Against the backdrop of the 2007-08 global financial crisis, a person or persons who went by the name Satoshi Nakamoto offered a solution. At the time, our faith in institutions lays shattered. Banks offered predatory lending that burst the housing bubble. Governments and regulations failed in their jobs to keep such banks and lending practices in check. Even the media seemed complicit in obfuscating the impending doom. Who can we trust?
Nakamoto's solution is that we stop believing in institutions and instead put our trust in technology. In October of 2008, Nakamoto published his first work, "Bitcoin: A Peer-to-Peer Electronic Cash System." In this now iconic work, Nakamoto lays out the groundwork behind the blockchain and its first manifestation as Bitcoin.In just over a decade, Bitcoin has gone from fringe fantasy to criminal cryptocurrency to mainstream money. Likely the most recent newsworthy example of this was billionaire Elon Musk pushing to accept Bitcoin as payment for his Tesla automobiles in March of 2021—only to then walk this back in May 2021 due to Bitcoins massive environmental impact (more on this below).
While I had heard of Bitcoin, my first real introduction to its underlying blockchain technology was reading Chris Ferrie and Marco Tomamichel's Blockchain for Babies to my twin toddlers. Ferrie and Tomamichel write, "But a digital coin is invisible. So how do we know who has the coin? The blockchain tracks who has the coin with a puzzle."
Today we are going to dive into the puzzle that is blockchain. We will explore how these blockchains are made and how they keep track of who has invisible coins such as Bitcoin and other cryptocurrencies. We'll also look into blockchain beyond money because this technology has far greater ramifications than just replacing money.
What's in a Name?
In his original paper on Bitcoin, Nakamoto did not use the term blockchain. He did, however, use these words in this order to describe the function of the seminal timestamp server in how Bitcoin works:
"A timestamp server works by taking a hash of a block of items to be timestamped and widely publishing the hash, … The timestamp proves that the data must have existed at the time to get into the hash. Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it."
Blockchain at Its Core Is a Distributed Ledger
The truly revolutionary idea that Nakamoto proposed with his Bitcoin blockchain was the concept of a distributed ledger. A ledger, of course, is a collection of accounts and transactions. We most often associate ledgers with financial institutions such as banks, but ledgers are used by nearly every business entity to track monies taken in, on hand, spent, etc.
Nakamoto proposed that rather than trusting these to people, we could place these on a computer network. The network would then be responsible for this ledger. And rather than trusting it to one ledger that could be lost or compromised, Nakamoto advocated that this ledger be duplicated on a multitude of nodes. Changing any one of these nodes does nothing as its data is compared to the rest of the network, which corrects the inaccurate information.
Hashing, or How to Put the Crypto- in Cryptocurrency
Before we get into the blockchain, we have to take a moment to discuss a seminal aspect of this technology. A seminal aspect of computer cryptography is the hash. A hash is a unique value of a specified length that represents the calculation of some data. Change the data in even the smallest bit, such as capitalizing a letter or adding punctuation, and the resulting hash is profoundly different. What's great about a hash is that it is easy to validate data, but nearly impossible to re-engineer the data from the hash.
In the blockchain, hashing is used to calculate transactions. Only the specific transactions within a block produce that specific hash. Recording and storing these hashes uses very few resources. Because hashes are unique to very specific data, hashes are often hashed together. This hash is only able to be created by the specific combination of the underlying hashes. As such, trying to forge transactions becomes ever increasingly difficult as the hashes and combined hashes are truly herculean to replicate.
Verification
One of the best parts of blockchain technology is that it can achieve comparable results to other industries—without the accompanying fees. For example, a bank needs to charge bank fees for financial transactions and their associated verifications. But with cryptocurrencies, all parties agree to perform verifications for the distributed ledger for others in exchange for all these others performing verifications in return. The overall cost is minimized and rolled into the cost of participating in the blockchain.
Let's contrast that with traditional electronic transactions. In any given exchange of money for goods and services, the vendor must reach out to the bank or credit card issuer. This financial institution then validates whether or not there is enough money in the purchaser's account and, if there are enough funds, begins the transfer of monies to the vendor. Getting the money from us at our bank to them at theirs is a lengthy process. We feel this whenever we return an item and are told that our returned funds will be available in two to five business days.
