What Is the Blockchain?

What Is Blockchain – CONTENTS

1. What Is Blockchain?
2. What Is Blockchain Good For?
3. How to Make It So There's Only One Digital Hamburger Left
4. Who Will Control the Accountant?
5. Leave It All to the Users
6. Economic Experiment Unprecedented in the World
7. Magic With Virtual Burgers
8. Examples of Blockchain Usage

What Is Blockchain?

The blockchain is often referred to as a distributed database (think of a giant Excel spreadsheet combined with Bittorrent) that stores all the records we put into it forever. But an even better analogy is an endless book of accounting records. Neither concept, however, goes far to explain what makes blockchain so unique. Blockchain is not actually as revolutionary a new technology as it is sometimes thought - all the elements it uses, i.e. the Internet, cryptography and the transmission protocol, have been with us for decades (cryptography even much longer). What is so revolutionary about blockchain is not the technology itself, but the way it uses existing technology.

What Is Blockchain Good For?

Blockchain has made it possible for people who don't trust each other to exchange or create records over the Internet in a completely secure way, without any intermediary (e.g. a notary, a bank, a database administrator of an MMO game). Instead of a central administrator, its users are directly involved in its operation. Anyone can be involved both directly in the verification of transactions (cryptocurrency mining) and in monitoring those who verify transactions on a given blockchain. All you need to do is run a so-called node, which is nothing more than an actual copy of the blockchain database.

In short, blockchain is a very specific form of database. It is distributed, has no central administrator, can be read by anyone, but can only be written to by consensus. It is created through voting of financially motivated participants of the network (at least in the case of public blockchain, there are other concepts). This makes it possible to store data or transactions securely and permanently without the need for a central monitoring authority and therefore without a single point of failure.

What about Blockchain and Cryptocurrencies?

Validation is handled by the network itself. Users who participate in the validation of transactions by voting are rewarded for their activity in the form of network tokens of the blockchain (better known as cryptocurrencies, such as bitcoin, ethereum, litecoin or monero). These tokens are now often easily exchangeable on specialised exchanges for government-issued money (referred to as fiat by cryptocurrency enthusiasts). The problem is that their real value is very difficult to determine and their current price is therefore largely speculative. So blockchain is actually replacing networked markets. Among its important aspects from a technical point of view are its stability, simplicity of specification and its persistence over time (it is extremely difficult to falsify).

Blockchain as a Tool in the War Against Censorship

Sounds a bit like a fairy tale. In a public decentralised blockchain, it is not possible for the database administrators or hackers to make unauthorized modifications to the records. Moreover, it allows two parties who do not trust each other to conduct virtually any conceivable transaction without the need for a trusted intermediary. Blockchain transactions are not vulnerable to censorship, as happened in the world of traditional finance when Visa, MasterCard and PayPal began blocking donations to Wikileaks accounts in 2010. Compared to traditional databases on a central server, it also does not suffer from "downtime", or outages (due to network maintenance, power outages, etc.).

Now stop! I wanted to clarify what blockchain actually is, and so far I am complicating it by introducing terms like nod, mining, cryptography, distributed database. Let's try it in a completely different way now - using an analogy. There are many analogies to the blockchain; cryptographer Nick Szabo, who is suspected of being a co-author of bitcoin, for example, compares the blockchain to amber in which a dragonfly got stuck in the Mesozoic era and has remained trapped there forever. Compared to recording media, it is also often compared to stone - what is set in stone is very difficult and expensive to destroy, and certainly cannot be done without leaving traces. But we will use a completely different analogy, much simpler.  

How to Make It So There's Only One Digital Hamburger Left

Imagine the simplest transaction in the physical world. I bought a hamburger for lunch, met you (an old friend), and since you look hungry, I offered you half of it. There was you, me, and a hamburger, half of which was left at the end of the transaction. Neither of us needed a middleman to oversee the transaction to ensure the integrity of the process.

