Blockchain

Definition and differentiation

Blockchain technology is a decentralised, unchangeable and transparent data storage system. This relatively new technology is categorised as a distributed ledger technology. It is characterised by the fact that a continuously growing list of entries is combined into blocks, cryptographically linked and maintained by a decentralised computer network^{[5], [27]}. Blockchain technology is therefore also referred to as trustless technology, as trust is not realised via an intermediary, but via the reliability of the technology itself^[21].

From cryptocurrency to decentralised world computer

The principle of technology-induced trust goes back to the first known blockchain application – the cryptocurrency Bitcoin. Bitcoin is a new form of digital money that works without a trusted financial institution that is normally responsible for the ownership of its customers’ money. Instead, cryptographic proofs, distributed systems, and economic and game-theoretic consensus incentive mechanisms (for example, block rewards in the form of bitcoins) are used to establish a shared truth about the ownership of digital money^{[21], [27]}.

While the Bitcoin blockchain is used exclusively as a cryptocurrency, there are also blockchain frameworks that can support additional application areas. For example, the Ethereum blockchain extends the distributed ledger model of Bitcoin by providing a platform including a programming language (Solidity) that can be used to execute your own computer programmes, so-called smart contracts, on the Ethereum blockchain^{[8], [14]}. Contrary to the legal connotation, smart contracts are primarily computer programs that run in a decentralised computer network and are therefore referred to as decentralised applications (dApps)^[17]. Smart contracts make it possible to simulate a kind of “virtual and global world computer” that executes the machine instructions stored in smart contracts with absolute reliability by all network participants in the Ethereum blockchain. The programmability of the blockchain as a decentralised computer makes it possible to separate “blockchain as cryptocurrency” and “blockchain as technology”^{[14], [32], [8]}.

History

in 2008, Satoshi Nakamoto published the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, which presented the theoretical framework for a digital and decentralised monetary system. A few months after publication, Satoshi Nakamoto published the first version of the new digital means of payment in early 2009 and implemented it using the cryptocurrency Bitcoin^[34]. A few days later, the first Bitcoin transfer was made as a test by Nakamoto to the developer Hal Finney, who supported Nakamoto in the development of Bitcoin in the early days^[30]. Finney was a member of Cypherpunks, which describes “any activist who favours the widespread use of strong cryptography and privacy-enhancing technologies as a means for social and political change”^[43]. This mission statement also underlies the Bitcoin blockchain and Nakamoto’s proximity to the Cypherpunks can be confirmed by the fact that the Bitcoin white paper was first circulated through the Cypherpunks mailing list^[35].

Looking at the technological level, the innovative character of blockchain technology can be traced back to the novel combination of existing concepts and technologies, the roots of which go back to the 1980s. Particularly noteworthy are the publications on linked timestamps by Stuart Haber and Scott Stornetta (1990-1997), Merkle trees (hash trees) by Ralph Merkle (1980), on Byzantine fault tolerance by Mike Just (1998) and, building on this, the extension in the form of practical Byzantine fault tolerance by Miguel Castro and Barbara Liskov (1999), proof-of-work by Cynthia Dwork and Moni Naor (1992), hashcash by Adam Beck (1997-2002) and asymmetric encryption, which is used to create digital signatures^[28]. Together, these technologies form the foundation for representing the ownership history of an “electronic coin” as a chain of digital signatures^[27].

The validity of the ownership history on the Bitcoin blockchain is guaranteed by several factors, including the fact that the calculations performed to create and transfer the ownership of digital money on the Bitcoin blockchain can be viewed transparently by all participants. Furthermore, all network participants independently check (verify) the correctness of the entries using cryptographic evidence. Transparency combined with cryptographic proofs ensures that the calculations performed when transferring digital money comply with the specifications of the consensus procedure defined in the Bitcoin protocol even without the involvement of a trusted party (in the case of Bitcoin, the so-called Nakamoto consensus^[11]). In other words, trust in the entries on the Bitcoin blockchain is created through verifiable calculations in a decentralised computer network whose participants do not know each other^[37] but all share a financial incentive and behave honestly in order to maintain a common truth^[27].

in 2013, Vitalik Buterin published a white paper entitled “A Next-Generation Smart Contract and Decentralised Application Platform”^[7]. The concept of the Ethereum blockchain presented by Buterin was formalised by Gavin Wood (a co-founder of Ethereum and later Polkadot) and published in the Ethereum Yellow Paper in 2014^[42]. The first specification of the associated smart contract programming language Solidity was also created by Wood in August 2014 and further developed by the Ethereum Foundation under the leadership of Christian Reitwiessner and his team^[23].

