Nir Kshetri, University of North Carolina – Greensboro

Big Wall Street companies are using a complicated technology called blockchain to further increase the already lightning-fast speed of international finance. But it’s not just the upper crust of high finance who can benefit from this new technology.

Most simply, a blockchain is an inexpensive and transparent way to record transactions. People who don’t know each other – and therefore may not trust each other – can securely exchange money without fear of fraud or theft. Major aid agencies, nonprofits and startup companies are working to extend blockchain systems across the developing world to help poor people around the world get easier access to banks for loans or to protect their savings.

In my work as a scholar of business and technology focusing on the impact of blockchain and other modern technologies such as cloud computing, big data and the Internet of Things on poor people, I see four main ways blockchain systems are already beginning to connect some of the world’s poorest people with the global economy.

How does a blockchain work?

A blockchain is a fancy word for a transaction-recording computer database that’s stored in lots of different places at once. The best-known example of blockchain technology is the electronic cryptocurrency called bitcoin, but the concept can be applied in lots of different ways.

One way to think about a blockchain is as a public bulletin board to which anyone can post a transaction record. Those posts have to be digitally signed in a particular way, and once posted, a record can never be changed or deleted. The data are stored on many different computers around the internet, and even around the world.

Together, these features – openness to writing and inspection, authentication through computerized cryptography and redundant storage – provide a mechanism for secure exchange of funds. They can even involve what are called “smart contracts,” transactions that happen only if certain conditions are met – such as a life insurance policy that sends money to the beneficiary only if a specific doctor submits a digitally signed death certificate to the blockchain.

Right now, these sorts of services are available – even in the developed world – only because nations have strong regulations protecting the money people deposit in banks, and clear laws about obeying the terms of formal contracts. In the developing world, these rules often don’t exist at all – so the services that depend on them don’t either, or are so expensive that most people can’t use them. For instance, to open a checking account in some parts of Africa, banks require enormous minimum deposits, sometimes more money than an average person earns in a year.

A blockchain system, though, inherently enforces rules about authentication and transaction security. That makes it safe and affordable for a person to store any amount of money securely and confidently. While that’s still in the future, blockchain-based systems are already helping people in the developing world in very real ways.

Sending money internationally

In 2016, emigrants working abroad sent an estimated US$442 billion to their families in their home countries. This global flow of cash is a significant factor in the financial well-being of families and societies in developing nations. But the process of sending money can be extremely expensive.

Using MoneyGram, for example, a worker in the U.S. with US$50 to send to Ghana might have to pay $10 in fees, meaning her family would receive only $40. In 2015, transaction costs and commission rates averaged 10.96 percent for remittances sent from banks and 6.36 percent for sending money through money transfer operators. Companies justify their costs by saying they reflect the price of providing reliable and convenient services.

By contrast, Hong Kong’s blockchain-enabled Bitspark has transaction costs so low it charges a flat HK$15 for remittances of less than HK$1,200 (about $2 in U.S. currency for transactions less than $150) and 1 percent for larger amounts. Using the secure digital connections of a blockchain system lets the company bypass existing banking networks and traditional remittance systems.

Similar services helping people send money to the Philippines, Ghana, Zimbabwe, Uganda, Sierra Leone and Rwanda also charge a fraction of the current banking rates.

Insurance

Most people in the developing world lack health and life insurance, primarily because it’s so expensive compared to income. Some of that is because of high administrative costs: For every dollar of insurance premium collected, administrative costs amounted to $0.28 in Brazil, $0.54 in Costa Rica, $0.47 in Mexico and $1.80 in the Philippines. And many people who live on less than a dollar a day have neither the ability to afford any insurance, nor any company offering them services.

In India, for example, only 15 percent of the population has health insurance. Even those people pay higher relative premiums than in developed countries. As a result, people in South Asia pay a much greater share of their health care costs out of their own pockets than do people in high-income industrialized countries.

Because blockchain systems are online and involve verification of transactions, they can deter (and expose) fraud, dramatically cutting costs for insurers.

Consuelo is a blockchain-based microinsurance service backed by Mexican mobile payments company Saldo.mx. Customers can pay small amounts for health and life insurance, with claims verified electronically and paid quickly.

Helping small businesses

Blockchain systems can also help very small businesses, which are often short of cash and also find it expensive – if not impossible – to borrow money. For instance, after delivering medicine to hospitals, small drug retailers in China often wait up to 90 days to get paid. But to stay afloat, these companies need cash. They rely on intermediaries that pay immediately, but don’t pay in full. A $100 invoice to a hospital might be worth $90 right away – and the intermediary would collect the $100 when it was finally paid.

Banks aren’t willing to lend money in places where fraudulent invoices are common, or where manufacturers and their customers might have inconsistent and error-ridden records. A blockchain system reduces those concerns because these records must be authenticated before being added to the books, and because they can’t be changed.

Those Chinese pharmaceutical companies are getting help from Yijan, a blockchain that is a joint effort of IBM and Chinese supply management company Hejia. Electronics, auto manufacturing and clothing companies facing similar difficulties are the test markets for Chained Finance, a blockchain platform backed by financial services company Dianrong and FnConn, the Chinese subsidiary of Foxconn.

Humanitarian aid

Blockchain technology can also improve humanitarian assistance. Fraud, corruption, discrimination and mismanagement block some money intended to reduce poverty and improve education and health care from actually helping people.

In early 2017 the U.N. World Food Program launched the first stage of what it calls “Building Block,” giving food and cash assistance to needy families in Pakistan’s Sindh province. An internet-connected smartphone authenticated and recorded payments from the U.N. agency to food vendors, ensuring the recipients got help, the merchants got paid and the agency didn’t lose track of its money.

The agency expects using a blockchain system will reduce its overhead costs from 3.5 percent to less than 1 percent. And it can speed aid to remote or disaster-struck areas, where ATMs may not exist or banks are not functioning normally. In urgent situations, blockchain currency can even take the place of scarce local cash, allowing aid organizations, residents and merchants to exchange money electronically.

Blockchains can even help individuals contribute to aid efforts overseas. Usizo is a South Africa-based blockchain platform that lets anyone help pay electricity bills for community schools. Donors can track how much electricity a school is using, calculate how much power their donation will buy and transfer the credit directly using bitcoin.

Future potential

In the future, blockchain-based projects can help people and governments in other ways, too. As many as 1.5 billion people – 20 percent of the world’s population – don’t have any documents that can verify their identity. That limits their ability to use banks, but also can bar their way when trying to access basic human rights like voting, getting health care, going to school and traveling.

