Blockchain Cryptocurrencies Explainers FinTech In Depth

Everything You Need to Know about Blockchain

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Understanding of the way blockchain functions is low in comparison to the frequency with which the term is used.

Bitcoin seems to hold an inherent promise, a far-off horizon which is undoubtedly in view – if far away. The pledge it submits is at once an existential concern for central banks, and the climax of a perfect party for those of a ‘fuck the system’ disposition. In many ways it seeks a level of borderline anarchist disruption which early internet purists would consider downright Utopian, to the detriment of their unwitting foes. Between either end of the spectrum lies the remaining majority population of the internet, whose confusion is a potential harbinger of a more dazed existence to come. This rarefied position is the precipitate of Bitcoin’s underlying technology: blockchain.

Blockchain technology is not simple, for those unfamiliar with programming logic and language it’s a little like trying to grip a wet fish – just because you’re holding it doesn’t mean you’ve got it. And all it takes is a brief distraction for it to release itself from your grasp. A workable definition of blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” An obvious first hurdle is the lingo, not only are uncommon terms introduced, but simple terms take on new meanings:

The Lingo

Block – This is an individual instance of the records and transactions as they exist at a specific time. This would contain, for example, each persons account balance at a given moment in time i.e. taking into account successful transactions up until that point but not after.

Chain – Refers to a series of blocks. For example, the latest block would be the record of current account balances, with all previous blocks being a record of previous balances according to the various times at which they were valid.

Decentralised/distributed – This refers to the fact that the data stored on the blockchain is not centralised in one, trusted server. But all participants in the blockchain system each store the same data, or “ledger”.

Mining – Because blockchain is decentralised it means that there is no one server to compute transactions. Blockchain uses the resources of participant computers to perform the necessary tasks, computers which help compute transactions earn currency in return. This is referred to as “mining”.

Ledger – The record of information which is considered valid by consensus, i.e. all stored versions of the data, across all participant machines, show the same thing.

Transaction – An event which changes the data in some way. In the instance of bitcoin this would be a transfer of money from one participant to another, but it could also refer to the state of a contract which is proposed, signed, fulfilled, paid, etc.

Hash – This is the complicated bit of how blockchain works. A hash is a unit of data of a certain length which identifies, and grants access to, a set of data held on the blockchain of an undefined length. The hash is passed through a cipher to allow access to the data it refers to, and is crucial to the security of blockchain.

Key – The key is the simplest bit of blockchain to understand. It is just what it says it is. It’s the combination of the key and they hash which grant a participant access to edit the data held on the blockchain in some way.

The Explain

So, then – blockchain is a record of data, or a set of information, a duplicate version of which is stored across a number of participant computers, and, combined, constitute the ledger. The ledger can be updated using the relevant key and hash, at which point the ledger will be checked across all machines and, if all agree on the relevant information, the update can be processed. At this point all computers will generate a new block on the chain, the combination of which will constitute the new ledger. In other words, blockchain allows anyone to make edits to the data stored, and is built in such a way that authority is built into the system itself – rather than held in any one place, or by any one entity as a trusted third party – so that only legitimate edits are allowable.

The reason blockchain is particularly new and interesting is because the method of storing and updating information requires no one entity (company or government) to perform the role of ultimate arbiter and editor of the data. Which removes the monopoly any single entity has on the data and allows the community to act together according to a shared understanding of how transactions work. It also makes the whole process secure by nature, rather than one server having to build a solid firewall, any invalid edits to the data would have to be made across all versions of the ledger – hacking into one computer wouldn’t suffice, all versions would need to be updated lest the blockchain reject the edit.

As an example, let’s imagine there are ten participants, each with a computer mining the blockchain. Each stores the list of the ten names of the ten participant computers, and only has access to edit their own name via the hash. If one participant wants to change their name they would do so using the relevant key and hash, the system would check each of the ten computers to verify they all hold the same version of the record, that the hash is relevant to the name and that the key is valid. If all checks are positive then the edit can be made and all versions of the ledger can be updated (i.e. a new block is created on the chain with updated information and a new timestamp).

If an outside computer tries to gain access to the ledger, or a participant computer tries to change someone else’s name, or claims their name is already something other than the one stored on the blockchain, they would fail this process and the change would be rejected. The rejection would be made on the basis that the ledger forms a consensus, in essence the community would agree that an inconsistency is at play and disregard the attempt to edit the data. In the case of bitcoin, the data stored is the account balance of each member, and edits to the account balances would refer to the transfer of money between accounts.