Blockchain technology is now seen as the key technology behind the decentralised internet, which became known as Web3. Gavin Wood presented the Web3 concept in 2014 and described it as a “decentralised online ecosystem based on blockchain technology”^[24].

Application and examples

The scope of application of blockchain technology and smart contracts has expanded from the financial industry to other sectors and use cases. Notable examples include

Industrial metaverse

The industrial metaverse ties in with the idea of Industry 4.0 and represents the next stage of digitisation in industry^[26]. The use of smart contracts makes it possible to digitally map tangible and intangible assets on a blockchain and digitally prove ownership (analogous to electronic coins in Bitcoin). This process is also known as tokenisation^[33].

A token in the blockchain context is representative of an asset in digital form (cryptoasset) and combines information and transferable rights. A token can represent the asset in its entirety or only in part. As tokens are based on smart contracts and are implemented using non-fungible tokens, they are programmable and automatable. If the properties of tokens are applied to digital twins, for example, ownership of the asset represented by the digital twin can also be proven, tracked and transferred in the digital space^[4].

Decentralised Physical Infrastructure Networks (DePin)

DePin bring the virtual and digital worlds together using blockchain technology. They describe an ecosystem of decentralised applications that use incentives in the form of tokens to motivate people or groups to build physical infrastructure^[29]. Examples include Charge for the provision of a charging infrastructure for electric cars^[15] or Helium for wireless networks, where the provision of physical hotspots is rewarded with tokens^[16].

Decentralised Finance (DeFi)

DeFi describes an alternative financial infrastructure based on several smart contracts that are combined into protocols. These replicate existing financial services in an open, transparent and interoperable way^[36]. Examples of DeFi protocols include the decentralised cryptocurrency exchange Uniswap^[39] or the lending platform AAVE for borrowing or lending cryptocurrencies^[1]. A benchmark for the adoption of DeFi protocols is the Total Value Locked (TVL), which represents an aggregated value of cryptoassets within a protocol^[38]. For the various DeFi protocols, the TVL in July 2024 was approximately USD 90 billion^[12].

Criticism and problems

Like many technological innovations, the acceptance of blockchain technology faces challenges that must be assessed differently depending on the area of application and level of consideration. At the technological level, scalability^[3]interoperability between different blockchain ecosystems^[31] and data protection issues relating to confidential information due to the inherent transparency and immutability of blockchain entries^[22]. Although blockchain technology itself is a secure technology, this does not necessarily apply to the decentralised applications that run on a blockchain^[13].

A well-known challenge in this context is the so-called blockchain oracle problem. By default, blockchains have no way of communicating with the outside world. In order for blockchain applications to access external (physical) data, so-called blockchain oracles are required as a bridge between the digital and physical world. The challenge is to ensure that the external data is not falsified during the transition to the blockchain^[10]. As in traditional financial systems, cases of fraud using social engineering also occur with cryptocurrencies^[6]. These cases do not exploit technical weaknesses in blockchain technology, but human factors to cause unknowing users to lose their cryptoassets^[41].

Research

Zero-knowledge proofs

The challenges relating to the scalability and privacy of blockchains are being addressed by intensive research in the field of zero-knowledge proofs (ZKP). ZKPs make it possible to verify a claim about a certain piece of information without revealing the information itself. An illustrative example is to use ZKP to prove that a person is of legal age without specifying their exact age^[1]. In blockchains, ZKPs are used for scaling busy blockchains such as Ethereum. Calculations for several transactions are bundled and executed outside (off-chain) a blockchain, and only a verifiable proof of the correctly executed calculations is anchored on the blockchain^[18]. In addition to scaling, CCPs are used to ensure the privacy of users. This manifests itself in applications for anonymous payments. One example is Tornado Cash, which allows anonymous payment transactions to be carried out on the Ethereum blockchain without explicitly disclosing certain information that could be traced back to the user^[19].

Regenerative finance

Blockchain also opens up completely new areas of application for the technology. Regenerative finance, for example, combines the decentralised financial infrastructure of DeFi with the theories of regenerative economics. Together, these form the foundation for redesigning current economic systems in harmony with the needs of the planet and society. This would make it possible, for example, to adequately finance public goods such as forests^[42].

Convergence between blockchain and AI A highly topical area of research is the investigation of the interplay between blockchain and artificial intelligence (AI). The European Commission was already looking at synergies between these emerging technologies in 2021^[20]. Currently, the vision of a European AI ecosystem envisages blockchain playing a central role in the creation of sovereign data marketplaces and federated learning. Blockchain technology combined with zero-knowledge proofs executed by blockchain enable companies, for example, to jointly train AI models without explicitly disclosing the data provided. This could create data marketplaces for various application areas such as healthcare, smart cities or industry ^[25].

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