I am scared of Blockchain! Help me out please?
- Tanishq Wadhwani
- Jan 17, 2021
- 12 min read
Updated: Jan 17, 2021
No matter what the context, blockchain will change everything. The big question is not if but when and are we prepared? -Harvard Business Review
The Problem
To establish trust between ourselves, we have depended on individual third-parties.
Imagine, Billu is your best friend. He is travelling to Kasol, and on the fifth day of his vacation, he calls you and says, “Bhai, I want to get high and I have run out of money.” You reply, “Sending some right away,” and hung up. You then call your account manager at your bank and tell him, “Please transfer ₹1000 from my account to Billu’s account.” Your account manager replies, “Yes, sir.” He opens up the register, checks your account balance to see if you have enough balance to transfer ₹1000 to Billu. Because you’re a rich man, you have plenty; thus, he makes an entry in the register. You call Billu and tell him, “I’ve transferred the money. Just go to your bank and you can withdraw the ₹1000 that I have just transferred.”
What just happened? You and Billu both trusted the bank to manage your money. There was no real movement of physical bills to transfer the money. All that was needed was an entry in the register. Or more precisely, an entry in the register that neither you nor Billu controls or owns. And that is the problem of the current systems.
For years, we’ve depended on these middlemen to trust each other. You might ask, “what is the problem depending on them?”
The problem is that they are singular in number. If a chaos has to be injected in the society, all it requires is one person/organization to go corrupt, intentionally or unintentionally.
What if that register in which the transaction was logged gets burnt in a fire?
What if, by mistake, your account manager had written ₹1500 instead of ₹1000?
What if he did that on purpose?
The Solution
The requirement of this method is that there must be enough people who would like not to depend on a third-party. How many are enough? At least three.
Let's assume three individuals want to give up on banks or any third-party. Upon mutual agreement, they have details of each other’s accounts all the time — without knowing the other’s identity.
1. An Empty Folder
Everyone contains an empty folder with themselves to start with. As we’ll progress, all these three individuals will keep adding pages to their currently empty folders. And this collection of pages will form the register that tracks the transactions.
2. When A Transaction Happens
Next, everyone in the network sits with a blank page and a pen in their hands. Everyone is ready to write any transaction that occurs within the system.
To make the transaction, #2 shouts and tells everyone, “I want to transfer ₹10 to #3. So, everyone, please make a note of it on your pages.”
Everyone checks whether #2 has enough balance to transfer ₹10 to #3. If he has enough balance, everyone then makes a note of the transaction on their blank pages.
The transaction is then considered to be complete.
3. Transactions Continue Happening
As the time passes, more people in the network feel the need to transfer money to others. Whenever they want to make a transaction, they announce it to everyone else. As soon as a person listens to the announcement, he writes it on his page. This exercise continues until everyone runs out of space on the current page. Assuming a page has space to record ten transactions, as soon as the tenth transaction is made, everybody runs out of the space.
It’s time to put the page away in the folder and bring out a new page and repeat the process from the step 2 above.
4. Putting Away The Page
Before we put away the page in our folders, we need to seal it with a unique key that everyone in the network agrees upon. By sealing it, we will make sure that no one can make any changes to it once its copies have been put away in everyone’s folder — not today, not tomorrow and not even after a year. Once in the folder, it will always stay in the folder — sealed. Moreover, if everyone trusts the seal, everyone trusts the contents of the page. And this sealing of the page is the crux of this method.
Interesting! How do we seal the page then?
The Magic Machine
Imagine a machine surrounded by thick walls. If you send a box with something inside it from the left, it will spit out a box containing something else. Suppose, you send the number 4 inside it from the left, we’d find that it spat out the following word on its right: ‘dcbea.’
How did it convert the number 4 to this word? No one knows. Moreover, it is an irreversible process. Given the word, ‘dcbea,’ it is impossible to tell what the machine was fed on the left. But every time you’d feed the number 4 to the machine, it will always spit out the same word, ‘dcbea.’
We’ll remember this one property of the Magic Machines throughout:
Given an output, it is extremely difficult to calculate the input, but given an input and output, it is pretty easy to verify if the input leads to the output.
How to use these machines to seal a page?
Imagine you have two boxes. The first box contains the number 20893. I, then, ask you, “Can you figure out a number that when added to the number in the first box and fed to the machine will give us a word that starts with three leading zeroes?”
First box will contain the list of transactions and the second box will contain the sealing number.
If anyone wants to verify whether the page was altered, all he would have to do is — add the contents of the page with the sealing number and feed to the magic machine.
