1. Blockchain and the
New Internet
Douglas Callaway
CP5310: E-business Technologies
May 29, 2015
Abstract
This paper provides an investigation of the ‘Blockchain’ – an emerging technology
underlying the recently popularized Bitcoin cryptocurrency. After explaining what the technology
is and how it works, I will discuss some of the many new applications being proposed using
variants of the Blockchain, and their implications for e-business. However, before becoming a
normal part of e-business, these new applications must first overcome a myriad of technical
challenges and security concerns to be accepted by the general public. I will identify the most
significant of these issues and explain the current solutions being proposed to address them.
Overview
In 2008 an anonymous individual under the pseudonym Satoshi Nakamoto published a
short whitepaper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin is an all-digital,
‘cryptocurrency’, meaning that it is a form of payment that relies on modern computer
cryptography and is not backed by traditional, state-generated fiat currencies. In [1], Nakamoto
describes the benefits of such a system which has extremely low transaction costs and eliminates
the need for a trusted third-party (e.g. banks or credit card companies) to administer transactions
between two entities that do not necessarily trust each other. Therefore, it is often referred to as a
‘trustless’ system. The power of this concept has already proven itself on a global scale. Since
Bitcoin was launched in 2009, it has exploded in popularity. According to [2], there are currently
over 30,000 vendors that accept Bitcoin for goods or services, and at the time of this writing, the
current value of one Bitcoin was $239 (USD). This introduces a highly disruptive paradigm for
the future of e-business.
Although Bitcoin is fascinating in its own right, the technology which makes Bitcoin possible
is even more interesting. Since no trusted central authority exists in a peer-to-peer (P2P) payment
system, some method to record and archive transactions is required to keep track of who owns
every fraction of currency in the system. An effective system must maintain the scarcity and value
of the currency, ensuring a given unit of currency cannot be spent more than once. This problem
is generally known as the Double Spend Problem, depicted in Figure 1. In [1] Nakamoto outlines
an elegant solution to this problem in which a public ledger is maintained over a P2P network,
archiving every transaction ever made in an ever-growing chain of ‘blocks’. Each block stores a

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2
set of transactions occurring over roughly the time the block was generated (see Figure 2). This
model has become known as the Blockchain.
Figure 1: Double Spend Problem as depicted in [3] – Alice owns the token
01000101, but since she can copy it infinitely to spend the same token on Bob,
Barry, and Sally; each token has no scarcity, and thus no value.
Figure 2: Nakamoto’s solution to Double Spend using a Blockchain in [1]. Each
block contains a unique set of transactions, identified by a proof-of-work nonce,
and sequenced by its hash of the previous block.
Although it’s a revolutionary technology, the Blockchain is actually an application
implementing over forty years of cryptographic research [2]. The same public-key cryptography
algorithms that secure communications on the web via the TLS/SSL protocols are used to establish
and secure the identities of members of a Blockchain network. Figure 3 depicts the basic structure
of public-key cryptography. This system allows users, identified only by their unique public key,
to write transactions to the Blockchain using their secret, private key.

