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NEC Activities on Blockchain

What is Blockchain?

Blockchain is causing a paradigm shift in the way individuals, businesses and governments conduct transactions. Enabling transactions with security and trust, Blockchain has the potential to trigger widespread digital transformation and create a far more digitally-integrated global economy than what we have today.

While this technology presents significant opportunities for disruptive innovation across various industries, it’s still at a nascent stage. With the technology rapidly evolving and its definition shifting, most people have inadequate and inaccurate knowledge of what blockchain really is. In fact, there’s little consensus, let alone standardization, even within the technical community.

Phase 1 in the Evolution of Blockchain: Public Ledger
(or Blockchain Emerges as a Public Ledger)

Blockchain was developed in 2008 as the accounting method for Bitcoin. The inventor of this game-changing technology is anonymous, going by the pseudonym Satoshi Nakamoto. Whether this is the name of a person or a group of people is yet unknown.

Gradually, this technology was adopted to verify and keep track of different digital currency transactions without any central recordkeeping.

In its first phase, blockchain was a digitized and decentralized public ledger of transactions. Here’s how it works:

The main elements of this revolutionary technology are:

  • A shared database of transactions
  • Decentralized (no central location where the database is stored)
  • The storage and transmission of data takes place in coded form
  • Relying on peer-to-peer networks
  • Creates an indelible record of transactions

Despite the many advantages, this first phase of blockchain has certain drawbacks that limits its adoption by businesses.

  • Not every business wants a public ledger. Blockchain being used for bitcoin transfers is not private; and leaks considerable information about its users.
  • Recent news has shown the limits of decentralization with just a few entities controlling mining and software development.
  • Contrary to popular belief, this version of blockchain isn’t an immutable ledger. Several ledger changes have been made, the most notable being done by Ethereum following an attack by a hacker in June 2016.
  • Blockchain being used for crypto transfers is independent of governance and regulations.
  • Several attacks have been mounted on it and its security guarantees are still not fully understood.
  • It’s based on proof-of-work, resulting in energy wastage and scalability limitations.

Phase 2 in the Evolution of Blockchain: Enterprise Use
(Or Enterprise Blockchain Evolves)

Before long, it was recognized that blockchain can be used to create records of virtually anything of value. Blockchain evolved for use by enterprises, which sought the many advantages this technology offered compared to traditional system architectures.

Types of Enterprise Blockchain

  • Private: Managed by a single company, where participants are internal users.
  • Collaborative: Managed by two or more trusted organizations, based on consensus by a number of participants from each organization.

In both these forms, blockchain comprises of digital ledger entries that are distributed within a predefined infrastructure. The distribution results in additional nodes (or layers) that provide consensus on each of the transactions.

Benefits of Enterprise Blockchain

The main benefit driving the increasing adoption of enterprise blockchain is that it is distributed. It doesn’t rely on any central location where the database is stored. This means:

  • The records are easily verifiable
  • The records are completely transparent
  • There’s no centralized version that a hacker can attack and corrupt
  • There’s no single point of failure

Another benefit of enterprise blockchain stems from the fact that it is is based on consensus. This ensures that:

  • Any tampering is immediately identified
  • Transactions once recorded cannot be altered

Other benefits of enterprise blockchain are:

  • Facilitates collaboration and tracking of any and all kinds of transactions
  • High security, using digital signatures and secure consensus technologies
  • Removes the need for middlemen
  • Eliminates the need to reconcile ledgers being maintained by different entities
  • Cost advantages, due to elimination of middlemen and cost of validating transactions

The Concept of Smart Contracts

The decentralized ledger can be used for smart contracts, which are essentially self-executing contracts. These smart contracts can be used to exchange anything of value without the need of a middleman.