The final crucial trait of this technology is that it maintains users anonymity, which is why bitcoin was the currency-of-choice for buy illicit substances on The Silk Road. If you want to know more about who uses bitcoin we have published a quick review with an infographic – Bitcoin Users: Who Are They?

The History

Blockchain is the result of a series of already-existing technologys, developed mostly during the 90s, which have been organised and aligned in a new way. The concept of blockchain as we know it today was first released in a 2008 paper by an anonymous person or group called Satoshi Nakamoto, built in to the proposition of bitcoin. That story will, TBM predicts, be made into a film at some point (assuming a screenwriter can find a central character to focus the story around in place of the anonymous creators), if you want to take a whizz through the tale we’ve published our version of it – Trust No One: The Story of Blockchain and Bitcoin.

The Implications

Blockchain was first put to use with bitcoin, but has since started to be used in a wide range of applications, causing some to think of bitcoin as its least interesting application. One of the most interesting aspects is ‘smart contracts’ which ethereum is the industry leader on. Ethereum is a cryptocurrency like bitcoin, but it also contains the ability to hold contractual information – that is, the terms and current status of an agreement between two parties – and has so been described as a kind of online vending machine. If, for example, a warehouse buys stock and must then pay the invoice on receipt of said stock, once the stock has landed and been verified the blockchain would be updated to reflect the fact and the relevant funds would automatically be released. Smart contracts hold the promise of an interesting future, potentially improving the relationship between businesses, or between customer and business.

These smart contracts hold an interesting potential for the music industry, for example. The blockchain itself would be able to act is a distributor, removing the need for intermediaries who usually take a sizeable cut of the revenue. The relationship between creator and consumer would be tightened because the blockchain could be updated readily enough for the system to release micropayments – hitherto unfeasible – each time a song is played rather than consumers having to purchase songs outright. The blockchain would also be nimble enough to store contributions to creations more delicately, meaning revenue could be siphoned to the relevant contributor on the most detailed level, preventing anyone from being cut out of the process.

The combined effect of blockchain’s future uses point towards the potential reorganisation of the internet, towards an ‘Internet of Value’ whereby the removal of intermediaries and the processing of micropayments make it possible to organise the internet not by mammoth servers like AWS and advertising on Facebook and Google, but instead by a direct relationship between creator and consumer on a distributed architecture. If you wand to know more about the potential future we’ve published a glimpse – Web 3.0: Using Blockchain to Build a P2P Internet.

Blockchain and cryptocurrencies are being taken up by various governments around the world, from the Russian ‘cryptoruble’ to suggestions for secure online voting systems.

The Shortcomings

The limitations of blockchain are severe, and should not be understated. The initial problems stem from the size of the network itself, which means that updating the system according to a transaction is not a quick or efficient process. The number of transactions which can be performed per second is, as of 2016, around 7 – way too low – and at a cost of about $0.20 while holding only 80 bytes of data. By current standards these limitations make blockchain unfeasible. However, anyone who can remember loading a simple internet page during the 90s will recognise that hard work and innovation can dramatically improve speed and efficiency.

Coupled with this is the fact that a blockchain transaction is immutable, once performed it cannot be undone or deleted which, while comforting in some regards, will presumably require a method of redress to be built in to the system. These flaws are deep and pose a severe problem. The question is whether time and effort on the part of those intent on blockchain’s success can overcome these problems, and provide incremental improvements to its operating protocol which will bring it in line with user expectations.

But more ephemeral problems exist beyond the programming. Blockchain is complicated, which means adoption won’t be easy and will perhaps always leave a worrisome knowledge-gap between those who build and administer it and those who use it. This feeds in to a second cultural problem which is the politics. For example, blockchain holds the potential to decimate the control central banks and financial hubs have on the system, which will pose a very real and formidable obstacle to its adoption.

At present blockchain has the feel of a new technology with enormous potential being explored in the way the tech sector always plays with new toys. While it may be some time before it’s use reaches ubiquity, the point at which the technology starts being taken seriously and encounters the tests and obstacles that go with that is probably not far off, if not imminent. It’s future will depend on how inherently equipped it is to deal with these trials and succeed.

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