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Figure 3: Digital signatures using public key cryptography as depicted in [3] –
any recipient with knowledge of Alice’s (the signers) public key can verify the
message’s authenticity if Alice signed it using her corresponding private key. In
the Blockchain, the signer’s ‘address’ is their public key, allowing anyone
browsing the Blockchain to verify any transaction.
Since the Blockchain exists on a P2P network, there is no central authority in charge of
collecting transactions and writing them to blocks. This is the strength of the system, but it also
poses a problem – how to authenticate and record transactions in a trustless network? Nakamoto
solves this problem in [1] through a system called mining. Miners are computers on the Blockchain
network that listen for and collect transactions in exchange for an incentive. In the case of Bitcoin,
the incentive is the chance to earn Bitcoin when a new block is created and collect a small
percentage of each Bitcoin transaction (a transaction fee). There is only a chance of reward though,
because to actually record or ‘find’ a block, a difficult computational problem must be solved by
the miner involving generating a hash that meets a certain criteria. The difficulty is automatically
set by the protocol to control the rate at which new blocks are found. This regulates the rate at
which blocks are found and new Bitcoins are created, maintaining scarcity. Double spending is
prevented by a majority of nodes agreeing upon which transaction occurred first and rejecting any
subsequent transactions with the same coin. Nakamoto claims that this is effective as long as the
number of honest nodes outnumbers dishonest attacker nodes; the collection of honest nodes will
be able to add blocks faster than the minority attacker nodes. Thus any attack attempting to create
a fraudulent branch of the Blockchain would have to somehow redo the work of, and outpace the
honest nodes. This ‘proof-of-work’ system has proven itself in the six-year history of Bitcoin, but
it is also critical to the integrity of any other application built upon the Blockchain.
Current Research
While Bitcoin has been gaining influence as an alternative currency, research into the
Blockchain as a whole is still in its infancy. Given the recent introduction of Bitcoin, there is
understandably little published work to be found from traditional peer-reviewed sources. What
sources there are generally focus on cryptocurrency-specific applications. In [4] for example,

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Hurlburt and Bojanova provide an overview of Bitcoin including criticisms such as the potential
for illicit use (e.g. money laundering) and the lack of financial regulations that govern the rest of
the financial industry.
The true potential of the Blockchain though, is in its functionality as a public ledger for any
type of transaction, not just of cryptocurrency. Yet there has been very little research in this area,
especially in the academic community. Several sources such as [5], [6], [7], and [8] identify
problems in the Nakamoto’s version of the Blockchain and offer solutions, but these papers are
currently still in draft phase. Institute for Blockchain Studies founder Melanie Swan has provided
the most significant contribution so far. In [2], Swan documents the vast amount of informal
research and development taking place in online forums, startup blogs, and conferences. These
sources provide the best glimpse at what new applications and challenges can be expected as the
Blockchain matures.
Future Applications
The potential applications of Blockchain technology seem to be as limitless as the internet
itself. The internet can be thought of as a network supporting any number and type of transactions,
whether they be requests for static web pages, posting to a blog, or transferring money between
bank accounts. With Blockchain, many or all of these transactions can all shift from the client-
server model popularized over the last twenty years to a P2P model. Such a shift will have a
dramatic impact on how e-business is conducted.
One of the most exciting ideas being proposed in [2] and many other sources is a smart contract
application. Instead of transferring units of cryptocurrency, smart contracts use the Blockchain to
record and execute pre-arranged agreements between two parties. The contract is ‘smart’ because
it is programmed to execute a pre-determined action once a set of conditions have been met. Figure
4 illustrates how such a contract could facilitate selling a car without the involvement of a bank or
title company. In [2], Swan explains how this can be taken a step further to implement smart
property. Smart property would implement connected physical devices such as locks that could
restrict access to property as defined by the current owner on the Blockchain. Using the example
from Figure 4, the car would be equipped with locks and ignition switches that could only be
unlocked by the current owners private key.

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Figure 4: A smart contract as depicted in [3] – the car’s unique ID is recorded on
a Blockchain with the seller listed as the owner. When the buyer transfers the
required funds to the seller, the smart contract is executed, automatically
recording the buyer as the new owner.
The current implementation of the Blockchain does not support such self-executing bits of
code as would be required for smart contracts. However, significant work is already underway on
a more robust implementation. According to [9], the Ethereum project is building a blockchain
with a built in programming language. The result will be a development platform that can support
any type of distributed application on customizable blockchains.
Blockchain’s quality of being an immutable public ledger also makes it an excellent candidate
to replace traditional public record central databases. In [2], Swan describes how public records
such as deeds, marriage, birth, and death certificates can all be written to the current Blockchain.
This could greatly reduce the time and resources governments spend responding to information
requests. Additionally, it would improve government transparency and accountability by allowing
instant, free access by anyone with access to the blockchain. It would also eliminate the central
database as a single point of failure where the records can be lost, corrupted, or tampered with.
As e-commerce has grown over the last twenty years, so has the introduction of web-based
feedback systems. The ubiquitous five-star rating scheme prevalent on sites like Amazon.com and
Netflix can also be improved with Blockchain technology. The problem with current
implementations is the feedback database is centrally managed and can be corrupted by false
reviews such as a company trying to boost its image. Advanced implementations give higher
weight to more trusted reviews using features such as ‘verified purchase’ but a better system is
needed. In [10], Carboni proposes a reputation/customer feedback system that can be implemented

