In “bitcoin explained” series I will try to shed some light on emerging technology called – as you probably could have guessed it – blockchain. Is it really so revolutionary as the Internet? Is it going to be the greatest invention of the 21st century? Or maybe it is just a passing fad? I will also, using bitcoin network as an example, explain all the nitty-gritty details how it works, what makes it a decentralized network, what are nodes, miners, wallets, how individual transactions and blocks are structured and much other exciting stuff. As a note of warning – if you are just completely new to blockchain and cryptocurrencies and want some tutorial for greenhorns how to start reading – Bitcoins for dummies – article first. Okay, are you ready? Let’s get started.
Blockchain is a technology
Let me ask you an honest question. Do you know what the Internet is? Like really, what is this thing you use every day? When I was a kid in the mid 90ties I thought that the Internet was just some sort of a program with a famous Internet Explorer icon on my desktop. You double-click on an icon, bear 20 seconds of really annoying, squeaking sounds ( if you are nostalgic ) while your dial-up modem connects to this Internet, and then bam! You could read whatever you wanted, like ’96 CNN news. But neither the CNN website or my modem, nor expansive telephone bills for my parents were the Internet. The internet is actually a straightforward technology. A technology which enables sending data (bits) from one computer to the other computer. That’s it. The overall simplicity of the Internet is its greatest strength. Because neither type, or the content of sent data is strictly narrowed, developers, on top of the Internet, can build unlimited potential applications. That data might be an e-mail, your facebook profile, Bonetrousle by Taylor Daivs youtube video. All of that is just a sequence of ones and zeros sent directly from a server to your computer over the Internet technology. Blockchain is actually similar straightforward technology.
Blockchain is a technology which provides immutable, neutral, forgery-proof and auditable certificates of ownership (tokens) with secure timestamp and enables an unfettered free exchange of them in a trustless environment.
Okay, many difficult and probably a bit confusing words but we will slowly tackle them one by one, hopefully clarifying certain things. These are the main characteristics of the bitcoin blockchain*:
- immutability – once a transaction is fully confirmed on a blockchain, the transaction data becomes immutable. It cannot be moved, it cannot be altered, it cannot be deleted. It stays the same, forever.
- neutrality – anyone can participate in bitcoin blockchain regardless of their race, age, political opinions, religion or location. No one can be excluded. Blockchain cares only about the validity of a transaction, not about senders, recipients or actual content of transactions.
- forgery-proof – all transactions are legit. It is not possible to counterfeit tokens.
- audibility – all transactions are public and can be audited. You can check every single transaction which ever happened. Who sents to whom, when and what. You can check the balance of every wallet on the bitcoin blockchain.
- non-double spendable – same token cannot be spent twice. The most important feature of a blockchain. I will elaborate more on it in the next chapter.
- secure timestamp – every single transaction has a valid timestamp which cannot be altered later.
- trustless environment – you don’t need to trust other participants in the blockchain. Before blockchain trust was ensured by third trusted parties like banks, escrow services, financial institutions etc. If I I know that you can’t cheat we don’t need a third trusted party. We can trade directly with each other. Strongly connected to forgery-proof and non-double spendable feature.
* One caveat though – although these are characteristics of the bitcoin blockchain , most blockchains share all of them as well with few exceptions, for instance, private blockchains to which no one has access to.
What is the double-spend problem? Let’s imagine you can have a digital money on your PC. On your desktop, there is a shiny icon called ten.$ which represents ten dollar digital bill. Now you want to pay for a Netflix monthly subscription with your digital-money-file so you attached it to an e-mail and send it to Netflix cashier address. If you have ever sent any files over the Internet you know what the obvious problem there is. Even though you send your ten.$ file to Netflix you still have a copy of it on your desktop! Hmm, maybe I can just use the same money-file to pay for my Spotify subscription. Just one time, I promise! That is the double-spend problem in a nutshell. How to prevent the same digital money to be spent more than one time.
