What is blockchain?

Blockchain is a technical solution for managing data from transactions agreed between users in a distributed infrastructure without a central authority in a transparent and tamper-proof manner. Blockchain enables the verification of transactions (e.g. in payment transactions with cryptocurrencies) without a central authority in a trustworthy and transparent manner.

The name blockchain comes from the documentation type: blocks of data records are chained together and linked to form a continuously growing blockchain. All nodes in the network agree on a uniform status of the blockchain as part of a consensus procedure. One of the roles of cryptographic mechanisms is to ensure that once data is recorded in the blockchain it can virtually no longer be changed.

An overview of the most important objectives of blockchain technology:

• Virtually unchangeable data
• Transactions that are transparent and understandable for all users
• Distributed (not centralised) and consensual data storage
• Doing away with intermediaries

What are cryptocurrencies?

A cryptocurrency is a digital means of payment based on a blockchain system. Credit is transferred from one user to another in the form of computer code. This type of transfer is documented by a cryptographically signed transaction in the blockchain.

These transactions (signature verification) are verified by the computers located in the network. A valid transaction can only be processed by those with a valid secret signature key and thus have the funds to do so. Personal signature keys are stored in a digital wallet.

Transaction recipients are usually only assigned an abstract address (an account number of sorts), so cryptocurrencies can ideally be used under a pseudonym. The transactions are monitored and recorded by what are known as miners. By harnessing huge computing power, the miners buy the right to create new blocks and to extend the blockchain. The successful miners are rewarded with currency units for this effort.

Cryptocurrencies such as Bitcoins, Ether or Monero are still an exception in terms of being able to make online payments. As such, this means that there are only a few online portals and shops that accept cryptocurrencies as a payment method. Similarly, away from the digital world, shops, restaurants and museums rarely offer cryptocurrencies as an alternative means of payment. Where possible, the payment is usually processed via QR codes using a digital wallet (a wallet on a smartphone). The following safeguards are advised to minimise security risks:

• Create several backups of your wallet in case your PC or smartphone is stolen or has a technical defect. These backups should be securely stored and have cryptographic access protection
• As is the case with cash, you should not store large sums in your wallet on your PC or smartphone; only smaller amounts for daily needs are advised
• It is particularly important that you encrypt the wallet as well as the backup copies that you create

The advantages of cryptocurrencies are that they can be used worldwide, under a pseudonym and without intermediaries (banks). Large sums can be transferred worldwide in just a matter of minutes. However, there is no official regulation of the currency, which can lead to various problems such as being suspended from making transactions due to a majority decision by miners. Due to the complexity of the mining process for managing the blockchain, cryptocurrencies are also often not very efficient. There are currently over 1000 different cryptocurrencies on the market, the most widely known of which is Bitcoin.

Cryptocurrencies are usually not a currency in the legal sense, but are classified as "financial instruments" according to BaFin. The Federal Tax Office classifies them as economic assets. Consequently, when or after paying with cryptocurrencies, you need to take tax considerations into account.

In the following video, Dr Sarah Maßberg from the BSI explains the connection between cryptocurrencies and blockchain and provides an insight into the security structure of this technology:

What are the applications of blockchain technology?

Cryptocurrencies are undoubtedly the most prominent and first example of applications of blockchain technology. In addition, opportunities and potentials for the use of blockchain technology are being discussed in many other economic sectors. The following are examples of potential applications in various sectors:

Financial sector

In addition to its use in digital payments, blockchain could be used in online trading systems such as after hours trading or for financial system participation for parts of the world's population that have not yet had access.

Automotive and insurance industries

Smart contracts, a type of computer protocol that run on the blockchain and technically support the handling of contracts, could augment the insurance market. For example, a contract could be created for direct use with a hire car, which would only be available to drive once the specified payment had been made.

Transport sector and supply chain management

In these areas, there are proposals for the seamless and efficient documentation of processes using blockchain technology.

Blockchains and the issue of security

Blockchains are secured by cryptographic procedures such as hash functions or digital signatures. The technologies used today are secure and proven concepts that provide protection against manipulation and forgery. However, there are also many other aspects, particularly in relation to practical implementation, that must be taken into account when assessing the security of blockchains. In practice (e.g. with Bitcoin), there are particularly clear problems in terms of implementation errors, insecure network protocols or poorly secured end applications (e.g. wallets).

For the BSI, the priority is technical design aspects for the secure use of blockchains. In particular, the BSI considers there to be challenges in relation to implementation security, data protection and long-term security. In terms of long-term security, it should be noted that progress is being made in the field of quantum computing, which in the longer term could pose a risk to the cryptographic algorithms usually currently used in blockchain applications. These aspects are explained in more detail in the key points highlighted by the BSI. In the future, these key points will be expanded into a guide.