Several companies are launching blockchain-powered digital identity programs that can help create and validate individuals’ identities. Using only an internet-connected smartphone, a person is photographed and recorded on video making particular facial expressions and speaking, reading an on-screen text. The data are recorded on a blockchain and can be accessed later by anyone who needs to check that person’s identity.

Without email, phones, passports or even birth certificates, a blockchain could be the only way many poor people have to prove who they are. That could really make their lives better and expand their opportunities.

Nir Kshetri, Professor of Management, University of North Carolina – Greensboro

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Public warning alerts using embedded Cell Broadcast feature on Android 7.1

Cell Broadcast (CB) is a method of sending messages to multiple mobile telephone users in a defined area at the same time. It is defined by the ETSI’s GSM committee and 3GPP and is part of the 2G, 3G, 4G LTE (telecommunication) and 5G standards. It is also known as Short Message Service-Cell Broadcast (SMS-CB).

Unlike Short Message Service-Point to Point (SMS-PP), Cell Broadcast is a one-to-many geo-targeted and geo-fenced messaging service.

History

Cell Broadcast messaging was first demonstrated in Paris in 1997. Some mobile operators used Cell Broadcast for communicating the area code of the antenna cell to the mobile user (via channel 050), for nationwide or citywide alerting, weather reports, mass messaging, location-based news, etc. Cell broadcast has been widely deployed since 2008 by major Asian, US, Canadian, South American and European network operators. Not all operators have the Cell Broadcast messaging function activated in their network yet, but most of the currently used handsets support cell broadcast.

Service

One Cell Broadcast message can reach a large number of telephones at once. Cell Broadcast messages are directed to radio cells, rather than to a specific telephone. The latest generation of Cell Broadcast Systems (CBS) can send to the whole mobile network (e.g. 1,000,000 cells) in less than 10 seconds, reaching millions of mobile subscribers at the same time. A Cell Broadcast message is an unconfirmed push service, meaning that the originators of the messages do not know who has received the message, allowing for services based on anonymity. Cell Broadcast is compliant with the latest EU General Data Protection Regulation (GDPR) as mobile phone numbers are not required by CB. The originator (alerting authority) of the Cell Broadcast message can request the success rate of a message. In such a case the Cell Broadcast System will respond with the number of addressed cells and the number of cells that have broadcast the Cell broadcast (alert) message.

Technology

The maximum length of a cell broadcast message is 1395 characters. The CB message parameters contain the broadcasting schedule. If the start-time is left open, the CBC system will assume an immediate start, which will be the case for Public Warning messages. If the end-time is left open, the message will be repeated indefinitely. A subsequent cancel message shall be used to stop this message. The repetition rate can be set between 2 seconds and to values beyond 30 minutes. Each repeated CB message will have the same message identifier (indicating the source of the message), and the same serial number. Using this information, the mobile telephone is able to identify and ignore broadcasts of already received messages. A Cell Broadcast message page is composed of 82 octets, which, using the default character set, can encode 93 characters. Up to 15 of these pages may be concatenated to form a Cell Broadcast message (hence maximum length of one Cell broadcast message is therefore 1395 characters).

A Cell Broadcast Centre (CBC), a system which is the source of SMS-CB, is connected to a Base Station Controller (BSC) in GSM networks, to a Radio Network Controller (RNC) in UMTS networks, to a Mobility Management Entity (MME) in LTE (telecommunication) networks or to a core Access and Mobility management Function (AMF) in 5G networks.

The technical implementation of the cell broadcast service is described in the 3GPP specification TS 23.041 ^[1]

• The 2G-CBC (BSC) interface is described in 3GPP standard TS 48.049; however, non-standard implementations exist.
• The 3G-CBC (RNC) interface is described in 3GPP standard TS 25.419.
• The 4G-CBC (MME) interface is described in 3GPP standard TS 29.168.
• The 5G-CBC (AMF) interface is described in 3GPP standard TS 29.518.

A CBC sends CB messages, a list of cells where messages are to be broadcast, and the requested repetition rate and number of times they shall be broadcast to the BSC/RNC/MME/AMF. The BSC’s/RNC’s/MME/AMF responsibility is to deliver the CB messages to the base station (BTSs), NodeBs, ENodeBs and gNodeBs which handle the requested cells.

Emergency communication system

Cell Broadcast is not affected by traffic load; therefore, it is very suitable during a disaster when load spikes of data (social media and mobile app), regular SMS and voice calls usage (mass call events) tend to significantly congest mobile networks, as multiple events have shown.

Wireless Emergency Alerts and Government alerts using Cell Broadcast are supported in all models of mobile telephones. Smart phones have a configuration menu that offer opt-out capabilities for certain public warning severity levels.

Broadcast messages are used in most countries to send emergency alerts, using as input a CAP (Common Alerting Protocol) message as specified by OASIS (organization) or Wireless Emergency Alerts (WEA) C-interface protocol, which has been specified jointly by the Alliance for Telecommunications Industry Solutions (ATIS) and the Telecommunications Industry Association (TIA).

Advantages of using Cell Broadcast for Public warning are:

• Sending out a Cell Broadcast message to a few or millions of people take less than 10 seconds
• Cell Broadcast has a unique and dedicated ringtone and vibration
• Only an authorized authority and the serving mobile network are able to send out the Cell Broadcast messages
• 99% of all handsets used today support Cell Broadcast
• Cell Broadcast supports per CB-message a maximum message length of 1395 characters in Latin and 615 characters in Universal Coded Character Set (UCS-2) encoding in order to support e.g. Arabic, Chinese alphabet, Urdu, Greek alphabet.
• Cell Broadcast supports multiple languages
• Cell Broadcast supports the use of URLs and Web-links in the alert message
• Cell Broadcast supports Device Based Geo-Fencing
• Cell Broadcast supports the update within seconds of existing alert messages due to changing hazard situations
• Cell Broadcast supports the mechanism to inform and instruct people within seconds in the adjacent hazard areas
• Cell Broadcast is able to reach all mobile subscribers including roaming subscribers (in their own language)
• Cell Broadcast is not affected by mobile network congestion
• Cell Broadcast is not affected by access class baring and or SIM class baring
• Cell Broadcast is not affected by any data protection constraints as no personal data (subscriber identity or MSISDN) is required and used to deliver the message.
• Cell Broadcast can be used to address people present in an individual cell sector or large polygons covering a complete city or country.
• Cell Broadcast messages can be updated as incident conditions change during an event at the end of an event an all-clear can be given.
• Cell Broadcast is suitable for monthly or half yearly national public warning awareness tests
• Cell Broadcast enablement in the mobile network has no influence on the battery life of mobile devices

Cell Broadcast adoption rate

A point of criticism in the past on Cell Broadcast was that there was no uniform user experience on all mobile devices in a country.