For the most time of the digital era, there was only one solution. Basically, we had to have a third trusted party like a bank or financial services like MasterCard or Visa. This solution is centralized because all of your money ‘is stored’ on a bank server. Potential problems with that approach were eloquently put already in 2001 by Nick Szabo ( link ). The main problem is that a centralized approach creates single point of failure. If your bank’s server stopped working you can’t have access to your money. The same with potential attacks. A potential hacker knows exactly where she has to hack to get your hard-earned dollars – your bank’s server. The other problem is that money in your bank is not really your money. It is bank’s money. If a bank goes bankrupt or for whatever reason decides to freeze your funds you lose access to your wealth. That was the only solution for the double-spending problem for many many years until October 31, 2008, when mysterious Satoshi Nakamoto, published a paper on a cryptography mailing list explaining the new way of dealing with the double-spending problem via a network of connected blocks. The paper is called bitcoin whitepaper and you can read it in full – here. The main idea can be summed up in the few first sentences of bitcoin white paper:
”[Bitcoin] a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.Satoshi NakamotoBitcoin whitepaper
But wait, isn’t bitcoin and blockchain the same thing?
This is probably the most often asked question I get from people just making their first steps in this new, blockchained world. Thinking that bitcoin is blockchain is similar to thinking that e-mail is the Internet. Blockchain is a technology and bitcoin is just one of the application of that technology. It gets all the hype because it was the first one and it was introduced at the same time as blockchain – parallel with Internet/e-mail. Back in the old, good days, the only thing you could do on the Internet was to send a text message to someone else so a lot of people confused e-mail with the Internet.
Okey then, what else can this whole blockchain do then, apart from bitcoin?
That’s a really good question. I will give you now good examples but keep in mind, that blockchain usage in a way is limited only to developers’ imagination. Like when the Internet popped out and all you could do was sending “hello!” to someone else. Back in the 80ties, no one predicted that people would do their job over the Internet, listen to music, steal new blockbuster movie, order pizza and pretty much spend most of their waking hours on the Internet. As I said, the Internet is just a technology. What developers can build on top of that is virtually endless, just like with blockchain.
The first obvious usage for blockchain is digital money, like bitcoin. Most people are actually shocked when they hear that apart from bitcoins there are hundreds other cryptocurrencies. And you know what? In the future, there will be thousands. You may ask why so many. Well everyone symbolizes some value to different groups, have different usages and potential features. I will try to explain how I see the monetary world in 2100 in another article. For now, it is enough to know that there are hundreds of cryptocurrencies and if you want you can even issue your own! In my future posts, I will show you how to do that.
What apart from that? What can be other usages of blockchain apart from cryptocurrencies? Most people, even those interested in bitcoin can’t really find the answer to that question. Yea you said that blockchain is like the Internet and developers can potentially build many different applications but I simply don’t see it! Let me introduce you to the concept of Token. If you’ve been reading this article carefully (and I hope you do!) you must have already stumbled upon this keyword in blockchain. Go up. What was my definition of a blockchain? “Blockchain is a technology which provides [..] certificates of ownership (tokens) [..].”
What are blockchained tokens? A blockchained token is a representation of a particular asset which is recorded and stored on a blockchain. The obvious example is a bitcoin itself. A bitcoin is an intrinsic token because an asset it represents (a bitcoin) resides on a blockchain. But we can have an “extrinsic” or asset-backed tokens – a token representing an asset which doesn’t reside on a blockchain. Like your car, your house, your digital photos from vacations or even your dog. It doesn’t matter what it is because everything in the physical world might have its tokenized representation on a blockchain. How is it achieved?