Now imagine that the whole process is to take place in the digital world. So I bought a digital hamburger and there was a problem. If the digital form of the hamburger is to retain its transactional value, it must not be easily copied. Or rather, we need to somehow ensure that only one copy of it will ever exist (until someone eats it and it disappears completely). Otherwise, I can multiply the hamburger and give the same half I gave you to someone else, sell it or eat it myself, and no one would know anything because everyone would have their half of the hamburger. Here we come to the so-called double-spending problem - someone could pay twice with the exact same asset.

Blockchain and the double-spending problem

Anyone who has an idea of, for example, how computer networks work, must now beware, because it is quite obvious to them what a fundamental problem we are facing. Data is commonly moved by copying. For example, if we send an email to someone, by sending it we create a number of copies - one is created on each mail server through which our message travels, and at the end another copy ends up in the recipient's mailbox, on their hard drive, and so on.

The problem of unplanned copying of digital objects that were supposed to derive their value from their rarity, by the way, is often suffered by virtual economies in MMORPGs. In one of the very first titles of this kind (Meridian 59), a bug that allowed digital apples to be easily multiplied and then exchanged for in-game currency caused the entire in-game economy to collapse. The multiplayer of the now legendary Diablo, for example, also suffered from the unwanted proliferation of digital objects. Our traditional financial system deals with the problem through central supervisory authorities that intervene in the event of an attempted similar fraud. But this is also not an ideal solution for many reasons.

Who Will Control the Accountant?

Let's go back to our transaction. What if we had some kind of ledger (blockchain) that contained all the transactions made with the digital burgers issued, and someone to oversee the accuracy of the records? Every transfer of ownership of a hamburger or a part of it could be easily traced and verified and our accountant would guarantee its accuracy. Problem solved?

Unfortunately, not really, because the problem lies in the very trust in the integrity and accuracy of our accountant. Suppose he is careful at first, but later he may let his guard down. If he then realizes his mistake and finds that no one else but himself has noticed it, he may later be more inclined, for example, to accept a bribe to turn a blind eye somewhere and make the double-spending possible. It can also edit older records for its own benefit. Another problem can arise when our administrator starts to play censor and excludes someone who rubs him up the wrong way from the transaction process at his discretion. How does blockchain address this?

Leave It All to the Users

What if we made the ledger (blockchain), or a current copy of it, available to everyone and left the actual recording of transactions to the users? They will verify the transactions until one page of the ledger entry is completely full, then file it, seal it with a unique key agreed upon by all the accountants in the group, and thus ensure that no one can interfere with its contents in the future. This key will also provide continuity, as each subsequent page will need to contain the key fingerprint of the previous one. If a number of pages are created in this way, it will be virtually impossible to spoof pages with fake transactions into older records (because the keys would not be related).

Imagine this imaginary page as a separate block that is tied to the entire transaction history via the key of the previous block, and you get a rough idea of what a blockchain looks like, and where its name actually came from (our ledger is a chain of blocks).

Suddenly you can't so easily donate a hamburger you've sold in the meantime, because the attempted record is not synchronized with the database copies of all other members of the network. Respectively, the deeper the record of the hamburger you sold is buried in the blockchain history, the less likely a similar modification is. Moreover, the system is not overseen by one central authority that could decide who can participate in transactions or enrich themselves with a few burgers in violation of the rules, but on the other hand, all participants can do so.

Economic Experiment Unprecedented in the World

But how to make sure that network members are sufficiently motivated to become active accountants of the system who are willing to check and update their records? In the first case, it's a bit easier, as we only need to have a valid copy of our digital ledger, or blockchain, to confirm the correctness of older records. Checking the honesty of those who verify the records is then good to ensure that the value of our own digital burgers is preserved.

New transactions verification

But when it comes to verifying new transactions on the blockchain, there is already some work to be done. What if, for example, a small reward of let's say 12 and 5 virtual hamburgers was distributed to each accountant for each page of the book described, and it was also the only way to add more digital hamburgers to the system? This will not only ensure a willingness to create records, but could also reduce the number of fraud attempts, as not many people will want to devalue their own wealth.

Is there another way to ensure that one super-performing accountant does not collect and sign off on the majority of transactions? Because then we would be back to the problem of central authority. And how about a little more chance involved in the whole process? For example, accountants could draw lots to see who can sign the finished transaction page. No one would be sure that it would be him.   

