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Overview of blockchain technology

What is blockchain technology?

Blockchain technology (or distributed ledger technology) is a mechanism in which transaction records (in a ledger) are mutually verified, agreed on, shared, and managed by participants (such as computers and nodes) on distributed locations on a computer network. Developed as an underlying technology for bitcoin, blockchain technology is expected to transform the structures of conventional systems.

Blockchain systems are:

Decentralized
Transactions do not require full trust of any third party institution.
Fault tolerant
Cooperative operations and management of data and systems enable the construction of networks with high availability.
Resistant to tampering
Blockchain technology allows new data to be added, but does not allow existing data to be modified or deleted. This makes it almost impossible for data that is already recorded to be tampered with. In order for data to be added, a consensus is needed among the participants. If a consensus is not available, the addition of unauthorized data cannot be approved.

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Blockchain types

Blockchain configurations are classified into the following types, based on the nodes that approve transactions:

Permissionless
Permissionless blockchains are mainly used for the virtual currency such as Bitcoin. Transactions on the network are verified and approved by an unspecified number of participant nodes. This type of blockchain configuration can be used to build a trustless transaction system. Methods such as Proof of Work (PoW)*1 are used to approve transactions. Such methods can be used to reach a consensus among an unspecified number of participants.
Permissioned
Permissioned blockchain networks consist only of clearly identified nodes that are authorized by administrators. Only a limited number of nodes can approve transactions. As opposed to permissionless blockchains, permissioned blockchains are not completely trustless because a certain degree of trust in each participant is required. When reaching consensuses, however, permissioned blockchains can take advantage of smaller workloads and meet performance requirements easily. In addition, permissioned blockchains are easier to maintain and manage (especially in terms of compliance and security) because the number of participants is limited. For these reasons, permissioned blockchains are expected to be adopted by business organizations such as financial institutions.
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Permissionless blockchain Permissioned blockchain
Trustless A consensus must be reached among mutually untrusted and anonymous participants. A certain degree of trust can be expected because the identity of the participants is known.
Finality*2 Strict finality is not required. Approximate finality is acceptable. Strict finality is required.
Performance Performance cannot be guaranteed. A certain level of performance is required.
*1
Proof of Work refers to a method of reaching consensuses and approving transactions. This method is used for bitcoin.
*2
Finality, also known as settlement finality, refers to a state in which a transaction has been settled and can no longer be canceled.

The value of blockchain technology

Blockchain technology provides value in the following areas:

Improvement and transformation of business processes
By taking advantage of the distributed nature of blockchains to redesign business tasks, it becomes possible to streamline business processes. For example, participants might be able to perform transactions directly without any third-party broker. The expected benefits include reductions in brokerage commissions and in the time required to complete business tasks.
More stringent protection of transactions
Distributed management of transaction data and the use of electronic signatures ensure the safety of transactions and helps prevent fraudulent transactions and the tampering of transaction information.
Increased transparency of transactions (implementation of stronger measures related to AML and CFT*1)
Because all transaction logs remain recorded on the blockchain in a distributed manner and are shared by the participants, illegal transactions can be easily detected.
*1
AML: Anti Money Laundering, CFT:Combating Finance of Terrorism

Blockchains are expected to provide another advantage through the implementation of smart contracts.

A smart contract is a way of automating contract fulfillment management. For example, a smart contract can be used to automate the execution of predefined processing if specific conditions are met regarding a contract or transaction. By using a program that includes conditions to ensure that transactions and contracts recorded on blockchains go into effect, fulfillment management can be automated, and a variety of tasks can be seamlessly linked. For example, smart contracts could be combined with IoT technologies to automatically lock a car if the owner falls behind on the loan payments.

The concept of smart contracts

Hitachi's efforts

Hitachi has been making efforts in the following three areas

Development and standardization of the blockchain platform
Through participation in Hyperledger, Hitachi has been working on the development of a global-standard core blockchain functionality.
Research and development of additional functions for financial institutions
Hitachi has been developing unique additional functions for financial institutions, leveraging our past experience in building financial core systems along with expertise gained from research into technologies such as security and distributed data processing technologies.
Consideration of use cases applicable to future social infrastructure
Hitachi has been examining use cases of services that interconnect different types of businesses, not limited to financial services. We are exploring the possibility of leveraging our expertise in a wide range of business domains to apply those use cases to future social infrastructure.