As we mentioned before a blockchain is fully auditable so you can track where every single Satoshi (smallest unit of the bitcoin currency, 1BTC = 100 million Satoshis) came from, who was its previous owner, how many times it was transferred and when. So if we say that a particular Satoshi represents your car, then bam!, your car is on a blockchain! Now if this Satoshi is in your wallet you have a proof that this is indeed your car. If you’d like to sell for instance your car to someone else, all you’d need to do is transfer that particular Satoshi to someone else. No documents are required. This process of tokenization of external asset on the bitcoin blockchain is called “coloring coins” – (how to do that and how it technically works I will explain in my further posts). As a side note, that transaction of external assets through blockchain has as for now no legal bearing – it requires the law stating that specific blockchain is equivalent to the national register of cars. It doesn’t need to be bitcoin blockchain though. It could be any statutory blockchain. It is interesting how the law will eventually adapt to blockchain revolution. FYI, guys in India already work on the very idea (car registration on blockchain in India).
Problem of provenance
Provenance derived from French provenir (to come from) is a history of ownership. When we want to buy something it might be extremally difficult to restore the past of a wanted item. If you, for instance, want to buy a second-hand car you probably would want to know how many previous owners this car had and for how long. Usually, we just need to trust whatever the seller is saying. Blockchain which operates in a trustless environment can change that.
Apart from ease of exchange, an additional benefit of assets tokenization comes from blockchain audibility. It can be extremally useful when dealing with other expensive items, like diamonds. There is a company called everledger which has put over one million diamonds on a blockchain. The main issue they want to tackle is
Would you feel secure buying a 10.000$ diamond on eBay?
Not an easy question, especially if the guy is not a well-known luxury jewelry seller. What everledger does is take all the important details of a particular diamond, create a unique token representing that diamond and putting it on a blockchain. Now if a seller is able to send you that token alongside with the diamond you might be certain of its authenticity, check from where it came from, and how many previous owners it had.
Digital content creators since the beginning of time (in case you didn’t know – time started exactly on Jan 1970) had problems with an illegal use of their work. If a photographer posted his new photos only to find out that a month later someone else without his consent used it, it isn’t easy to prove his author’s rights. Yes, it can be done, but if the other side claims that they are the author the process might be really cumbersome. By leveraging blockchain technology it can be extremally straightforward to protect copyrights. It’d only require creating a specific token representing a photo, music, or any type of digital content and whoever owns that token has all the copyrights.
Internet of Things
Internet of things is a network of connected devices which can exchange data seamlessly between each other. The easiest example would be a “smart home”, where many home appliances are connected together. For example, your door can detect who’s coming back home and then it sends a notification to your smartphone, potentially protecting you from a burglary or just simply letting you know that your kids came back safely from school.
It is estimated that by 2019 up to 20% of IoT networks will run on blockchain services.
The topic of IoT is extremely broad and even if you think you will never be interested in your fridge automatically buying milk for you (me included, I actually enjoy walking for my groceries) this is the future. Networks of connected devices, governed by artificial intelligence with security and trust provided by blockchain solutions will have a profound impact on pretty much every aspect of our daily lives. We humans aren’t good at processing loads of data and future of AI and IoT doing that for us is inevitable. We can only hope that AI won’t eventually render us dispensable.
In this post, I tried- using bitcoin blockchain as an example – to explain the basics of what a blockchain really is, and paradoxically (taking the title) prove that blockchain is so much more than just bitcoin. As I mentioned at the beginning, blockchain is just a technology and it is really hard to predict what we will be using it for 30 years from now – like no one in 1987 could envision that in 30 years connection to the Internet will be so essential for our lives that we’ll start to consider it to be one of the human rights.
As we inescapably marching towards constantly growing data flow I’d like to leave you with just one, last bit of knowledge how not get engulfed by the inevitable era of information, taken from a thought-provoking book, depicting future of our species, “Homo Deus: A Brief History of Tomorrow” by Yuval Noah Harari:
”In the past, censorship worked by blocking the flow of information. In the twenty-first century, censorship works by flooding people with irrelevant information. People just don't know what to pay attention to, and they often spend their time investigating and debating side issues. In ancient times having power meant having access to data. Today having power means knowing what to ignore.Yuval Noah HarariHomo Deus: A Brief History of Tomorrow