Gartner’s 2016 Hype Cycle for Emerging Technologies identifies three key trends and one of these is “Platform Revolution”. It is believed that these technologies have the potential to be game-changers in the way business ecosystems are run today. A key technology identified in this paradigm is the Blockchain.
A “Bit” (pun unintended) of History
The Blockchain story starts with the famed cryptocurrency bitcoin. In 2008, unknown person(s) named as “Satoshi Nakamoto”, in a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System, designed the Bitcoin (the one with the upper case B denotes the software, protocol and community; the other denotes the cryptocurrency) and urged a few peers on the Cryptography mailing list metzdowd.com to join the initiative. In January 2009 Satoshi wrote its reference implementation called Bitcoin Core and published it.
Initially, he actively participated in its improvements, but by mid-2010 he had handed over the code repository to Gavin Anderson and had stepped out of the picture. Satoshi has neither disclosed his identity nor cashed in on his invention – it is estimated that his accounts still show a balance of 1 million unspent BTC.
The Bitcoin decisions are now front-ended by the non-profit Bitcoin Foundation, which is a community of core developers. Although this community has been trying to advance bitcoin in the face of the challenges of the past few years and an increasingly tough competition, other communities are emerging and trying to counterbalance this power.
For an idea that was discouraged by governments and banking institutions, Bitcoin has been surprisingly successful. Incidents such as the use of Bitcoin to run the darknet Tor hidden service “SilkRoad” (brought down in late 2013) could not deter its supporters. The currency has appreciated more than 900 times in 6 years. At the time of writing, market capitalization has reached 18 Billion USD, daily transactions are worth $200 million and it valued close to $1100.
As originally intended by the CypherPunk movement of the 1990s, bitcoin, and other cryptocurrencies like it (over 700 of them) have displayed the potential of creating an inclusive economy for the 2 Billion non-banked people in the world.
In spite of all of its achievements, the biggest potential of the Bitcoin inception is much beyond the cryptocurrency-based payments use case. This comes from the backbone technology that Satoshi built to run Bitcoin – the Blockchain.
So, what is Blockchain and how does it work?
In its simplest form, Blockchain can be thought of as a shared database. Blockchain Technology allows for secure management of a public ledger (database of append-only transactions) where transactions are verified and stored on a network of Peer-to-Peer nodes, running a distributed computing platform.
Let’s break down the working of a Blockchain using a simple payments use case à la bitcoin:
- Say, Alice owes Bob 1 BTC for a service she bought. She uses a bitcoin wallet such as Unocoin to make the transfer.
- To set up this transfer Alice needs her own Private Key and Bob’s Public Key on the Bitcoin network.
- She triggers the transaction of 1 BTC to Bob’s Public Key.
The above steps are all executed off the chain, for example, on a mobile wallet. From this point onwards, the Blockchain comes into action and the steps below are executed on the Peer-to-Peer network.
- The transaction triggered by Alice is broadcast to the P2P network where nodes, called miners on the Bitcoin network, are listening in.
- Each miner picks up as many current transactions as possible and races to be the first one to generate a block of transactions. The act of generating a block is a 3-step process:
- Check the validity of the transaction, i.e. the account behind the private key (in this case, Alice’s account) has sufficient funds.
- Club all transactions into a Merkle Tree, a binary hash tree.
- Solve a brute-force cryptographic puzzle to generate a Block Header Hash, a unique identifier for the Block.
This protocol of generating a block is called Proof of Work (PoW) and is the protocol used by the Bitcoin Blockchain. Other Blockchain platforms may use protocols such as Proof of Stake, Practical Byzantine Fault Tolerant etc.
- On successfully having generated a block, the miner links it to the previous block (hence called “Blockchain”) and re-broadcasts the resulting block chain to the P2P network.
- The other nodes now have to agree on the validity of this new Block. Given the nature of hashing algorithms, the validation process is an easier one. They also validate a transaction to ensure there has been no double-spending.