This limitation is since 2012 no longer present. In case a national civil defence organisation is adopting one of the Wireless Emergency Alerts standards, WEA – formerly known as CMAS in North America, EU-Alert in Europe, LAT-Alert in South America, Earthquake Tsunami Warning System in Japan, each subscriber in that country either making use of the home network or is roaming automatically makes use of the embedded Public warning Cell Broadcast feature present in every Android (operating system) and iOS mobile device.

In countries that have selected Cell Broadcast to transmit public warning messages, up to 99% of the handsets receive the cell broadcast message (reaching between 85-95% of the entire population as not all people have a mobile phone) within seconds after the government authorities have submitted the message; see as examples Emergency Mobile Alert (New Zealand), Wireless Emergency Alerts (USA) and NL-Alert (Netherlands).

Public warning implementations

Many countries and regions have implemented location-based alert systems based on cell broadcast. The alert messages to the population, already broadcast by various media, are relayed over the mobile network using cell broadcast.

An example of an actual Cell Broadcast Message on an Android smartphone, indicating a Tornado Warning in the covered area in the US.

• Japan – Earthquake Early Warning
• Canada – Alert Ready
• United States – Wireless Emergency Alerts
• New Zealand – Emergency Mobile Alert
• United Arabic Emirates – UAE-Alert
• Oman – Oman-Alert
• European Union – EU-Alert
• Netherlands – NL-Alert
• Lithuania – LT-Alert ^[2]
• Romania – RO-ALERT
• Greece – GR-Alert
• South Korea – Korean Public Alert Service
• Taiwan – Public Warning Cell Broadcast Service ^[3]
• Sri Lanka – Disaster and Emergency Warning Network (DEWN)
• Philippines – Emergency Cell Broadcast System (ECBS)
• Chile – Sistema de Alerta de Emergencias (SAE)
• Saudi Arabia – KSA-Alert ^[4]

Countries in the process of implementing Cell Broadcast for the national public warning system

The following countries and regions have selected Cell Broadcast to use for their national public warning system but are currently in the process of implementing.

• Hong Kong
• Italy (delayed)
• Peru
• Mexico
• United Kingdom ^[5]
• Denmark – Put into operation June 2022.^[6]
• Germany

Sources

• “5G Americas White Paper Public Warning Systems in the Americas” (PDF). www.5gamericas.org. 5G Americas. July 2018.
• “Mobile Network Public Warning Systems and the Rise of Cell-Broadcast” (PDF). www.gsma.com. GSMA. January 2013.

Source: Cell Broadcast, https://en.wikipedia.org/w/index.php?title=Cell_Broadcast&oldid=1035428015 (last visited Aug. 17, 2021).

Nir Kshetri, University of North Carolina – Greensboro

When malicious software takes over computers around the world, encrypts their data and demands a ransom to decode the information, regular activities of governments, companies and hospitals slam to a halt. Sometimes security researchers release a fix that allows computer owners to decrypt their machines without paying, but many people are forced to pony up to free their data.

In 2016, the FBI estimated that the ransomware industry took in US$1 billion – and that’s only the cases officials know about. All that money isn’t paid in cash. Before digital currencies existed, extortionists asked victims to send money by more formal transfer companies like Western Union or make deposits to bank accounts. Those were easily traced. Today, ransomware attacks demand payment in bitcoin and its ilk, systems praised by supporters for their transaction speed and protection of users’ anonymity.

In researching cybercrime and cybersecurity for more than a decade, I have found that obtaining cybercrime proceeds is often the biggest challenge that cybercriminals face. In this regard, diffusion of cryptocurrencies is a major development that enables cybercriminals to achieve their goals. In fact, the escalation of ransomware attacks and the increasing prominence of cryptocurrencies may be connected. Some companies have invested in bitcoin and other cryptocurrencies specifically so they can pay extortionists if it ever becomes necessary. That helps contribute to the rapid growth in use and value of e-currencies. And as digital currencies become more common, ransomware attackers will have an easier time hiding their illicit transactions among the growing crowd of legitimate transfers.

Using cryptocurrencies in cyber extortion

The extortionists behind most ransomware attacks demand payments in bitcoin, the most popular cryptocurrency. The WannaCry attackers demanded between $300 and $600 per computer; the Petya ransomware wanted $300 in bitcoins before providing a code that would let victims decrypt their data. Not many people actually pay, though: WannaCry victims paid only about $241,000 in bitcoins to the extortionists. If everyone infected had paid, the criminals would have received at least $60 million. It translated to a payout rate of 0.4 percent. Even fewer paid the Petya perpetrators: They got just 66 payments, totaling barely over 4 bitcoins, or about $18,200.

Other attacks are more successful: In June, a ransomware attack hit more than 150 servers owned by South Korean web hosting firm Nayana. More than 3,400 of the company’s customers were affected – mostly small businesses running their websites on Nayana’s equipment. Nayana itself stepped up, taking loans to cover a payment of more than $1 million in bitcoins to the attackers, saying it had to save its clients’ sites.

The attackers don’t always need to make much money to be effective. Many cybersecurity researchers believe that Petya attacks were carried out with political motives rather than for financial gains. But ransomware has a much higher payout rate than other common cybercrimes. One study found that for every 12.5 million spam emails sent promoting a fake online pharmacy, the scammers got only one response. That’s a success rate of about 0.000008 percent. They make a lot of money – up to $3.5 million a year – only by sending out enormous numbers of messages.

Trusting cyberthieves?

One reason cybercrime success rates are low is that victims don’t trust the extortionists to actually unlock their data once they get paid. In 2016, about a quarter of the organizations that paid ransoms were not able to recover their data.

The WannaCry attackers were particularly bad: Their system was labor-intensive, requiring the criminals to manually connect payments with encrypted files before letting victims decode them. In fact, a flaw in the WannaCry attack software made it almost impossible to decrypt a paying victim’s data.

More sophisticated methods do exist, including those that incorporate what are called “smart contracts,” another aspect of some cryptocurrency systems that runs a particular program as part of completing a transaction. In those ransomware attacks, making payment automatically releases the information a victim needs to decrypt and recover hijacked files.