By cutting out these middlemen, our financial institutions, the time to verify a transaction and transfer funds diminishes from days to minutes.
The 51% Problem
The trust from the blockchain stems from the fact that the vast majority of computers with the distributed ledger are legitimate users participating in maintaining and forwarding the overall blockchain. For a bad agent to force a fraudulent transaction into the blockchain, it would take over half of the computing power to side with the fraudulent transactions over the legitimate transactions. This is known as the 51% problem.
If a bad actor could wrestle control of a simple majority of computers overseeing a particular blockchain, this actor could rewrite the distributed ledger—and verify this revised version—so that this new iteration becomes the truth for the blockchain. While this won't rewrite history, it could be used to double spend the currency in question or hold blocks hostage.
As there are over a million devices all over the world on the Bitcoin network, this is not an easy task. However, Bitcoin is just one of many currencies. Other currencies that don't have the ubiquity of Bitcoin or Ethereum could be at risk of a hostile takeover if a bad agent musters enough resources to rewrite the blockchain.
However, so long as the majority of computers on the network are honest, this should not be an issue. And when the way to generate more of the cryptocurrency is to participate in this honest furthering of the blockchain, the majority of users will be agents for this blockchain.
Proof of Work Mining
An essential element of the blockchain is mining. Traditionally, blockchain mining came in the form of proof of work. In proof of work, all the miners on the network compete to create the next block. They do this by trying to solve a puzzle in which a value is added to transactions to produce a specific hash result. An example of the result might be a certain number of leading zeroes in the final hash of the block. Since the value only matters in that when hashed it will produce the desired result, it has no value in itself and is thus known as a nonce.
In the case of cryptocurrency, being the first to calculate the lowest nonce value is then rewarded with an amount of the cryptocurrency. It is a race, with the first computer to reach the nonce winning the money. Once this is accomplished, the various computers then begin work on the next block, racing once more to be the first to the nonce.
For Bitcoin, the average time to craft a block is about every 10 minutes. What's interesting is that this is despite the number of miners trying to crack the nonce. While part of this comes from the sure herculean task of calculating the nonce, the powers behind Bitcoin dial in the difficulty commiserate with the number of devices mining on the network. More devices? A more difficult problem to solve!
The problem with proof of work is that no matter how many computers are competing, only one will be the first to discover the correct nonce. This solitary computer receives the reward and all the rest of the computers on the network have just wasted their time—and their power. For Bitcoin, this is the wasted energy of an estimated million mining computers. As such, the amount of money spent on electricity easily outpaces the amount of money generated by the currency produced.[1] Years ago the amount of energy consumed from mining Bitcoin outpaced energy consumption from over a hundred entire countries, including Nigeria and Ireland.
And it has only gotten worse.
Blockchain beyond Bitcoin
Ethereum
Because of its exorbitant cost and limited return, many groups have tried to come up with other methods for crafting blocks. The most successful alternative (so far) is Ethereum, which has moved from proof of work to proof of stake. In this system, a staker is selected somewhat at random to craft the next block. This staker is then rewarded with cryptocurrency for their efforts. Because one staker is selected in proof of stake, no energy is wasted like in proof of work. Which staker is selected is determined based on a percentage chance equal to their amount of cryptocurrency. Rewards are paid out to the block writer and selected validators.
In addition to mining differently, Ethereum also offers opportunities beyond cryptocurrencies. One of its main selling points is offering decentralized applications. At its core, Ethereum is a scripting language. This language and its associated blockchain manifest as both a central currency, Ethereum, and a vehicle for much more. Applications crafted on Ethereum become part of its blockchain and are granted the same legacy and staying power as the cryptocurrency.
One of the opportunities from Ethereum is its initial coin offering (ITO). This functions in many ways like a crowd-funding opportunity, such as Kickstarter or IndieGoGo, allowing companies to raise significant capital via tokens. These tokens can be exchanged for others in the Ethereum infrastructure.