- The miners express their agreement by adding new blocks to the accepted Blockchain. Once the transaction is added to a block in the longest Blockchain it is considered confirmed. The miner whose block is accepted receives a reward (in case of Bitcoin the reward is currently 12.5 BTC).
On the Bitcoin Blockchain this trigger-to-confirmation journey takes approximately 10 minutes. In order to be sure that the Block will not be “orphaned”, Bob is advised to wait for 5 more blocks to be added to the Blockchain after the one that contains his transaction. Hence, it is 60 minutes for an irrevocable confirmation a.k.a . “payment settlement”.
Other Blockchain platforms may need less time and less number of confirmations depending on their distributed consensus protocols.
The activity on the network having completed, the action is back to Alice’s and Bob’s mobile wallet now: The wallet detects that the transaction has been recorded on the Blockchain and displays the conformation to Alice and Bob.
We have been acquainted with digital payments for many years now. So, one may question the benefits of the payment scenario narrated above.
In addition, an obvious question at this point may be why one would want to adopt the somewhat complex transaction confirmation process when the current database management systems have proven their prowess at recording transactions.
Here is how a public Blockchain (a Blockchain open to participation by anyone – as miners or users) such as Bitcoin scores over plain digital transactions and databases.
Benefit of a Cryptocurrency transaction vis-à-vis an Electronic Fund Transfer
In the midst of the 2008 financial crisis, the biggest since the Great Depression, the Bitcoin showed that financial institutions no longer have the monopoly in trust.
When two people transact in cash, trust is absolute. Handing over a $100 note to someone ensures instant transfer of money and the transaction itself can never be contested. In addition, there is no requirement of an intermediary to validate the transaction has gone through. Simply handing over the money seals the deal. The deal itself is resistant to any censorship by central authorities.
A cryptocurrency such as bitcoin gives the same benefits as a cash transaction but with the convenience of a digital one i.e. option of a transfer made between people who are not in physical presence of each other; and with no requirement to carry the money around with them. It is minted via cryptography and hence completely excludes the need for a central controlling authority.
Benefits of a Cryptocurrency transaction vis-à-vis a Centralised Database
Security: Though no system can claim to be 100% secure, the public Blockchain comes quite close, mainly through its usage of mathematical proofs.
1 – The sequence of blocks, and hence the Blockchain, is tamper-proof:
This concept can be explained in simple way using a simile presented at bitsonblocks.net – You can easily tear page #40 of a book and replace it with another one. But imagine if each page were linked to the previous in a unique way. Changing one page would need a change to the next one and changing the next one would mean having to change the one after that and so on.
This is the kind of “linkage” that the hash header of a Block (described above) provides through its cryptographic properties. Since re-writing the whole chain in the PoW protocol requires a humongous amount of hashing power (To put things into perspective, the Bitcoin miners are currently performing 450 thousand trillion solutions per second) and the ability to overtake all the other miners active at the moment, it becomes almost impossible to tamper with the sequence of blocks.
As Satoshi said – “As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.”
2 – The block, and hence the record of transactions, is immutable:
Transactions are organized in the form of Merkle trees in a Block where each node of the tree is a hash of the two nodes below it and so on until the root node. The Block header is a factor of the Merkel root. Any attempt to mutate a transaction in a block will trigger a change to the nodes above it and in turn the Block header.
Remember that the next node contains a pointer to this block header. This cascade effect triggers condition #1 above, thus making the block immutable.
3 – Blockchain is much less susceptible to hacking than a centralized database:
A centralized database containing sensitive data is a honeypot for hackers. Given the fact that there will be a small number of instances at fixed locations, hackers find ways to break through the systems. The Blockchain database resides with all participating nodes, which for a public Blockchain such as Bitcoin may be a very large number. The possibility of locating a majority of nodes and hacking into them to tamper the history of the ledger at the same time is minimal.
To summarize, the public Blockchain offers disintermediation and robustness of the kind that is not possible in other systems.