Preparing for future ransomware

The fear of ransomware is growing. In mid-2016, a study found that one-third of British firms had bought bitcoins just in case they needed to pay off ransomware attackers. More than 35 percent of large firms, those with more than 2,000 employees, reported being willing to pay as much as $65,000 to unlock critical files. Even Cornell University was reported to be stockpiling bitcoins in case of a future ransomware attack.

At the same time, bitcoin and other similar systems are becoming much more popular. In 2016, the total value of all cryptocurrencies was 0.025 percent of the world’s GDP. By August 2017, that number had increased more than eight-fold, to 0.21 percent of global GDP – about $162 billion. The World Economic Forum projects cryptocurrencies will hold 10 percent of global GDP by 2027.

These cycles are self-reinforcing: The more transactions there are involving cryptocurrencies, the harder it will be to trace where the money is going. As a result, cybercriminals will use cryptocurrencies more often – forcing their victims (and even potential targets) to invest in cryptocurrencies, too.

Nir Kshetri, Professor of Management, University of North Carolina – Greensboro

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Kayla Harris, University of Dayton; Christina Beis, University of Dayton, and Stephanie Shreffler, University of Dayton

This year the Internet Archive turns 25. It’s best known for its pioneering role in archiving the internet through the Wayback Machine, which allows users to see how websites looked in the past.

Increasingly, much of daily life is conducted online. School, work, communication with friends and family, as well as news and images, are accessed through a variety of websites. Information that once was printed, physically mailed or kept in photo albums and notebooks may now be available only online. The COVID-19 pandemic has pushed even more interactions to the web.

You may not realize portions of the internet are constantly disappearing. As librarians and archivists, we strengthen collective memory by preserving materials that document the cultural heritage of society, including on the web. You can help us save the internet, too, as a citizen archivist.

Disappearing act

People and organizations remove content from the web for a variety of reasons. Sometimes it’s a result of changing internet culture, such as the recent shutdown of Yahoo Answers.

It can also be a result of following best practices for website design. When a website is updated, for example, the previous version is overwritten – unless it was archived.

Web archiving is the process of collecting, preserving and providing continued access to information on the internet. Often this work is done by librarians and archivists, with assistance from automated technology like web crawlers.

Web crawlers are programs that index web pages to make them available through search engines, or for long-term preservation. The Internet Archive, a nonprofit organization, uses thousands of computer servers to save multiple digital copies of these pages, requiring over 70 petabytes of data. It is funded through donations, grants and payments for its digitization services. Over 750 million web pages are captured per day in the Internet Archive’s Wayback Machine.

Why archive?

In 2018, President Donald Trump wrongly claimed via Twitter that Google had promoted on its homepage President Barack Obama’s State of the Union address, but not his own. Archived versions of the Google homepage proved that Google had, in fact, highlighted Trump’s State of the Union address in the same manner. Multiple news outlets use the Internet Archive’s Wayback Machine as the source for fact-checking these types of claims, since screenshots alone can be easily altered.

A 2019 report from the Tow Center for Digital Journalism examined the digital archiving practices and policies of newspapers, magazines and other news producers. The interviews revealed that many news media staff either do not have the resources to devote to archiving their work or misunderstand digital archiving by equating it to having a backup version.

When a news story disappeared from the Gawker website a year after the publication shut down, the Freedom of the Press Foundation became concerned with what might happen when wealthy individuals purchase websites with the intent to delete or censor the archives. It partnered with the Internet Archive to launch a web archive collection focused on preserving the web archives of vulnerable news outlets – and to dissuade billionaires from purchasing such material to censor.

Archiving websites that document social justice issues, such as Black Lives Matter, helps explain these movements to people of the present and the future.

Archiving government websites promotes transparency and accountability. Especially during times of transition, government websites are vulnerable to deletion with changing political parties.

In 2017 the Library of Congress announced it would no longer archive every single tweet, because of Twitter’s growth as a communication tool. Twitter supplies the Library of Congress with the texts of tweets, not shared images or videos. Instead of comprehensive collecting, the Library of Congress now archives only tweets of significant national importance.

Archived websites that document the culture and history of the internet, like the Geocities Gallery, not only are fun to look at but illustrate the ways early websites were created and used by individuals.

Citizen archivists

Archiving the internet is a monumental task, one that librarians and archivists cannot do alone. Anyone can be a citizen archivist and preserve history through the Internet Archive’s Wayback Machine. The “Save Page Now” feature allows anyone to freely archive a single, public website page. Bear in mind, some websites prevent web crawling and archiving through special coding or by requiring a login to the site. This may be due to sensitive content or the personal preference of the web developer.

Local cultural heritage institutions, such as libraries, archives and museums, are also actively archiving the internet. Over 800 institutions use Archive-It, a tool from the Internet Archive, to create archived web collections. At the University of Dayton we curate collections related to our Catholic and Marianist heritage, from Catholic blogs to stories of the Virgin Mary in the news.

Through its Spontaneous Event collections, Archive-It partners with organizations and individuals to create collections of “web content related to a specific event, capturing at risk content during times of crisis.”

Similarly, it created the Community Webs program, in partnership with the Institute of Museum and Library Services, to help public libraries create collections of archived web content relevant to local communities.

The websites of today are the historical evidence of tomorrow, but only if they are archived. If they are lost, we will lose crucial information about corporate and government decisions, modern communication methods such as social media, and social movements with significant online presences, such as Black Lives Matter and #MeToo.

Together with librarians and archivists, you can help ensure the survival of this evidence and save internet history.

Kayla Harris, Librarian/Archivist at the Marian Library, Associate Professor, University of Dayton; Christina Beis, Director of Collections Strategies & Services, Associate Professor, University Libraries, University of Dayton, and Stephanie Shreffler, Collections Librarian/Archivist and Associate Professor, University Libraries, University of Dayton

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Nir Kshetri, University of North Carolina – Greensboro

Cryptocurrencies like bitcoin are based on systems that are supposed to be inherently protected from fraud. Yet the U.S. Department of Justice has opened a criminal investigation into manipulation of bitcoin prices. How is that sort of activity even possible?

From researching blockchain and cryptocurrencies for the past three years, I know that blockchain systems have some immutable security features. For instance, if I sent you some amount of bitcoin, and that transaction were recorded in the blockchain ledger, I couldn’t force the system to give that money back. The technology itself prevents the transaction from being reversed.

But that is only true if transactions happen within the system. And there are other elements of cryptocurrency technologies that actually make fraud easier.