If the machine gives out a word with three leading zeroes, the contents were untouched. If the word that comes out doesn’t meet our requirements, we can throw away the page because its contents were compromised, and are of no use. We’ll use a similar sealing mechanism to seal all our pages and eventually arrange them in our respective folders.
Now that we know about sealing the page, we will go back to the time when we had finished writing the tenth transaction on the page, and we ran out of space to write more.
As soon as everyone runs out of the page to write further transactions, they indulge in calculating the sealing number for the page so that it can be tucked away in the folder. Everyone in the network does the calculation. The first one in the network to figure out the sealing number announces it to everyone else.
Immediately on hearing the sealing number, everyone verifies if it yields the required output or not. If it does, everyone labels their pages with this number and put it away in their folders.
But what if for someone, say #1, the sealing number that was announced doesn’t yield the required output? Such cases are not unusual.
No matter what the reason is, #1 has only one choice — to discard his page and copy it from someone else so that he too can put it in the folder. Unless he doesn’t put his page in the folder, he cannot continue writing further transactions, thus, forbidding him to be part of the network.
Whatever sealing number the majority agrees upon, becomes the honest sealing number.
Then why does everyone spend resources doing the calculation when they know that someone else will calculate and announce it to them? Why not sit idle and wait for the announcement?
This is where the incentives come in the picture. Everyone who is the part of the Blockchain is eligible for rewards. The first one to calculate the sealing number gets rewarded with free money for his efforts (i.e. expended CPU power and electricity).
That’s how Bitcoin got into existence. It was the first currency to be transacted on a Blockchain (i.e. distributed registers). And in return, to keep the efforts going on in the network, people were awarded Bitcoins.
When enough people possess Bitcoins, they grow in value, making other people wanting Bitcoins; making Bitcoins grow in value even further; making even more people wanting Bitcoins; making them grow in value even further; and so on.
The rewards make everyone keep working in the network.
And once everyone tucks away the page in their folders, they bring out a new blank page and repeat the whole process all over again — doing it forever.
And that is how Blockchain works!
Except that there’s one tiny thing I didn’t tell you, yet.
Imagine there are five pages in the folder already — all sealed with a sealing number. What if I go back to the second page and modify a transaction to favor myself? The sealing number will let anyone detect the inconsistency in the transactions, right? What if I go ahead and calculate a new sealing number too for the modified transactions and label the page with that instead?
To prevent this problem of someone going back and modifying a page (Block) as well as the sealing number, there’s a little twist to how a sealing number is calculated.
In reality, to calculate the sealing number in a Blockchain, instead of two boxes, there are three — two pre-filled and one to be calculated. And when the contents of all those three boxes are added and fed to the machine, the answer that comes out from the right side must satisfy the required conditions. We already know that one box contains the list of transactions and one box will contain the sealing number. The third box contains the output of the magic machine for the previous page.
With this neat little trick, we have made sure that every page depends on its previous page. Therefore, if someone has to modify a historical page, he would also have to change the contents and the sealing number of all the pages after that, to keep the chain consistent. If one individual, out of the three we imagined in the beginning, tries to cheat and modify the contents of the Blockchain (the folder containing the pages with the list of transactions), he would have to adjust several pages and also calculate the new sealing numbers for all those pages. We know how difficult it is to calculate the sealing numbers. Therefore, one dishonest guy in the network cannot beat the two honest guys. What will happen is, from the page the dishonest guy tries to cheat, he would be creating another chain in the network, but that chain would never be able to catch up with the honest chain — simply because one guy’s efforts and speed cannot beat cumulative efforts and speed of two. Hence, guaranteeing that the longest chain in a network is the honest chain.
What if, instead of one, two guys turn dishonest?
In that case, the protocol will fall flat on its face. And it is known as “51% Attack”. If the majority of the individuals in the network decides to turn dishonest and cheat the rest of the network, the protocol will fail its purpose.
And that’s the only vulnerable reason why Blockchains might collapse if they ever will. Know that, it is unlikely to happen but we must all know the vulnerable points of the system. It is built on the assumption that the majority of a crowd is always honest.
Now technically, sealing is mining. The Magic Machines are Hash Functions. The sealing number is called ‘Proof Of Work,’ meaning that this number is the proof that efforts had been made to calculate it. Think of a single page as a Block of transactions and the folder as the Chain of pages (Blocks), therefore, turning it into a Blockchain.
A Technical Introduction to Blockchain
A blockchain, is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.
By design, a blockchain is resistant to modification of its data. This is because once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks.
For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. The blockchain has been described as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".