Here’s how it works:

Leveraging Enterprise Blockchain

Blockchain makes transactions more secure and transparent. The legacy banking and financial-services industries are already facing the risk of serious disruption. However, blockchain can be adopted by any industry that needs at least one of the following:

  • A backend database
  • A mechanism to exchange value
  • Validation of contracts
  • Maintaining online identities

The areas spearheading blockchain innovations are:

  • Managing digital identities: Like birth certificates, marriage certificates, passports, social security numbers
  • Property ownership: A recordkeeper of titles with time stamp that cannot be changed
  • Healthcare: Access to different aspects of medical records to different entities
  • Intellectual Property: Protection from piracy and IP infringement

Blockchain is already being used in various commercial applications and to deliver public services. It’s only a matter of time before practically all industries will begin to search for ways in which blockchain can be incorporated into their operations, especially as governments are pouring billions of dollars into testing this technology for use in different spheres. Blockchain is set to revolutionize the world economy and the way we do anything today.

So, what is the real risk with blockchain? The greatest risks are lack of information about how blockchain can impact businesses and letting others take the lead, thereby foregoing first-mover advantages.

NEC and Blockchain

The global shift to digital presented a host of possibilities. But, with new capabilities came new risks, the gravest among these being security and privacy. Against this backdrop, blockchain held immense promise and development of this revolutionary technology rapidly gained momentum.

When a technology is potentially disruptive and when change is too rapid, there’s an urgent need to identity vulnerabilities and measure the implications for society at large. With these broad goals and backed by 100+ years of expertise in technological innovation and research, NEC began exploring blockchain and studying its role in enhancing security, efficiency and neutrality.

It Began with Bitcoin

NEC’s research team recognized the potential of blockchain in 2012, when this technology was merely an enabler of Bitcoin.

In a bid to strengthen the global crypto ecosystem, the NEC team and its partners invested time in the:

  • Identification and analysis of vulnerabilities of Blockchain solutions
  • Design, verification and implementation of Blockchain security enhancements
  • Application of improved blockchain to financial services, supply chain management and decentralized storage systems.

The team and its partners studied Bitcoin transactions and the security of using the digital currency for fast payments, when the time between exchange of currency and goods is only a few seconds. The team found that double-spending attacks could be made on these fast payments at very low costs. NEC and its partners recommended a lightweight countermeasure for the detection of double-spending attacks in fast transactions.

By 2014, Lightweight Bitcoin clients were gaining increasing adoption among Bitcoin users. These were based on SPV (Simplified Payment Verification), which required users to download and verify only a part of a block in the chain. SPV brought Bitcoin trading to smartphones. SPV clients relied on Bloom filters to receive relevant transactions to their local wallets. The NEC team and our partners determined that SPV compromised privacy. Providing analytical and empirical proof, the team highlighted how SPV clients leaked considerable information of Bitcoin addresses, while also proposing a solution to enhance privacy.

In 2015, there was a significant rise in the number of Bitcoin transactions and block sizes, which was only expected to increase. To tackle this situation, Bitcoin implemented a number of optimizations and scalability measures. NEC and our partners discovered that these measures came at the cost of security; and proved that an adversary could exploit them to mount Denial-of-Service attacks and cause double-spend transactions. NEC and our partners proposed several countermeasures to enhance security without compromising scalability.

By 2016, Proof of Work (PoW) powered blockchains accounted for over 90% of the total crypto market capitalization. The security provisions of variant (forked) PoW blockchains had not received much attention till then. NEC and our partners proposed a novel quantitative framework to analyze the security and performance implications of PoW blockchains. The framework took into account adversary attacks as well as real world constraints to facilitate comparisons of the tradeoffs between performance and security provisions.

The Ripple Effect

In early 2015, Ripple represented the second highest crypto market cap after Bitcoin. Despite this, there were no studies analyzing the provisions of Ripple. NEC studied the Ripple protocol and outlined its security and privacy provisions. Contrary to the claims made by Ripple developers, the NEC team highlighted that the system could fork and proposed a solution for its prevention.

NEC recognizes that seeding a technology while compromising its role in ensuring security, efficiency and equality would be counterproductive. The team continues to study the impact of blockchain technology and to explore new horizons with this innovative technology, with the objective of empowering people, businesses and society.