Trading bitcoin like stocks

Some of the problems the Justice Department is investigating appear to have arisen because bitcoin enthusiasts are not treating cryptocurrencies as a means of payment like dollars. Rather, they’re behaving as if bitcoins and their ilk are speculative assets like stocks and bonds. So they’re placing orders to buy bitcoin in advance, only later completing the deal. One type of fraud investigators are looking into is called “spoofing,” in which people place orders but cancel them before the deal is finalized – often without even having to pay a service fee. That makes it look like there’s more demand for bitcoin than there actually is, driving up the value of each bitcoin.

That sort of manipulation is possible with almost any type of asset. Bitcoin is more susceptible than stocks or bonds because so few people hold large amounts of bitcoin. The largest 1,000 bitcoin accounts hold 40 percent of all the bitcoins in existence – with almost 20 percent held in just 100 accounts.

Many of the people who own large amounts of bitcoin have been in the cryptocurrency community for a number of years and know each other. They can take coordinated actions to increase or decrease prices – and because there’s no real regulation of cryptocurrency markets, it might not even be illegal for them to do so.

There are fewer protections for cryptocurrency trading, in part because it’s so new. For instance, a high volatility in stock prices would trigger “circuit breakers” in the U.S., halting trading and resetting prices to limit investors’ losses. Cryptocurrency markets have no such built-in mechanisms.

Exploiting anonymity

Another type of fraud the Justice Department is investigating is called “wash trading,” in which one person sets up what looks like a legitimate purchase-and-sale deal, but actually does the deal with himself or herself. That makes it look like there is more activity in the market than there actually is, artificially increasing demand and value.

Anyone can have as many cryptocurrency accounts as they wish to set up. And many blockchain-based systems keep users’ identities anonymous. The transactions themselves – if they actually happen – are recorded and publicly viewable, but the accounts involved are only identified with bitcoin addresses, which are long alphanumeric codes like “1ExAmpLe0FaBiTco1NADr3sSV5tsGaMF6hd.”

That anonymity can make it very hard to prove that wash trading is happening and challenges law enforcement to identify and catch fraudsters. At a June 2017 congressional hearing a former federal prosecutor told of cryptocurrency investigations revealing an account set up by a person claiming to be “Mickey Mouse” living at “123 Main Street.”

Strengthening oversight

Some countries are starting to regulate cryptocurrency markets, either under existing regulations or new ones. In 2015, for instance, a federal investigation found that the U.S. cryptocurrency company Ripple Labs had not properly followed anti-money laundering laws and rules about getting accurate customer identification information.

In May 2018, 40 jurisdictions including U.S. states, Canadian provinces and national regulators in both countries launched a formal probe dubbed “Operation Cryptosweep,” to crack down on fraudulent cryptocurrency trading. They opened as many as 70 investigations and warned roughly 35 companies about potentially violating securities laws.

The vast majority of cryptocurrency trading, however, happens in countries with few regulations and lax enforcement. For instance, from early 2014 to early 2017, about 90 percent of global bitcoin trading happened through Chinese cryptocurrency exchanges. At least some of those businesses allegedly falsely inflated trading volumes to attract new customers. China has since banned online cryptocurrency trading, but people are finding loopholes.

The problems will likely shift to other countries that lack strong rules, which highlights the importance of international cooperation in investigations. Cryptocurrencies are a global phenomenon; the world’s nations – especially those with lots of trading activity – will have to work together to protect consumers.

Nir Kshetri, Professor of Management, University of North Carolina – Greensboro

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Neil Gandal, Tel Aviv University and Tyler Moore, University of Tulsa

Cryptocurrencies like bitcoin have grown in popularity in large part because they can be bought and sold without a government or other third party overseeing everything. But there’s a flipside: Unlike in markets for other assets such as stocks or bonds, it makes it much harder to uncover price manipulation and fraud.

But that’s what the Justice Department likely intends to do. In May, it opened a criminal investigation to examine whether there has been price manipulation in the cryptocurrency markets. While it wasn’t clear what time period investigators are looking at, it’s likely that they’re focusing on the sharp rise and fall that occurred in late 2017 and early 2018.

The impact of illicit cryptocurrency trading could be large. For example, bitconnect, once the seventh-biggest digital coin, collapsed in a matter of hours in January, costing investors hundreds of millions of dollars and eroding trust in legitimate cryptocurrencies.

We have been researching digital currencies for the last several years. Our most recent paper, published in the Journal of Monetary Economics earlier this year, found evidence of fraudulent behavior in 2013 and 2014, when prices soared and then tumbled over several months.

Could the failure to root out and prevent this kind of abuse erode trust in digital currencies?

Why cryptocurrency fraud matters

First it’s worth considering why anyone should care about digital currencies. Their total market capitalization of about US$350 billion, for example, is just a fraction of the size of the global stock market, which is closing in on $100 trillion.

Still, cryptocurrencies have soared in value in a very short period of time, climbing from just $14 billion in January 2014. And since bitcoin became the first digital currency in 2009, hundreds have launched, with more than 800 active today.

While cryptocurrencies can in theory be used to purchase goods and services – they are called currencies after all – they must first attract large numbers of merchants and consumers, which hasn’t happened yet. That’s why, currently, crytocurrencies are primarily purchased as financial assets like stocks and bonds that buyers hope will appreciate in value over time.

But unlike currencies, financial assets have a tendency to fluctuate wildly.

And since investors without a lot of experience with risky assets are increasingly purchasing cryptocurrencies, that puts them at risk when there’s a rapid rise and fall in prices.

Bitcoin’s first roller-coaster ride

That’s what happened to the price of bitcoin in 2013, when it jumped from around $150 in October to over $1,000 in December before dropping over 50 percent weeks later. By early 2014, several people who traded on Mt. Gox, the leading bitcoin currency exchange at the time, had identified what they considered “suspicious activity” on the exchange and wrote extensively about it.

Our paper, titled “Price Manipulation in the Bitcoin Ecosystem,” examined this suspicious trading activity.

We were able to conduct the analysis because when Mt. Gox collapsed in early 2014, its transaction history data got leaked. This gave researchers like us access to approximately 18 million transactions from April 2011 to November 2013. The key is that these data linked transactions to user accounts – though not their real identities. With this information, we were able to link suspicious trades to accounts.

Our analysis of the data confirmed much of what was reported in the “anonymous” documents. In the paper’s appendix, we go into great detail to show why two trading mechanisms in particular should be considered suspicious. The first, known as the “Markus bot,” involved reporting trades that did not exist. The second, or “Willy bot,” involved trades in which Mt. Gox itself bought bitcoins from its own customers but did not let many of them withdraw the proceeds from their accounts.