The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central server. The bitcoin design has inspired other applications and blockchains that are readable by the public and are widely used by cryptocurrencies. The blockchain is considered a type of payment rail.
The Conception
Cryptographer David Chaum first proposed a blockchain-like protocol in his 1982 dissertation "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups." Further work on a cryptographically secured chain of blocks was described in 1991 by Stuart Haber and W. Scott Stornetta. They wanted to implement a system where document timestamps could not be tampered with. In 1992, Haber, Stornetta, and Dave Bayer incorporated Merkle trees to the design, which improved its efficiency by allowing several document certificates to be collected into one block.
The first blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto in 2008. Nakamoto improved the design in an important way using a Hashcash-like method to timestamp blocks without requiring them to be signed by a trusted party and introducing a difficulty parameter to stabilize rate with which blocks are added to the chain. The design was implemented the following year by Nakamoto as a core component of the cryptocurrency bitcoin, where it serves as the public ledger for all transactions on the network.
In August 2014, the bitcoin blockchain file size, containing records of all transactions that have occurred on the network, reached 20 GB. In January 2015, the size had grown to almost 30 GB, and from January 2016 to January 2017, the bitcoin blockchain grew from 50 GB to 100 GB in size. The ledger size had exceeded 200 GiB by early 2020.
The words block and chain were used separately in Satoshi Nakamoto's original paper, but were eventually popularized as a single word, blockchain, by 2016.
According to Accenture, an application of the diffusion of innovations theory suggests that blockchains attained a 13.5% adoption rate within financial services in 2016, therefore reaching the early adopters phase. Industry trade groups joined to create the Global Blockchain Forum in 2016, an initiative of the Chamber of Digital Commerce.
In May 2018, Gartner found that only 1% of CIOs indicated any kind of blockchain adoption within their organisations, and only 8% of CIOs were in the short-term "planning or [looking at] active experimentation with blockchain".
Timeline of the most important and notable events in the development of blockchain
2008
Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer to Peer Electronic Cash System."
2009
The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.
2010
Florida-based programmer Laszlo Hanycez completes the first ever purchase using Bitcoin — two Papa John’s pizzas. Hanycez transferred 10,000 BTC’s, worth about $60 at the time. Today it's worth $80 million.
The market cap of Bitcoin officially exceeds $1 million.
2011
1 BTC = $1USD, giving the cryptocurrency parity with the US dollar.
Electronic Frontier Foundation, Wikileaks and other organizations start accepting Bitcoin as donations.
2012
Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.
Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.
2013
BTC market cap surpassed $1 billion.
Bitcoin reached $100/BTC for first time.
Buterin publishes “Ethereum Project" paper suggesting that blockchain has other possibilities besides Bitcoin (e.g., smart contracts).
2014
Gaming company Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.
Buterin’s Ethereum Project is crowdfunded via an Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.
R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.
PayPal announces Bitcoin integration.
2015
Number of merchants accepting BTC exceeds 100,000.
NASDAQ and San-Francisco blockchain company Chain team up to test the technology for trading shares in private companies.
2016
Tech giant IBM announces a blockchain strategy for cloud-based business solutions.
Government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.
2017
Bitcoin reaches $1,000/BTC for first time.
Cryptocurrency market cap reaches $150 billion.
JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence from Wall Street.
Bitcoin reaches its all-time high at $19,783.21/BTC.
Dubai announces its government will be blockchain-powered by 2020.
2018
Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.
IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.
Challenges
1. Developing and testing distributed applications can be difficult. Testing and debugging software that runs on a single computer is hard enough; testing and debugging software that must coordinate with other software over a buggy network is even harder.
2. Transactions of any significance can be complicated and need a robust legal framework to make them useful. That is why important data, such as that associated with bank accounts, is either heavily regulated or operated by government organizations. Blockchains, on the other hand, particularly in the way that they are implemented by Bitcoin, do not currently have that same level of legal backing. It will probably take a while for lawyers to work out a reasonable legal framework for transactions involving blockchains, especially because it is not yet clear at this point exactly what a blockchain is.
3. You need a good way to validate that the data that will be written to a blockchain is accurate. And the fact that data appears in a blockchain does not mean that the data is necessarily accurate. In the case of Bitcoin, it is relatively easy to verify that transactions are valid. IT uses public-key cryptography to authenticate transfers of Bitcoins from one owner to another, and the validity of Bitcoin transactions is checked before they are added to the Bitcoin blockchain. But in other applications, how to validate data is less clear. Next, you need a way to write the validated data to the blockchain.
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