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Blockchain Is Rapidly Expanding, and Its Not Just for Bitcoin

Why is this technology for virtual currency also being used in other industries?

Many people could not get enough sleep because they stayed up late to watch the World Cup soccer games held once every four years. Japan's national team advanced to the final rounds this year, which greatly excited fans. In addition to the plays by great athletes, rousing cheers by supporters from around the world also made the news. News reports included the fact that a global soccer player had started a social network powered by blockchain. In June 2018, Andrés Iniesta, a midfielder of J-League's Vissel Kobe who has represented Spain, launched a test site for the "Olyseum" social network for sports fans together with Carles Puyol, a legendary former defender and captain of FC Barcelona, who represented Spain in the previous World Cup. They harnessed blockchain technology to deepen communication between fans and athletes.

Olyseum front page where Mr. Puyol encourages users to register
(Source: https://www.olyseum.com/welcome/init)

Upon hearing the news, some may have thought, "Wasn't blockchain technology developed for virtual currencies? Does it have anything to do with social networking?" Although blockchain is a technology created to realize virtual currencies, it is also an attractive technology for enabling distributed ledgers to safely store transaction records. In addition, as new features have been developed, blockchain has evolved into a general-purpose system technology that supports various operations systems. Let's take a look at blockchain, which has already started to be used in familiar apps.

Bitcoin Was Developed for Micropayments by Internet Users

Blockchain is a distributed system technology that was invented to realize Bitcoin, a virtual currency. A blockchain consists of a large number of computers connected peer-to-peer (P2P) via the Internet (one-to-one as equal computing peers). A white paper written by Satoshi Nakamoto in 2009 entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" is regarded to be the origin of blockchain.

The white paper written by Satoshi Nakamoto regarded to be the origin of blockchain
(Source: https://bitcoin.org/bitcoin.pdf)

Bitcoin is a virtual currency developed to enable Internet users to make low-cost, secure business transactions. Double-spending is an important problem for electronic payments. Unlike cash payments, e-commerce payments involve a time lag between purchase and payment; therefore, a mechanism is needed to prevent double-billing and double-spending. For this reason, when Internet users perform business transactions on the Internet, it is commonplace to pay fees to intermediaries that provide mechanisms to avoid double-spending. However, by incorporating a mechanism to prevent double-spending into its P2P system, Bitcoin realized a digital payment system (bitcoin transfer) that does not require any intermediaries. Although this system does incur system maintenance costs, the amount is less than the fees paid to intermediaries.
Bitcoin is based on a P2P system comprised of Internet users around the world who run specialized software on their own computers. What is important is that all Bitcoin transactions (transfer logs) are recorded on all computers that comprise the P2P system rather than on a specific server installed for centralized management, and Bitcoin also has a built-in mechanism to prevent falsification. If all transmission records are stored with no risk of falsification, double spending cannot occur.

Transactions Are Recorded as Blocks, and Blocks Are Connected to Create Transaction Ledgers

Blockchain is a "system technology that prevents double-spending" incorporated into the P2P system that makes Bitcoin possible. The advent of blockchain shows that the value and credit of money, which thus far have depended on governments and companies, can be ensured by technology provided by a system. Thus, the possibility that virtual currencies that are not restricted by governments or companies can be issued and traded has come to the fore. In fact, when the Cyprus financial crisis occurred in 2013, the value of Bitcoin increased because it could be traded at any time without being affected by the country's loss of credibility.
What is the mechanism that prevents double-spending? The essence of blockchain technology is that transaction records on a blockchain are divided into chunks called blocks at regular intervals, and these blocks are linked together in chronological order to form a chain. In short, all Bitcoin transaction ledgers consist of blocks and chains.
When a new block is created, information from the preceding block is used. New blocks are created at a certain time interval, and the consistency of the entire blockchain is checked every time a new block is added. Even when changing the content of a single block, the entire ledger must be reviewed. This makes blockchain a system that is nearly impossible to falsify.
Operating Bitcoin requires a large number of computers that form a P2P system on the Internet. These computers must be running 24 hours a day, 365 days a year in order to record transaction data from around the world in blocks at regular intervals. To ensure stable system operation, incentives in the form of bitcoins are provided to participants who compute large volumes of data. Transaction fees are also paid to such participants. The calculation process for maintaining this system is called "mining" because getting bitcoins resembles the process of mining metals. To receive rewards, participants (miners) must complete the calculation process faster than others; therefore, many companies have now installed a large number of computers for Bitcoin system operation and compete in increasing their calculation processing capacities.
This incentive system contributes to the blockchain system's stability in two ways. First, the entire system is continuously strengthened by the many participants who continue to work to extend the system. Second, even if a participant who had an overwhelming calculation capacity that could possibly falsify the system appears, considering the huge investment made to acquire that outstanding calculation capacity, it is safer and more efficient for the participant to contribute to system operation and receive a stable, fair reward rather than to obtain profits by falsification, which poses the risk of destroying the currency's monetary value.
Incidentally, although the terms "block" and "chain" appear in the paper by Nakamoto cited above, the term "blockchain" does not appear. The word blockchain began to be used among virtual currency researchers and became widespread because Bitcoin's core technology connects blocks like a chain.