In a trial in Japan in 2017, former Mt. Gox CEO Mark Karpeles confirmed that the exchange operated the “Willy” accounts and that the trades were issued automatically.

The trading activity of these bots led to significantly increased trade at Mt. Gox and other exchanges as well. As a result, prices rose when the bots were active.

We believe this is one type of suspicious trading that will likely be investigated by the Justice Department following the massive rise and fall in the price of bitcoin that occurred around the end of 2017.

Investors go for another ride

Last year was a banner one for cryptocurrencies, particularly bitcoin, which soared from $1,000 at the end of 2016 to a peak of over $19,000 in December.

The real spike, however, came in November when the price tripled in less than a month. The euphoria was over as quickly as it started as bitcoin plunged to $7,000 by February.

University of Texas finance professors John M. Griffin and Amin Shams released an SSRN working paper in June concluding that price manipulation likely led to more than 50 percent of the meteoric rise in bitcoin in 2017. Their focus was on the flow of bitcoin going in and out of Bitfinex, which according to an article in The New York Times is one of the largest and least regulated exchanges in the industry.

Beyond bitcoin, the potential for price manipulation is even higher in digital currencies with much less trading volume.

Moving forward

Commenting about the market for digital coin offerings – where cryptocurrencies go public – Security and Exchange Commission Commissioner Robert Jackson remarked in April that “investors are having a hard time telling the difference between investments and fraud.”

The challenge for investigators and others in detecting price manipulation today is that there isn’t sufficient transparency about trading patterns of individuals, as there is in more regulated assets like stocks and bonds traded on stock exchanges like the Dow Jones and Nasdaq. In our research, we were fortunate to have internal trading data made public following Mt. Gox’s collapse. We do not have the same luxury today.

The key lesson is that cryptocurrency markets need increased cooperation between financial regulators and trading platforms. For example, exchanges could be required to share information about the trading behavior of individuals with very large positions. This would help ensure that the trades taking place are in fact legitimate and reflect real sales.

The consequence of not taking steps in this direction is likely a loss of faith in cryptocurrencies.

Neil Gandal, Professor of Economics, Tel Aviv University and Tyler Moore, Assistant Professor of Computer Science and Tandy Chair of Cyber Security and Information Assurance, University of Tulsa

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Stephen McKeon, University of Oregon

People are just becoming acquainted with the idea of digital money in the form of cryptocurrencies like bitcoin, where transactions are recorded on a secure distributed database called a blockchain. And now along comes a new concept: the blockchain-based token, which I’ve been following as a blockchain researcher and teacher of courses about cryptocurrency and blockchain tokens.

In the last 18 months, digital developers have raised more than US$20 billion through a funding process called “initial coin offering” – many of which use tokens. There are two common categories of them: “utility” tokens and “security” tokens.

Utility tokens

Utility tokens are essentially cryptocurrencies that are used for a specific purpose, like buying a particular good or service. For example, if you want to store information online, the most common way today is to become a customer of a hosting service like Google Drive, Dropbox or Amazon Web Services. You reserve a certain amount of storage space on those companies’ servers and pay for it with dollars, euros, yen or other national currencies.

But there is another way. The Filecoin network, for instance, expects to provide similar cloud storage services without itself operating buildings full of massive servers. Instead, its users will store their data, in encrypted form, on the spare hard drive space of other regular people. This needs a different form of tracking of how much space a person uses, and a new way to pay all the people whose hard drives host the data. Enter the utility token, in this case called Filecoin.

As a customer stores more data, the network will deduct from their balance of Filecoin tokens and will send those tokens to each storage provider based on how much data they’re hosting. Customers can buy more tokens with whatever currency they wish, and hosts can exchange them for any currency they choose – or keep them to spend on storage of their own data.

In addition to automating the data use and payments, Filecoin tokens offer another advantage over regular currencies: They can be used in much smaller increments than pennies, so prices can be very accurate.

Filecoin’s goal is a cloud storage system that is as trustworthy and secure as commercial operations, but decentralized. The utility token is simply a tool that makes this approach possible.

Security tokens

A security token, sometimes called a “tokenized security” or a “crypto-security,” is more than a currency – it often represents ownership in an underlying real-world asset. Like traditional stocks or bonds, they’re regulated by the U.S. Securities and Exchange Commission. Regular securities are tracked either on paper or – more likely these days – in a centralized database. Security tokens use a blockchain system – a decentralized database – to do the tracking of who owns which assets.

Using blockchain-based security tokens expands trading beyond regular bankers’ and stock-market hours, and may enable faster finalization of transactions. In addition, a marketplace based in software that allows smart contracts can automate various aspects of regulations and reporting.

Security tokens make it easy for customers to access multiple investments: Just as a single E-Trade investment account can keep records for a variety of different stocks and bonds, a blockchain-based digital wallet can do the same for a range of different security tokens, representing equity, debt and even real estate.

Connection to cryptocurrencies

Neither kind of token requires its own blockchain, the way the bitcoin and Ethereum cryptocurrencies do. Instead, tokens can outsource their ownership accounting systems, attaching them to preexisting blockchain ledgers. This in effect creates a new subledger, say of the Ethereum network’s ledger, just for that particular token. Every user who sends a token that is tracked and recorded on Ethereum pays a small transaction fee to the Ethereum network to validate the transaction.

Tokens are still at an early stage of development. I expect to see lots of innovation around how to use them for years to come.

Stephen McKeon, Assistant Professor of Finance, University of Oregon

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Philippa Ryan, University of Technology Sydney

Companies around the world are exploring blockchain, the technology underpinning digital currency bitcoin. In this Blockchain unleashed series, we investigate the many possible use cases for the blockchain, from the novel to the transformative.

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Most people agree we do not need to know how a television works to enjoy using one. This is true of many existing and emerging technologies. Most of us happily drive cars, use mobile phones and send emails without knowing how they work. With this in mind, here is a tech-free user guide to the blockchain – the technology infrastructure behind bitcoin, and many other emerging platforms.

What does the blockchain do?

The blockchain is software that stores and transfers value or data across the internet.

What can I store and transfer using the blockchain?

To use the blockchain, you will need to set up an account or address (a virtual wallet). At this time, the most popular use for the blockchain is to make micro-payments with virtual currencies. For example, you can buy bitcoin with real money and then spend it on the internet using the blockchain.

Authorising a payment using the blockchain is similar to using a credit card to buy something online. Instead of a 16-digit credit card number, you provide the vendor with a unique string of numbers and letters generated for each transaction. With this unique identifier, the blockchain can verify and authenticate the transaction.

Can I use the blockchain to transfer real money?

