearly impossible to delete or rollback transactions once they are
included in the blockchain. Blocks that contain invalid transactions could be discovered
immediately.

• Anonymity. Each user can interact with the blockchain with a generated address, which does
not reveal the real identity of the user. Note that blockchain cannot guarantee the perfect privacy
preservation due to the intrinsic constraint (details will be discussed in section IV).

• Auditability. Bitcoin blockchain stores data about user balances based on the Unspent
Transaction Output (UTXO) model [2]: Any transaction has to refer to some previous unspent
transactions. Once the current transaction is recorded into the blockchain, the state of those
referred unspent transactions switch from unspent to spent. So transactions could be easily
verified and tracked.

Risk Associated

BlockChain is a promising breakthrough technology. As we described before, there are vast

array of applications or problems that can be solved using BlockChain based technology. That
spans from Financial ( remittance to investment banking ) to non-financial applications like
Notary services. Most of these are radical innovations. As it happens with adoption with radical
innovations, there are significant risks of adoption.

Early adoption

At the moment, many blockchain solutions are in a development or low adoption phase and, as a
consequence, the technology and policies offered are relatively untrusted. Many organisations
will therefore be uncertain of using services in relation to business critical activities without a
high degree of confidence in the quality and stability of services it will receive. Vendors will
need to be prepared to provide a level of protection to customers via not just the solution but the
contractual terms themselves.

Data privacy risk:

The consensus protocol requires that all participants in the framework can view transactions
appended to the ledger. While the transactions in a permissioned network could be stored in a
hashed format so as to not reveal the contents, certain metadata will always be available to
network participants. Monitoring the metadata can reveal information on the type of activity and
the volume associated with the activity of any public address on the blockchain framework to
any participant node.

Scaling: Scaling of the current nascent services based on BlockChain presents a challenge.
Imagine yourself executing a BlockChain transaction for the first time. You will have to go
through downloading the entire set of existing BlockChains and validate before executing your
first transaction. This may take hours or longer as the number of blocks increase exponentially.

Bootstrapping: Moving the existing contracts or business documents/frameworks to the new

BlockChain based methodology presents a significant set of migration tasks that need to be
executed. For example in case of Real Estate ownerships/liens, the existing documents lying in
County or Escrow companies need to be migrated to the equivalent BlockChain form. This may
involve time and cost.

Government Regulations: In the new world of BlockChain-based transactions, Government

agencies like FTC, SEC, etc may slow down the adoption by introducing new laws to monitor
and regulate the industry for compliance. In USA, this may in a way help adoption as these
agencies carry customer trust. In more controlled economies like in China, the adoption will face
significant headwind.

Fraudulent Activities: Given the pseudonymous nature of BlockChain transactions, coupled with
ease of moving valuables, the bad guys may misuse this for fraudulent activities like money
trafficking. That said, with enough regulations and technology support law enforcement agencies
will be able to monitor and prosecute them

Status of BlockChain in Nepal

On August 13, 2017 Nepal Rastra Bank (NRB) on its official notice stated that the operation of
Bitcoin or any other cryptocurrency is illegal inside the country (NRB Act 2058) as it is not
legally accepted as currency in Nepal. Furthermore, then Finance Minister of Nepal, Krishna
Bahadur Mahara told that the regulations regarding virtual coins will be monitored but termed as
illegal until further notice during his 2017-2018 budget speech. The reason given was due to Anti
Money Laundering risk associated with virtual coins or crypto currency.

Terming Bitcoin trading as criminal offence, Nepal has closed it door to cryptocurrency (as of
now) before it barely started to take off. According to Bitsewa, Nepal-based bitcoin trading
platform, said ‘We worked very hard to bring this revolutionary technology to Nepal, but it turns
out our government have a very different plan altogether and doesn’t want this technology in the
hands of Nepalese citizen.’ Currently, the situation for both bitcoin enthusiasts and
cryptocurrency businesses trying to operate in Nepal looks grim; at least until the government
reveals its regulatory guidelines.

Such decision of NRB also might be a result of illegality of cryptocurrencies in the SAARC
nations like Pakistan and Bangladesh. While India doesn’t have a clear standing for or against
virtual currencies, the government has started to study them. While developed economies like
China, Japan and European Union have already started studies on the use of blockchain, Nepal
could also do a feasibility study on use of bitcoin and blockchain as a whole. Digital currencies
could surely make exchanges and transactions easier.

Recommendation and Conclusion

As per news that surfaced on newspaper a year back during NRB restrictions, almost 10,000
Nepali hold 10 billion worth of bitcoin illegally. Thus this shows that despite many people don’t
know what bitcoin is, those who know are highly keen on investing and trading in this currency.
Thus it demands for a need of a regulatory mechanism for digital currencies and for its mining.

In Nepal’s context many households depend on remittance in which the transaction cost is high
and use of Bitcoins in Nepal can reduce the intermediaries and maximize the value of the
service. Also the online service and payment system in Nepal is in its preliminary stage, the use
of blockchain technology can be a challenge. However, the use of bitcoins is rather simple and
can work with basic infrastructure used for cellular communications and mobile phones to make
bitcoin transactions. This will reduce the cost of investment in infrastructure and also reduce the
transaction cost.
Also use of blockchain can be useful for Nepal in foreign payments. As many developed
countries have started using virtual currencies in their banking and payment system, use of such
virtual currencies can help Nepal solve the payment related problems in international trade and
eradicate the delay caused due to intermediary inefficiency.

Bitcoin, being one of the pioneer example of blockchain, is known to many people in Nepal.
However, Blockchain is not only limited to virtual currencies and can have a greater impact on
different sectors of any economy. As of now as the virtual currencies are termed illegal, hence, it
is important for our economy to identify the opportunity of use of blockchain in other fields like
health and medical, insurance, supply chain and wherever blockchain can help simplify the
business process and reduce the cost of transaction and enhance security and trust which is
lacking in the present scenario.

http://kathmandupost.ekantipur.com/news/2017-12-27/the-future-of-cryptocurrencies.html