Of course, there are still a few technical issues to be resolved for such a system to work in practice like blockchain. For example, how do we ensure that our local copies of the "ledgers" are synchronized? How to achieve distributed consensus in case of conflicting records when there is no central authority overseeing the system to say in case of disagreement: "This option applies, and whoever doesn't like it, um, is just out of luck." And how do you detect and eliminate a fraudster in your network early?

What about Bitcoin?

Fortunately, we don't have to do this from scratch, because such a system already exists. It's called the Bitcoin protocol, it's fully open-source and uses a digital token known as bitcoin instead of hamburgers. The total number of digital tokens in the bitcoin protocol is capped at less than 21 million, making it a highly deflationary asset in the long run and the largest economic experiment in modern history. But otherwise, everything works similarly to our hamburger blockchain described above. By the way, all three problems raised in the previous paragraph are probably most elegantly solved by the so-called proof of work, which was come up with by none other than the mysterious inventor of bitcoin, Satoshi Nakamoto, but that's a topic for a brand new article.

Magic With Virtual Burgers

But let's recap what the blockchain-modelled system described above has made possible:

1. To preserve rarity even in the digital world.
2. All transactions are permanent and irreversible - if I make a transaction with my hamburger, there is a permanent and very well documented change. The hamburger, for example, is no longer mine, or at least not all of it, and everyone knows it.
3. We don't need a third party to oversee the integrity of the transaction process.

However, this is far from everything, many other benefits arise from the digital nature of our asset itself. Suddenly we are not bound by the physical constraints of our world at all. We can, for example, merge and split a hamburger almost at will, and give someone just 0.00000001 of a piece of it. Or we can create other digital goods on top of our hamburger (for example, a special hamburger used as a license plate) and use that in turn as a base layer.

We can also attach a message to the hamburger. Speaking of attaching text, why not just attach some more useful code to the hamburger? For example, a certificate of ownership of one share of a fast-food chain, a digital ID, or perhaps a smart contract code that is only filled out when all the proposed conditions are met? Blockchain in a digital world where data is transferred by self-copying has made it possible to own data that is completely unique. A seemingly small thing, but the possibilities of applying such an invention are endless. 

Examples of Blockchain Usage

What are the specific advantages of blockchain compared to traditional databases? Actually, there are a lot of them. I have chosen two for simplicity:

1. decentralized and shared control
2. non-corruptibility and immutability of records

Copyright protection

Shared control and practical non-corruptibility allow two competing parties to work together to their mutual satisfaction. This is used, for example, by the Open Music Initiative or UjoMusic, which are blockchain projects that simplify rights monitoring and compensation for musicians and rights holders (no OSA (or CPA, Czech copyright protection association) is needed).

R3 Banking Consortium

Blockchain solutions can significantly reduce tensions and power frictions, for example when forming an industry consortium, as stakeholders do not have to place control of the infrastructure in the hands of a single entity. A specific case of this happening in practice is the R3 banking consortium, which today unites 43 otherwise rival banking houses.

WWW, bitcoin and ethereum

If the network is decentralised and open enough to all, it is only a step (enough network effect) away from becoming a new public service, just like the Internet and WWW. We don't have to go far for examples, bitcoin as "Internet money", ethereum as a simple global decentralized supercomputer.

Entries in the Land Registry

Writing data into a (public) blockchain is akin to carving it in stone. This is useful, for example, when it comes to land registry entries (BenBen, Bitfury, Velox.re), which allow to eliminate fraud (unauthorized disposal of real estate, misappropriation of financial advances - payment can be included directly in the smart contract) and reduce the overall cost of registration and operation of the database.

Academic certificates

Academic certificates are a simple yet effective application. They are easily traceable and verifiable in the blockchain and also permanent (no need to issue officially certified copies as in the case of loss of the paper version).

In short, blockchain offers an extremely broad application layer and has the potential to completely change the Internet or the global economy. While this technology may remain misunderstood by many investors, users and financial experts, one thing is certain - blockchain will make a record in the history of modern technology.