A quick guide to blockchain

There is one technology trend that could prove to be even more tectonic and sustainable than cloud computing: the blockchain. As the cloud challenges the way we build software and reshapes the way we operate businesses, blockchain technology may be changing the way we think about and process transactions ourselves. In addition to serving as the foundation for cryptocurrency, blockchain can fundamentally affect how we envision and record agreements.

The revolutionary nature of blockchain and the cryptocurrencies it enables are widely touted and certainly subject to exaggeration. And yet, when you think about how current technological developments might play into the future, it’s hard to identify another development more likely to affect the shape of things to come. Blockchain may turn out to be the most important innovation since the internet.

So what is the blockchain and why is it potentially changing history?

consensus truth

Building distributed software systems is difficult. The core of this difficulty is the data: protecting it, making it available, storing it. While much of the difficulty comes from people trying to cheat the system, there is also inherent objective difficulty in overcoming errors and maintaining data consistency (see, for example, the CAP theorem). Every time data is sent or retrieved (whether it’s a message about your lunch or your bank account balance), these dangers are subject.

In the case of something important, such as your bank account, the traditional way to make data safe and accurate is through a trusted agent, such as the bank. Until now, the distributed version of banking has been a graft of traditional practices on the Internet. The bank is expected to persevere and get our financial information.

The limitations of this scheme are outlined in the Bitcoin whitepaper that sparked the crypto tidal wave. (The fundamental document in cryptocurrency, this article by Satoshi Nakamoto summarizes the state of the art and presents the first true, public blockchain network.) Satoshi’s criticism of the “inherent weaknesses of the trust-based model” is linked to the fact that “non-reversible transactions are not possible.” In other words, banks must be in a position to mediate in disputes, thereby building trust and increasing costs.

Frankly, for a white paper describing a full-fledged alternative to traditional banking, this criticism has been moderated quite a bit. Most of us could easily find further problems: surprise fees and interaction with Byzantine corporate structures, for starters. In addition, the structures present significant barriers to participation in the financial system for disenfranchised players.

The Bitcoin paper proposes an “electronic payment system based on cryptographic evidence rather than trust.”

cryptographic signature

The core mechanism of such a network is cryptographic pairs used to sign transactions. Owners of electronic currency (or more generally, a digital state) sign the currency (or state) to buyers with their public key and authenticate themselves with their private key. Each transaction also contains a hash of the previous transaction and the owner’s public key. You can see this structure in diagram 1.

Diagram 1. Blockchain Signing

blockchain signing IDG

Double Spending and the Blockchain

If all participants in the network acted in good faith, the transaction chains would already be secure (i.e. the system would be secure for external direct manipulation thanks to the cryptographic signature). The weakness is that currency owners can trick the system by spending currency more than once. A buyer cannot know if the currency he is buying has already been spent.

Solving this problem without relying on a central authority is not trivial. It requires that all participants in the network are aware of all transactions and their order of occurrence. If we could achieve that, nodes would be able to accept only the first instance of a transaction and dismiss others as fraudulent. The mechanism to achieve that is the blockchain.

The central idea is that transactions are collected in a set (a ‘block’) and the nodes struggle to reach a hard-to-calculate value (a nonce that when hashed produces a value with a certain number of leading zeros). Each block also references the hash of the previous block. This setup means that transactions are accepted in blocks that are verified with computational effort, and that each new block creates a longer chain of such work.

51% attack

To fool this system, one would have to redo all the work of the chain, which becomes less and less likely as the chain grows.

The name for an attempt to catch up with the legitimate set of blocks is a 51% attack. The idea is that an attacker would obtain more than half of the computing power participating in the system and use it to validate fake transactions. As the blockchain grows, this becomes more difficult, and even if achieved, it offers limited opportunities.

Aside: Storage Optimized

A mind-boggling fact about this tree of nodes is that the entire chain (representing a market cap currently close to $1 trillion USD) is stored on every participating computer system. Smart design is being done to make this achievable. A central mechanism for this is the use of a Merkel Tree to enable the system to store only the root and relevant leaves in the chain.

consensus truth

While each node works to validate its transaction block, other nodes do the same. When a particular node receives a competing block from the network, it stores that block in a competing chain and continues to work on its own chain. If the node receives enough new blocks on the competing chain, it rejects its work and accepts the competing chain as the truth. If the current node completes its work before the competing chain is confirmed, the current node broadcasts its effort to the network. The other nodes behave the same way with regard to validating that claim.

In this way, the network inevitably accepts the work of the largest number of nodes, in a sense voting for a consensus version of the truth, backed up by the computational work the hashes require.

Mine and strike

Mining activity is widely publicized and has acquired geopolitical significance. But what is it? With our understanding of the blockchain to date, we can describe it clearly.

When a node succeeds in validating its block (by getting a good hash and proving to the network that it is the first valid new block in the chain), it receives a new coin it owns. This is mining. The coin serves as an incentive for the system to participate in the mining process.

Security without trust

The main achievement of the blockchain is to secure a network that runs on nodes owned by everyone. It seems counterintuitive, but the system works by making assumptions not only about cryptography, but also about human behavior. That a widespread system controlled by (let’s face it) untrustworthy people should function safely is breathtaking.

Once the functionality of this system was demonstrated by Bitcoin, the explosion of new digital coins was remarkable. One notable coin is Ether, created by Ethereum, a company that proposes superimposing a Turing-complete computer on top of a Bitcoin-like blockchain. And there are many others.

In the specific case of currencies, traditional banking will certainly largely remain as it is, and entrenched interests in the financial system will work to reap benefits within the crypto system. They have already moved to introduce their own coins.

Perhaps the most history-changing promise of blockchain systems is that humanity may have stumbled upon a method of building consensus for remotely connected participants. Such ability has far-reaching implications, difficult to specify in detail, but easy to predict as broad.

Of course there are challenges. First, the extreme volatility of crypto markets makes it difficult to predict cryptocurrency values ​​(for this reason, stable coins were introduced). For another, programming the blockchain is difficult. Finally, deep-seated interests in financial and other industries are resistant to blockchain.

Overall, blockchain technology is an amazing innovation and a fascinating space to watch as it evolves rapidly before our eyes.

Copyright © 2022 IDG Communications, Inc.

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