Not yet. Some companies are using the blockchain to make international financial transfers, but most of these transactions are enabled by bitcoin or other digital currencies. Exchanging real money for bitcoin incurs fees for the sender, but the benefit is speed, security and convenience.

How is transferring value or virtual currency on the blockchain different from transferring money from my bank account?

Depending on the amount and the destination, when you transfer money from your bank account, your bank will limit the amount you can transfer. Most banks impose daily limits for all transactions. When you use virtual money on the blockchain, there are no limits.

When you transfer value or currency from your bank account to an account with a different bank or other financial institution, the transfer can take days. When you use the blockchain, the transfer is immediate. If a transfer from your bank account puts your account into debit, your bank will charge you a fee. The blockchain will not allow a transfer in excess of your balance and so your virtual wallet will never be in debit.

How is storing value using the blockchain different from keeping my money in a bank account?

Bank accounts and credit cards are vulnerable to attack from fraudsters and hackers. The blockchain is a more secure way to store and transfer funds, particularly if you keep a modest value in your virtual wallet. Hacking the blockchain is difficult, time-consuming and expensive. No one breaks into Fort Knox for just $500. Of course, value stored on the blockchain will not earn you interest or improve your credit rating; and the blockchain will not lend you money to buy a house or car. The blockchain does not replace your bank, but very soon banks will be using the blockchain too.

How is transferring data using the blockchain different to attaching a file to an email?

Unlike emails with attachments, the blockchain enables the immediate transfer of data no matter how big the file. Also, there is less danger of spam or viruses and no need for firewalls or junk folders.

How is storing data using the blockchain different to storing my files on my computer?

If you lose or break your computer or if it is attacked by a hacker or virus, you could lose that data. The blockchain resides in the cloud. Like any web-based storage, you just need your username and password to access your data from anywhere anytime.

What else can I use the blockchain for?

Very soon the blockchain will be used for online transactions. It will enable smart contracts, crowdfunding and auctions. It will verify the provenance of artworks and diamonds; transfer title to real estate and other assets; and store information about people, products and property. Apps for music distribution, sports betting and a new type of financial auditing are also being tested.

Why is the blockchain described as “riskless”?

The blockchain verifies and authenticates both ends of each transaction. It will not release a purchaser’s funds until it has checked that the vendor will deliver as promised.

Is the blockchain safe?

Standards and regulations are needed so that the technology can be readily used across different organisations, industries and jurisdictions. Blockchains can be private (like an email) or public (like Facebook), so users need to know which type is being operated before joining a new blockchain.

My tips for safe use of the blockchain are: keep your virtual wallet details secure; do not let an unknown third party hold virtual currency or data for you; and do not provide your online banking details to anyone. As seen in a recent attack on a crowdfunding project, the blockchain is at its most vulnerable when significant value is stored in a single address. The blockchain may be trustworthy, but the people on it might not be.

Philippa Ryan, Lecturer in Civil Practice and Commercial Equity, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Posted February 14, 2019 by Michael Batnick

Earlier this week I moderated a session at Inside ETFs called “How to capture outperformance and manage risk.”

Before tackling the challenges of outperformance, I wanted to ask everybody how they think about the amorphous concept of risk. The responses ran the gamut from “the chance of permanent loss of capital” to “the chance of running out of money” and everything in between. Risk is a gargantuan force that can’t be wrestled into one sentence or even a singular idea, but if you’ll allow me to channel my inner Charlie Munger via Tren Griffin for a moment- I think risk is best thought of through the prism of inversion; Risk is the opposite of risk-free. Risk-free however is a bit or a misnomer because risk rules everything around us.

Corey Hoffstein often talks about risk and the two ways it manifests in a portfolio-you can fail quickly and you can fail slowly.

The risk of failing slowly occurs, paradoxically, when an investor does everything they can to insulate themselves from it. What they fail to realize is that absent a high savings rate and a very high income, the avoidance of risk only delays the inevitable fact that risk is ever present. It is these investors who will fail slowly by over allocating into assets like cash and bonds. The stock market provides different risk characteristics and is a more fertile breeding ground for failure in the sense that it gives investors the ability to fail quickly and slowly.

In order to put some meat on this discussion, let’s go to the numbers. Take the risk averse investor who saved 15% of their salary for 40 years starting at age 25. Each year their salary grew with the pace of inflation, with the savings going into one-month treasury bills. At age 66, they turn on the 4% rule- withdrawing 4% of the final amount saved and increasing that each year with the pace of inflation. Their money remains invested in one-month treasury bills (all numbers are net of inflation).

Starting in 1926, saving for 40 years, and then drawing down for 25 years only gives us 28 scenarios to measure. However, I think this is a fair representation of what sort of trouble the risk averse investor will run into. The chart below shows that this person would have run out of money in each of the 28 scenarios. The first column shows the investor who saved 15% of their salary every year from 1926-1966, and then used the 4% rule. On average, the first month spending would be 13% of your final monthly income. This is not enough to sustain oneself in retirement as this pile of money would run out on average after 15 years.

These numbers were made possible by the great Nick Maggiulli

Not only does the risk averse investor run out of money, but this says nothing about the life they’d be able to live in retirement. The chart below shows how much an investor could have spent in their first month of retirement (after saving 15% for 40 years, and then turning on the 4% rule). The average amount withdrawn in the first month for t-bills is $1,750, or 13% of the average final monthly income. Had the investor gone the opposite direction and invested all of their money in the stock market, the average spending in the first month would be $6,000, or 52% of average final monthly income. As you can see in the chart below, stocks reward investors for the risk they took, and allowed for an average withdrawal in the first month that was four times larger than bonds.

The stock market usually pays investors who bear risk, but it doesn’t always. The idea that you can see your wealth cut in half, stay the course, and still not be compensated is an uncomfortable reality that investors should come to grips with. You can eat your vegetables and still die prematurely. Even in the United States, one of the best places to invest over the last hundred years, there have been markets that were rife with risk and absent reward. The chart below shows S&P 500 adjusted for dividends and inflation. The all-time highs are in black, everything else is in red.

Had your retirement started in the throes of the 1973 red for example, you would have run out of money after only 12 years. Had your retirement started any year later than 1974, you were in the clear.

This whole exercise is hypothetical, of course. It assumes that index funds were around before they actually were, that there were no transaction costs, no taxes, and perfect behavior.