Hitachi's efforts

Development and standardization of the blockchain platform

Hitachi believes that blockchain technologies can be used to restructure our social infrastructure. As a participant in the Hyperledger program, an international collaborative program for standardizing blockchain technologies, Hitachi is engaged in the development and standardization of blockchain technologies. Hyperledger was established by the Linux Foundation, a nonprofit organization based in the United States, and over 197 (as of December, 2017) companies and organizations are currently participating in the project.

Hyperledger

Hitachi has been a premier member of Hyperledger since it was established. Hitachi made significant contributions to the release of Hyperledger Fabric 1.0*1 in the summer of 2017, by stabilizing operations, preparing the application development environment and user documentation, and reviewing proposals from other participant companies.*2

Toshiya Cho of Hitachi, Ltd. is a governing board member of the Hyperledger project, and is deeply involved with the running of the Hyperledger organization. Mr. Cho is the head of the Financial Innovation Center, Business Planning Office, Financial Information Systems Sales Management Division at Hitachi, Ltd.

*1
Hyperledger Fabric 1.0 is a major open-source general-purpose blockchain platform configured and intended for business enterprises.
*2
Hitachi is said to have made the second largest contribution among all participants worldwide.

Research and development of additional functions for financial institutions

By utilizing our experience in configuring core financial systems, Hitachi has identified functions that need to be added, and we are currently focused on examining and developing those functions for financial institutions. Most of all, Hitachi is focused on investigating and developing the advanced security functions that are required for financial systems.

Hitachi also established the Financial Innovation Laboratory for FinTech R&D in Sillicon Valley, U.S.A. This laboratory is intended to drive R&D efforts in the area of financial blockchain technology and accelerate collaborative creation with financial institutions.

Consideration of use cases applicable to future social infrastructure

Leveraging expertise in a wide range of business domains, Hitachi has developed the following prototypes to implement proof-of-concept (PoC) testing of services that link different types of businesses by using a blockchain.

Prototype for properties and casualties insurance businesses
This prototype uses blockchain technology to ensure information sharing and thereby streamline processes such as the proposal of insurance products, communication between insurance companies in the event of an accident, confirmation of purchased insurance policies by automobile repair shops, and insurance claims.

Screen example of the prototype for non-life insurance business operations

This blockchain implementation will enable stakeholders other than the non-life insurance companies to do the following:
  • Motor vehicle offices will be able to identify automobiles for which insurance policies have not been purchased or for which policies have expired.
  • Used car dealers will be able to view repair histories to ensure that the dealer is not deceived by false reports from the previous owner.
  • Car manufacturers will be able to view information about glitch repairs (repairs caused by reasons other than accidents) and use this information to gain an understanding of the quality of their parts.
Prototype for trade
This prototype is intended to manage a part of the flow of tasks for trade. Tasks to be managed by using blockchain technology include contracts, customs clearing, and settlement. This will help to ensure that the relevant tasks are performed correctly and to streamline those tasks.

Screen example of the prototype for trade

This prototype ensures that contract details and status information (for example, information about whether a purchase order has already been placed or received) is recorded and shared by using blockchain technology. This streamlines the sharing of such information among relevant parties. Because the workflow is synchronized with the status of the contract, and because the smart contract automates and ensures payment reservation (deposit) and payment execution, this prototype can also help ensure the proper execution of clerical tasks and streamline those tasks.
Prototype of a traceability management system
In this prototype, information such as whether purchase orders for parts have been placed or received is managed on the blockchain. This prototype is intended to track information about parts and products across multiple manufacturers.

Screen example of the prototype for a traceability management system

This prototype enables manufacturers of the final products, tier 1 parts manufacturers, and tier 2 parts manufacturers to carry out both trace-back and trace-forward investigations. Trace-back investigations examine problem reports to identify parts to be recalled, while trace-forward investigations identify parts to be recalled and examine the expected results of the recall.

Trademarks

  • Bitcoin is a registered trademark of bitFlyer, Inc.
  • Hyperledger is a registered trademark of The Linux Foundation.
  • Other company names and product names are trademarks or registered trademarks of their respective companies.