Smart Contracts--Programs Built into Blockchain

The Bitcoin blockchain employs public key cryptography (a cryptographic method in which a pair of keys are used to encrypt and decrypt; one key is made public while the other is kept secret--blockchain uses a secret key for personal authentication) and hash functions (functions that generate fixed-length bit strings from an arbitrary-length bit string; the original data cannot be retrieved from the generated bit strings, which are used to efficiently perform certain types of processing after encrypting the original data) in order to keep transaction data and participants' personal data secret. That said, the Bitcoin blockchain only records bitcoin transactions accurately since its sole purpose is to facilitate virtual currency transactions.
In 2013, a new blockchain-based virtual currency platform called Ethereum emerged, which enables users to embed programs into the blockchain. Ethereum is an operating system for the "Ether" virtual currency, and it aims to realize a new e-commerce platform that makes use of Ether.

Front page of Ethereum's official website, which declares Ethereum to be a blockchain application platform
(Source: https://www.ethereum.org/)

Ethereum's blockchain incorporates smart contracts, which are software programs that automatically execute applications. Smart contracts work like vending machines on the Internet for Ethereum users.
To explain in more detail, Ethereum's blockchain allows for "contract rules" and "programs to execute contracts" to be built into the blockchain itself. For example, suppose Company A plans to sell content at 10 ethers per download. In this case, Company A writes a contract rule that "after Company A receives 10 ethers from Customer X, it will send a password to Customer X to allow the content to be downloaded" and writes a program to implement said contract into Ethereum's blockchain. According to the Ethereum blockchain's mechanism, the rule and program will be spread across all computers in the Ethereum blockchain network. This allows Company A to operate a content sale business for Ethereum users without any intermediaries.

Hyperledger to Spread the Use of Blockchain, Separating It from Electronic Payment Systems

Bitcoin and Ethereum use blockchain technology to execute virtual currency transactions. Meanwhile, attempts are already underway to use blockchain as a distributed ledger technology (DLT) by separating it from virtual currencies. A typical example is the "Hyperledger Project" launched by the Linux Foundation in December 2015. The Linux Foundation is a non-profit consortium dedicated to fostering the growth of Linux, and it provides a variety of support for the open source community.
The Hyperledger Project aims to solve system problems in various industries using blockchain's distributed ledger based on a P2P system. To promote this effort, the project has developed frameworks and tools for open-source blockchain. Individual projects have been set up under various development themes, and as of June 2018, there are five framework projects and five tool projects. In each project, members are working to create open-source blockchain platforms by providing blockchain software they have developed themselves.

Projects hosted by the Hyperledger Project
(Source: https://www.hyperledger.org/projects)

Premier members of the Hyperledger Project include major IT vendors such as Fujitsu, banking giants such as US's JP Morgan and Germany's Deutsche Bank, US credit card giant American Express, major German automotive company Daimler, and leading French aircraft manufacturer Airbus.

A Testbed Using Hyperledger Project Outcomes Launched in Japan

The outcomes of the Hyperledger Project will be reflected in blockchain-related products of the project's member companies. For example, in June 2017, Fujitsu developed software based on Fujitsu VPX (Virtual Private digital eXchange) that applies blockchain to control access to distributed data. This new software is based on Hyperledger Fabric, a blockchain framework that is one of the Hyperledger projects; it was created by developing proprietary smart contracts executed on blockchain.
Hyperledger Fabric is also employed for the Fujitsu cloud service used by the Japanese Bankers Association (JBA) as a testbed environment for financial services based on blockchain technologies. This testbed environment, called the "Collaborative Blockchain Platform," is implemented on FUJITSU Cloud Service K5 using Hyperledger Fabric as the blockchain platform.

Collaborative Blockchain Platform employed by JBA as a testbed environment

Though blockchain technology already supports a variety of virtual currencies, it has evolved into a new system technology that can be used in a wide range of industries by adding functions (e.g., smart contracts) and the contributions of the Hyperledger Project, which has separated blockchain from virtual currency functions. Olyseum, which I introduced at the beginning of this article, plans to create a new mechanism to connect fans and players using blockchain. For example, Olyseum may use smart contracts to implement a mechanism whereby when a certain number of comments are made that agree with a post, a special message or special piece of content may be transmitted from a player to the people who made the post.
Next time, we will look at the benefits of using blockchain and the challenges that blockchain faces today as I introduce application examples that go beyond virtual currencies.

Author Profile
Tetsushi Hayashi
Nikkei BP Intelligence Group Clean Tech Laboratory, Chief Research Officer

Mr. Hayashi joined Nikkei BP after graduating from Tohoku University's School of Engineering in 1985. As a reporter and editor-in-chief for outlets such as Nikkei Datapro, Nikkei Communications, and Nikkei Network, he has covered stories and written articles on topics such as cutting-edge communications and data processing technologies as well as standardization and productization trends. He consecutively held the post of chief editor for Nikkei BYTE from 2002, Nikkei Network from 2005, and Nikkei Communications from 2007. In January 2014, he became Chief Director of Overseas Operations after acting as publisher for magazines including ITpro, Nikkei Systems, Tech-On!, Nikkei Electronics, Nikkei Monozukuri, and Nikkei Automotive. He has served at his present post since September 2015. Since August 2016, Mr. Hayashi has been writing a regular column, "Creating the Future with Automated Driving," in the Nikkei Digital Edition. Moreover, he published the "Overview of International Automated Driving Development Projects" in December 2016 and the "Overview of International Automated Driving/Connected Cars Development" in December 2017. Mr. Hayashi has also served as a CEATEC Award judge since 2011.