The point of this is not to convince you to forego the long-term risk in bonds for the short-term risk in stocks. As I already said, both are risky in their own ways. But rather, I hope this crystallizes one of the most critical concepts in investing; Risk cannot be eliminated. It can be measured and to some extent it can be managed, but it can never be eradicated. If the possibility of failure didn’t exist, there would be no risk. And if there were no risk, there would be no reward. Anyone who tells you differently is ignorant or deliberately lying.

The investor’s job is to figure out what risk means to them, how much they can stomach, and if necessary make changes along the way until their true ability to tolerate it is properly calibrated.

Source: https://theirrelevantinvestor.com/2019/02/14/the-elimination-of-risk loaded 06.08.2021

Mark Staples, Data61

Blockchain technology is not just useful for creating digital currencies such as Bitcoin or developing new financial technologies.

Blockchains can be used for a wide variety of applications, such as tracking ownership or the provenance of documents, digital assets, physical assets or voting rights.

Blockchain technology was popularised by the Bitcoin digital currency system. But, essentially, a blockchain is just a special kind of database. The Bitcoin blockchain stores cryptographically signed records of financial transfers, but blockchain systems can store any kind of data. Blockchains can also store and run computer code called “smart contracts”.

What makes a blockchain system special is that it doesn’t run on just one computer like a regular database. Rather, many distributed processing nodes collaborate to run it. There can be a full copy of the database on every node, and the system encourages all those nodes to establish a consensus about its contents.

This boosts our confidence in the database and its contents. It’s difficult, if not impossible, to meddle with the database without others finding out and correcting it. The global consensus among the nodes about the integrity and contents of the distributed database is why it’s often called a “distributed ledger”.

Why all the hype?

In our society, we normally rely on trusted third parties, such as lawyers, courts, banks and governments to process and keep authoritative records about commercial transactions.

These transactions aren’t just about financial transfers, but also include the creation or transfer of physical assets, shareholdings, certifications, digital rights, intellectual property or even votes.

These third parties are trusted because we rely on them. If they fail or lie, we suffer. We tend to trust the third parties for reasons that are external to the database; lawyers are accredited; votes are counted by independent monitors; and courts run to established laws for matters such as oversight and the possibility of appeal.

Blockchains are interesting because the integrity of the contents of the distributed ledger does not rely on any specific individual or organisation. So, rather than relying on trusted third-party organisations to facilitate these commercial transactions, we might instead rely on a trusted blockchain system.

This means blockchains give us new opportunities to rethink how parts of our society work. Innovation here might reduce friction in the economy, or create new kinds of services and ways of doing business with each other.

Whether or not blockchain systems are trustworthy is an interesting question. The reasons for believing that blockchain systems won’t fail or lie would be based on our understanding of the underlying software technologies. It also depends on our understanding of market incentives that influence behaviour of the many distributed processing nodes that run blockchains.

However, blockchain technologies are still new in the scheme of things, and the community is still discovering their risks, limitations and potential economic and social impact.

How will blockchains be used?

Because blockchain technology is so new, it’s difficult to predict exactly how they will end up being used. This is why we at Data61 in CSIRO are exploring new ways blockchains can be used across industries.

To understand the economic and societal opportunities presented by blockchain technology, we also need to understand its technological risks and limitations. At Data61, we plan to identify, develop and evaluate some “proof of concept” systems using blockchains to investigate them.

A recent UK government report on blockchain technologies provides a good overview and examples of the use of blockchain.

One of these is Everledger, a company founded by Australian woman Leanne Kemp.

Everledger uses a blockchain to record information about the provenance and ownership of individual diamonds and other valuables. Here, rather than the blockchain recording transfers of digital currency, it records transfers of ownership of identified physical assets.

This globally accessible provenance trail could reduce fraud and theft, and enable new or improved kinds of insurance and finance services.

The same general idea could be used for any supply chain, such as in retail, agriculture or pharmaceuticals.

The drivers for improving assurance of supply chain quality vary in different industries. It could be brand reputation in retail, or safety in pharmaceuticals, or a combination in agriculture.

It is worth observing that blockchains don’t totally do away with the need for trusted third parties. A blockchain is only a digital record, but we need others to determine if those records actually match the corresponding physical assets in the real world.

Everledger relies on major diamond certification companies to measure identifying information about individual diamonds. These measurements can be independently cross-checked. But in some sense, companies such as these become trusted third parties for this blockchain-based system. One can imagine the adoption of blockchain technologies creating opportunities for new kinds of trusted third-party organisations.

Underlying all of these applications is the need for data integrity, which is the key security property for commercial systems, and the primary property for blockchain technologies.

For financial transactions, data integrity means you can’t spend money you don’t have, and you can’t spend money twice. For physical supply chains, this means you can’t fraudulently acquire record of ownership for an asset.

However, other security properties, such as privacy and confidentiality, are also important in many application areas. To achieve confidentiality, other mechanisms such as cryptography must be used in conjunction with the blockchain.

Part of our software architecture research at Data61 is to seek to understand how design choices for software-based systems affect tradeoffs for qualities including security (integrity, confidentiality, privacy), performance (latency, throughput and scalability), and others.

Good design choices can control risks to achieving these qualities, and this is part of what is evaluated in our research using proof-of-concept systems.

Smart contracts

Computer programs are a special kind of data and so can be stored in a database. That means we can store programs in the distributed ledger of a blockchain system, and execute those programs while later transactions are being processed.

In the Ethereum blockchain, these programs can be highly complex. These programs are normally called “smart contracts”.

Smart contracts can carry value, and can conditionally transfer that value according to complex business conditions based on the latest state of the distributed ledger.

This means blockchain systems can do more than store information about commercial transactions; they can also process commercial transactions too. This greatly expands the opportunities for using blockchain systems.

Although smart contracts are often thought of as standing for self-executing legal contracts, they are written in a general purpose programming language and can be used to implement a wide range of business logic.

Can smart contracts actually stand as legal contracts? This is an interesting question. For legal contracts to be enforceable, they need to be understandable by reasonable persons.

Can the bytecode of a program stored on a blockchain really be understood by any human? Perhaps only obsessive hobbyists might be able to develop that skill! Another thread of research in Data61 is investigating new ways of representing and analysing smart contracts, using recent results from legal informatics.

Blockchain technology is still in its infancy. There are a wide range of plausible future scenarios for their future impact, ranging from efficiency improvements for commercial transactions through to a complete reinvention of the economy.

As with any disruptive technology, understanding the plausible, possible and probable impacts – the opportunities and risks – will be vital for wise policy, strategy, and design choices by Australian governments and companies.

Mark Staples, Principal Researcher in Software Systems, Data61

This article is republished from The Conversation under a Creative Commons license. Read the original article.