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with the current Bitcoin technology. The system involves creating a voucher that accompanies an
e-business transaction. The voucher contains a fraction of the purchase price which is awarded to
the consumer once the transaction is complete and positive feedback is provided. The companies
with the most positive feedback (attainable only through paid, completed transactions) enjoy the
best reputation. Such a system is superior because the Blockchain provides an incorruptible
transaction ledger and has a built in system for financial incentives.
Figure 5: A Blockchain based feedback system as shown in [10]. Such a system
ensures authentic feedback and provides incentives for positive feedback if the
contract is fulfilled.
The Blockchain’s very low transaction costs also make it a suitable platform for processing
micropayments. As discussed in [2], micropayments are small financial transactions that are
currently impractical due to credit card fees and minimum purchase requirements at many retailers.
Micropayments promote efficiency by allowing consumers to only pay for what they use. For
example, a company like Dropbox which currently provides blocks of data storage at fixed
monthly prices could instead accept micropayments for megabytes of storage used per minute.
Currently, this type of application is limited by Blockchain’s relatively high latency, since
transactions take at least ten minutes before they are written to a new block. Many types of
micropayments would likely require faster transaction time to attain reasonable assurance that the
transaction was successful. Modifications to the Blockchain like those proposed in [5], however
will theoretically allow near to real-time confirmations while maintaining consistency in the
Blockchain.
Challenges
The development of these ideas points to a much more immersive, useful, and ubiquitous
internet; however several obstacles must be overcome before Blockchain technology can reach its
full potential. First, and perhaps most important, is widespread consumer acceptance of the
technology. Such acceptance requires technology that is useful, easy to use, reasonably secure, and
better than the alternatives. Bitcoin is currently the only major implementation of the Blockchain,
and is limited by perceptions of its ease of use and security. For example, in February 2014, a

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major online Bitcoin repository called MtGox announced that it had lost over $600 million (USD)
in customer Bitcoins [11]. MtGox made Bitcoin easy by allowing users to store their private keys,
called ‘wallets’ in the MtGox database. The loss shook user confidence in the Blockchain,
especially when MtGox blamed the loss on a hack exploiting a theoretical bug in the Blockchain.
Researchers Decker and Wattenhofer found that this was not very likely in [11] (it was more likely
a MtGox insider lost or stole the Bitcoins), however the damage to public perception was done.
Prevention and awareness of online scams, as with any internet service, must be addressed.
Another challenge is the uncertainty generated by government’s regulatory response to the new
technology. In the United States, where many Blockchain-based startups are located, Bitcoin is
classified differently among state and federal government agencies. For example, the Internal
Revenue Service treats Bitcoin as property, not currency as explained in [12]. But Ripple Labs, an
alternative-currency based transfer network, was recently fined $700,000 (USD) for failing to
register as a Money Services Business (MSB) with the Financial Crimes Enforcement Network
(FinCEN) [13]. In [14], Epstein describes how the bureaucratic approval process for startups like
Coinbase has taken over two years and cost over $2 million (USD) just to become compliant in
half the states. This poses a significant barrier to entry for startups, especially if they don’t have
capital for teams of lawyers to ensure compliance at every level of government.
There are also security concerns that must be addressed for widespread trust in the system.
Research including [2, 6] suggests that the most significant threat is the possibility of what is
known as a 51% attack. In such an attack, a majority of the computing power that is used to create
new blocks and record transactions (called ‘mining’ because computational power is used to create
a new block in exchange for an incentive) is controlled so that one entity has the largest ‘vote’ of
what transactions will be written to the block. This would allow the attacker to arbitrarily write
transactions to the Blockchain that could, for example, redirect transferred assets back to himself.
In [2, 6], Swan and Eyal agree that the current incentive is for miners to be good players since
attacking the network would undermine the value of whatever assets they were able to steal.
However, Eyal finds in [6] that a dishonest mining pool can, over time, gain enough advantage
over honest miners that only 33% control over all mining power is required to control new block
creation. Additional research needs to be conducted to test this theory and ensure the Blockchain
remains distributed and unbiased.
Conclusion
Despite these challenges, Blockchain technology appears to be on track to become the new
standard for e-business transactions. Bitcoin’s success so far shows that the system doesn’t need
to be perfect for widespread adoption. In fact, the history of the internet has been far from perfect.
New bugs in e-business protocols such as the recent Heartbleed vulnerability do not seem to have
had a significant impact on people conducting online business. Blockchain’s low transaction cost

