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Briefing
Blockchain, a digital ledger technology, is widely known for its application to cryptocurrencies. Introduced in 2008 to serve as a public transaction ledger for Bitcoin, the technology has given rise to hundreds of cryptocurrencies (e.g. Ethereum, Ripple, NEO, Litecoin), as well as having other emerging applications in diverse fields, including supply chains, digital content, patents, smart contracts, governance and e-voting (EPRS, 2017).
Understanding the basics of blockchain technology is essential to assess its implications, which are potentially huge and transformative for society, the economy and the environment. The European Union Agency for Network and Information Security (ENISA) defines blockchain as:
… a public ledger consisting of all transactions taking place across a peer-to-peer network. It is a data structure consisting of linked blocks of data … This decentralised technology enables the participants of a peer-to-peer network to make transactions without the need of a trusted central authority and at the same time relying on cryptography to ensure the integrity of transactions.
(ENISA, 2019)
In contrast to the traditional ledgers used by banks and governments for centuries, which are centralised and inaccessible, blockchain ledgers are decentralised and transparent (EPRS, 2017). There is no central authority acting as the exclusive manager of the ledger, with sole responsibility for storage, updates and verification of transactions. On the contrary, all participants of the blockchain network hold a copy of the ledger, and transactions — although encrypted — are visible to all.
Although participants may not know each other, such a decentralised ledger system is viable because it is made trustworthy and secure by design. Blockchain stores, shares and synchronises data as ‘chains of blocks’ using cryptographic techniques. Blocks represent recorded transactions, and each new block of transactions is linked to the previous ones, thus creating an ever growing chain (Nakamoto, 2008). The creation of each new block must be approved by all network participants. This is achieved thanks to a predefined ‘consensus mechanism’ that sets the rules for the verification, validation and addition of transactions to the ledger (JRC, 2018). The most common approach is ‘mining’, which relies on the ‘proof-of-work’ mechanism. To add a block of transactions to a blockchain, participants compete to find a solution to a difficult mathematical problem based on a cryptographic algorithm (EPRS,2017). When a ‘miner’ finds the solution, and after verification from other participants, the block is added to the blockchain. All copies of the ledger are updated, making the new changes permanent.
Furthermore, each block has a timestamp as well as a unique hash value referring to previous blocks. The authenticity and integrity of transactions themselves are ensured by standard public-private key cryptography. With constant updates and validation made to the blockchain, as well as inspection of the complete history of transactions open (at least potentially) to everyone, unauthorised changes or tampering are almost impossible (JRC, 2018). All these features make the ledger unique and immutable, ensuring trust among participants to operate their transactions. In addition, these transactions can be executed automatically, without the need for human intervention, thanks to self-executing computer codes — named ‘smart contracts’ — that contain the terms of contracts and are stored in the blockchain.
‘Permissionless’ blockchains, of the sort just described, allow anyone to access, verify and add transitions. But it is also possible to set up a ‘permissioned’ blockchain where access to and the validation or addition of transactions are restricted to a more limited group of people (Kouhizadeh and Sarkis, 2018).
Type of signal: Emerging trend
Geographical scope: Local, regional, national, European, global
Origin of signal: Technological
Time horizon of expected significant impact: Mid- to long-term
Authors: Richard Filcak (ETC), Radoslav Považan (ETC) and Vincent Viaud (EEA)
Reviewers: Hördur Haraldsson (FLIS), Tara Higgins (FLIS) and Sylvia Veenhoff (FLIS)
For references, please go to https://www.eea.europa.eu/publications/blockchain-and-the-environment/blockchain-and-the-environment or scan the QR code.
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