Brave
One of the biggest issues of internet advertising is that the stranglehold that Facebook and Google hold on the market. Overwhelmingly, advertisers have to go through these giants to get their products advertised to consumers. The advertiser has to pay Facebook and Google for this and it is not the most effective method. Because of the bombardment of internet advertisers, many computer users have opted for advertisement blockers to stop the deluge. This move has cost advertisers millions of dollars, passing this cost on to consumers while still making Facebook and Google all the richer.
An alternative to this system is the Basic Attention Token (BAT) offered by the Brave browser. We talked about many of Brave's wonderful features in "A Brave (Browser) New World." But what we didn't touch on is the unique advertising opportunity Brave offers. This browser is without peer for out-of-the-box ad blocking, keeping pages clean, and preventing cross-site trackers. Despite this, Brave offers advertisers an even better opportunity: users can opt in to view ads in exchange for the BAT cryptocurrency. Effectively, users are paid to view ads. BAT can then be used to support content creators or cashed in for gift cards.
And the ad being pushed to the user and how the user responded to the ad, is then tracked through the blockchain. Advertisers have greater confidence that their ads were viewed by the intended audience and how the audience then reacted to the ad, clicking the link to learn more or closing it out.
Blockchain beyond Cryptocurrency
While Nakamoto originally envisioned blockchain, he or she or they were responding to the global financial crisis. As such, it makes sense that the first-ever blockchain would be a cryptocurrency. Nakamoto wanted money that we could trust without banks and governments. And his Bitcoin has gone from being worthless to being able to buy a nice automobile.
However, the underlying blockchain technology has far greater ramifications than anyone could have thought possible. Some experts in the field (such as Alan Norman and those writing for the Harvard Business Review) advocate that blockchain will do for trust what the internet has done for information. Recall that the internet has been around for over fifty years, while the blockchain has only been around for a decade.
First, a great example of the future of blockchain will likely be in how governments conduct elections. Especially in our modern political landscape, with frequent calls for voter fraud, the blockchain could transform elections. This technology would make it incredibly simple to both ensure voter eligibility and legitimacy while maintaining confidentiality. It could also be done safely and securely from a computer or smartphone at the users' convenience rather than at polling places.
Second, and likely very valuable to our clients, blockchain could be used by patients. Each patient's entire medical history could be coded into a blockchain. Patients could then offer temporary keys to medical professionals so that they could offer treatment. All interactions with this information could be logged to ensure confidentiality. And these keys could then be revoked when a patient changes doctors.
Third, in manufacturing, the blockchain can be used to track many aspects of the supply chain. This implementation is being done now in the diamond industry, where shortly after diamonds are mined, they are added to a blockchain, such as those by Everledger. This blockchain follows these diamonds from when they are bought and sold, cut, or set in jewelry. As such, can show off these beautiful gemstones and know with near 100% certainty that these were from a conflict-free zone and not a blood diamond.
Fourth, entire digital works of art can be bought and sold via the blockchain. While paintings, drawings, sculptures, and other works of art are truly one of a kind, this same scarcity didn't apply to mechanically reproducible works like books, photographs, and movies. And this was especially true for digital items. On the internet, texts, images, music, software, and more can be copied with ease. However, via the blockchain digital artists can create non-fungible tokens. Like cryptocurrencies, each of these has an entire blockchain distributed ledger that tracks who has the real digital artwork vs. what a knockoff or counterfeit.
CLOSING
We are still in the early days of blockchain, but even now companies and countries are investing in this technology. Like the internet, there will be organizations that will adapt to this new era and thrive. There will be companies that didn't exist before 2008 that will one day be household names, doing for blockchain what Google and Facebook did for the internet. And there will be big-name companies that will be unable to adapt to the new normal and will die in obscurity like Blockbuster and Borders.
As such, now is a perfect time to begin investing in blockchain. When you want to talk about what blockchain means for your company, reach out to us. We are at the dawn of our next digital evolution. And we are here to walk with you into this new age.
CALL-TO-ACTION
[1] A further criticism of proof of work is that overwhelmingly the payment for all this electricity needs to come from fiat currencies such as dollars, Euros, Yen, etc. As such, making this money a requirement for the cryptocurrency instead of its replacement.