The Opportunities of the Blockchain Technology (Part 1)

Blockchain technology jointly with AI, IoT and autonomous vehicles are the “hot” topics these days. Thanks to the speculative valuation of Bitcoin, the underlying solution — the blockchain is making its way in mainstream media. Тhe technology behind the Bitcoin is very innovative and provides solutions to use cases beyond its original purpose. This technology will become part of our lives.

So what is blockchain — the history, the concepts, the use cases and the future it offers?

Тhе ledger itself is defined as a register, book that records all incoming and outgoing transactions, assets in the domain of interest. Assets can be either physical or intangible. In general — anything that can be attributed with some kind of value can be recorded and/or moved through the blockchain network adding transparency, reducing risks.

Blockchain builds trust through the following five qualities:

1. Distributed and sustainable
2. Secure, private and indelible
3. Transparent and auditable
4. Consensus based and transactional
5. Orchestrated and flexible

Historically the basis of the blockchain technology was conceptualized within the scientific community in the last 4–5 decades within computer science and cryptography circles. But most of these science papers remained to be partial solutions and dominantly academic. The history begins with the Merkle Tree in 1979 continued with several verticals that form the specifics of the blockchain technology and its first successful implementation — Bitcoin. These scientific verticals include aspects of:

• Linked timestamping — verifiable logs (Merkle Tree)
• Digital cash
• Proof of Work (hashcash) (Consensus algorithm)
• Byzantine Fault Tolerance (Byzantine Generals problem)
• Public keys as identities
• Smart contracts (initiated in Ethereum, not present in Bitcoin)

These papers are the base of the actual blockchain products available on the market.

First successful implementation of Blockchain? Bitcoin (crypto-currency)

What is the problem that Bitcoin tries to address? Cash is useful only in local transactions. Long distance transfers take long time to finish and are prone to errors, inefficient procedures that require third parties to ensure transactions and safety, fraud, cyberattacks, credit cards are walled gardens and finally — half of the people of the world do not have bank accounts.

Satoshi Nakamoto (alias name — author itself has never appeared in public) published the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” which was the start of the first cryptocurrency in the world — digital cash transferrable across the internet in first distributed trustless cash protocol. It is also important to note that this is an open source project with codebase available to all interested parties. This is important step as it is the first practical and proven application of the blockchain technology that is used in production environment. Bitcoin created strong cross-border following and currently is traded in speculative markets with rapid increase of value (and high price volatility as well). We can use Bitcoin’s architecture diagram to understand the basics of the blockchain concept:

The data is stored in a chain of blocks, thus the name “blockchain”. Blockchain gives the means to record and store transactions. Key characteristics of the blockchain are:

The blockchain “database” has two types of elements: transactions and blocks. Blocks hold batches of transactions that are hashed and encoded into a Merkle tree. Each block has the hash of the prior block and links the two elements of the chain. The linked blocks form the chain. The process is iterative and every new block confirms the integrity of the prior all the way to the original block #1. Usually new block is generated in time frames of 10 minutes in Bitcoin to 5 seconds in some other blockchains, depending on use cases. After new block is “witnessed” by enough peers the transactions within it become immutable fact of the ledger and transaction is finalized.

New blocks are “mined” with different methods. Proof of Work consensus protocol of creating blocks is well known and original mining strategy in Bitcoin. It was invented in a research paper that addressed one solution of fighting spam mail messages called “Pricing via Processing, or, Combatting Junk Mail, Advances in Cryptology”. There is an option that two concurrent blocks would be generated in concurrently, but the general rule of consensus is to continue with the longest (winning) chain which eliminates hostile actions, spam, double spending and network splits in the time frame between 2 block generations. The Proof of Work protocol increases the difficulty of the computational work needed to be done as proof that block can be generated.

Every owner of the Bitcoin has its own unique account address which combined with his private and public digital signature prove the ownership of the Bitcoin wallet and transactions in the ledger. Transactions are signed with public keys while the private key is used in pair with the account address to prove ownership to the network without sharing secrets. You can send/receive portions of 1 coin (decimals). The ledger records the transactions and the wallet adds and subtracts the amounts of Bitcoins and provides the current holding sum in the account. A person can print his account address, his public and private keys and put the printed document in safe location. This is known as paper / offline wallet. The savings are guaranteed in this scenario until Bitcoin network is operational.

Thanks to its distributed manner the ledger can survive any possible scenario and guarantees the integrity of the ledger even in critical situations such as disasters and wars. Since summer of 2017 there is a world coverage using satellites that streams the blocks to all parts of the world. Although not the most exciting use scenario for science, Bitcoin is very important for being practical proof of concept for the blockchain technology that works out of the box and shows the possibilities in the future.

There are newer cryptocurrencies such as Litecoin, Monero, Dash. They try to solve some of the limitations of Bitcoin design — mostly lowering the cost of transactions, speed of transacting and privacy of the senders. Current market cap of Bitcoin is about 262 billion USD (or 460 billion of the top 6 cryptocurrencies). The value of the “coin” is decided by the market and it is completely arbitrary similar to gold — majority of market traders agree upon the value of the unit by selling and purchasing it for certain price. Bitcoin started with valuation of below 1 cent and in recent past reached valuation of $19000 per coin. Investment analysts are divided in two camps — one team that is bullish about Bitcoin and expecting future growth as new practical scenarios become relevant. They compare Bitcoin to the new wave of investment in IT similar to the Silicon Valley boom providing very fast and big returns of investment.

But also many analysts and almost all national banks are very concerned about the rise of cryptocurrencies because the price is very volatile, small investors can easily burn their savings lured by promises of high and fast returns. Also the nation states are concerned about money laundering and “dark web” transactions of criminal manner. Some analysts compare the Bitcoin with the Tulip mania case in Netherlands that happened in 1637 which is probably among the first historic records of market bubbles.

This is the first in series of articles that will follow in the upcoming period. Part 2 will be published in January 2018.

References:

1. Blockchain for Dummies (ebook), Gupta M., John Wiley & Sons, 2017, ISBN: 978–1–119–37123–6
2. Bitcoin’s Academic Pedigree (article), Narayanan A. & Clark J., ACM Queue Vol. 15, Issue 4, 2017, ISSN: 1542–7730
3. Bitcoin: A Peer-to-Peer Electronic Cash System (paper), Nakamoto S., Bitcoin Foundation, 2008
4. Method of providing digital signatures (Patent), Merkle R., 1979
5. Pricing via Processing or Combatting Junk Mail (paper), Dwork C. & Naor M., Weizmann Institute of Science — Israel, 1992
6. The Byzantine Generals Problem (paper), Lamport, L.; Shostak, R.; Pease, M., ACM Transactions on Programming Languages and Systems. 4 (3): 382–401, 1982
7. Undeniable Signatures (paper), Chaum, D.; van Antwerpen, H. LNCS. 435: 212–216, 1990
8. Hashcash — A Denial of Service Counter-Measure (paper), Black A., Cypherspace, 2002.
9. A (Short) Guide to Blockchain Consensus Protocols (article), Coindesk, 2016/17.