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and ability to easily deploy on a global scale provides a significant incentive for consumers and
retailers to adopt the new model.
But the Blockchain may be even bigger than a new way to do business. In [2], Swan describes
the rise of the internet as a series of paradigm shifts occurring about every ten years. It began with
the mainframe computer in the 1970s and has most recently evolved to the social-mobile paradigm,
somewhat synonymous with the ‘Web 2.0’ label describing the increasing interactivity of web
applications. Many would argue that the Internet of Things (IoT) is the next paradigm-shift. They
may in fact be right, but the Blockchain’s influence should not be discounted. It would be similar
to trying to explain the internet of the 1990s without mentioning email. The Blockchain will likely
revolutionize human-to-human and human-to-machine transactions, but it also makes machine-to-
machine transactions feasible with its ability to handle micro-transactions and share information
over an irregular network. As the Blockchain matures over the next few years, it will be exciting
to see what emerges.

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References
[1] S. Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. Available:
https://bitcoin.org/bitcoin.pdf
[2] M. Swan, Blockchain: Blueprint for a New Economy. Sebastopol: O'Reilly, 2015.
[3] P. Franco, Understanding Bitcoin: Cryptography, Engineering and Economics. Hoboken:
Wiley, 2014.
[4] G. F. Hurlburt and I. Bojanova, "Bitcoin: Benefit or Curse?," IT Professional, vol. 16, pp.
10-15, 2014.
[5] C. Decker, J. Seidel, and R. Wattenhofer. Bitcoin Meets Strong Consistency. Available:
http://arxiv.org/abs/1412.7935
[6] I. Eyal and E. G. Sirer. Majority is not Enough: Bitcoin Mining is Vulnerable. Available:
http://arxiv.org/abs/1311.0243
[7] S. L. Reed. Bitcoin Cooperative Proof-of-Stake. Available:
http://arxiv.org/abs/1405.5741
[8] M. Rosenfeld. Analysis of Hashrate-Based Double Spending. Available:
http://arxiv.org/abs/1402.2009
[9] Anonymous. A Next-Generation Smart Contract and Decentralized Application Platform.
Available: https://github.com/ethereum/wiki/wiki/White-Paper
[10] D. Carboni. Feedback based Reputation on top of the Bitcoin Blockchain. Available:
http://arxiv.org/abs/1502.01504
[11] Anonymous. The Troubling Holes in MtGox's Account of How It lost $600 Million in
Bitcoins. MIT Technology Review. Available:
http://technologyreview.com/view/526161/the-troubling-holes-in-mtgoxs-account-of-
how-it-lost-600-million-in-bitcoins
[12] Internal Revenue Service, Notice 2014-21. Available: http://www.irs.gov/pub/irs-drop/n-
14-21.pdf
[13] S. Higgins. FinCEN Fines Ripple Labs for Bank Secrecy Act Violations. Available:
http://coindesk.com/fincen-fines-ripple-labs-700000-bank-secrecy-act
[14] J. Epstein. Bitcoin's Regulatory Nightmare Is About to Get More Frightening. Reason.
Available: http://reason.com/reasontv/2015/05/20/bitlicense-benjamin-lawsky-bitcoin