Blockchain
In this article, we will discuss the mechanics of how the blockchain works, its uses and the problems it can solve. We will look into a speculative future where traditional ways of doing things are challenged and reimagined.
Introduction
Satoshi Nakamoto wrote a white paper in 2008 which first mentioned a new form of peer-to-peer electronic cash. Nobody knows whether Satoshi Nakamoto is a real person or a group of writers who used a pseudonym. The mystery of who was behind it continued with the emergence of Bitcoin in 2009 as open-source software, a type of software license which allows anyone to inspect, modify, and enhance it. The Bitcoin software enabled a digital currency that could be used without any intermediaries or governing authority. This means that currency could pass from person to person without the need for a bank or any other financial intermediary. In this way, it’s the opposite of all other forms of typical currency we know and use. Bitcoin is called cryptocurrency.
Bitcoin & Blockchain
Bitcoin, the first viable digital currency, was born on the internet in January 2009. A currency without the need for traditional banks and not governed by any central authority. It is managed through the consensus of all the users of the currency and seamlessly traversing the internet. The novel way to store, validate, authorize and move digital transactions of Bitcoin across the internet is called Blockchain. It has the potential to be a highly disruptive technology, not just in the world of digital currency but in a vast number of organizational contexts.
Anyone who wants to understand the future of the internet needs to understand the Blockchain. It has great potential and may disrupt the industries both positively and negatively.
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Challenges before blockchain?
A traditional database has a central authority that governs it means all rights to the database are owned by the organization that creates it. They can decide who can access and type of access that they can have, what to store, what to delete and what to archive. This kind of centralized authorization has two potential flaws.
First, if a system relies on a central database, this can result in a single point of failure. In other words, if either the central authority is compromised or a backdoor is exposed, the database can be subject to all manner of risk.
The second major flaw is that all power is held by the central authority. Now, in general, this is okay. For example, if you run an e-commerce website, you probably want total control over it. You as CEO decides all aspects of that environment, including shutting it down.
In most cases, humans remain the final arbiter of the validity of a transaction. We see this in most contract work. A contract between two entities completed over the internet still requires one or more central authority to validate data. For example, with a mortgage, banks must validate savings and approve loans. Title companies must validate properties. And legal professionals must validate signatures and other contractual requirements. Each one of these central authorities has a unique power that levies considerable overhead in a mortgage transaction. The transactions in the very databases all take time to process, cost money, are vulnerable to hacking, provide limited participation from those involved, require special skills, and can be error-prone.
How does blockchain work?
We’ve generally been okay with this un till now. The blockchain, however, solves almost all the aforementioned challenges. The blockchain is a new type of database. Instead of a centralized or decentralized database on one or more servers, a blockchain database is installed on individual computers used by the people who use the database. In fact, a copy of the same database is installed on every computer of every user who uses that database. In a central database, we have the database on one server in the center. In the decentralized database, it is spread out among several servers. However, a distributed blockchain database is copied to every client computer on this network. There are no database servers.
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For example, I need to update my phone number in the electronic phone book. First I make the change in the phone book database that’s on my computer. Next, my database transmits this transaction to every identical database on the distributed network over the Internet. At this point, all of the individual computers where the database resides have to agree that I have the permission to change my phone number. Since all the distributed databases already know this rule, that is, only the owner can change the phone number, they allow my change. We can think of as consensus-based permission because computers on the network have to reach an agreement before a change is allowed. Each database then appends a new block of data in the database that contains my new phone number.
Now, we’re going to go ahead and add another entry to this database. This could be perhaps another person’s phone number and now this phone number gets appended to all the other databases. It should be identical. The database itself has agreed that this is allowable and now we have a chain of blocks, we call it the blockchain, that has identical information in all of the different databases that are distributed throughout. Now, what makes this really interesting is that if somebody wanted to hack this, perhaps they wanted to change this block here by replacing it, say, with a blue block, the blockchain database is not going to permit this and the reason for that is because each row in this database right here relies on the identical row in each database previous to it. So any changes wouldn’t permit this to exist, so the integrity of the database would be broken. This is a really important quality. Blocks are only added and never deleted. All changes are simply captured as new blocks. We call this characteristic immutability. In another way, a blockchain database is an immutable database. We can think of the blockchain database as keeping track of changes, like an accounting ledger where financial transactions are recorded. For this reason, the blockchain is often referred to as a distributed ledger. First, there is no central authority. The power is now distributed across the entire network of users of the database. No single person or system can approve or deny my phone number change in the electronic phone book. Power has been decentralized. It requires the consensus of all participating computers. Since the distributed database knows that I am the only person allowed to change my own phone number, it is almost hack-proof. We are able to create these immutable transactions. A hacker would need to change the information on hundreds and likely thousands of computers in order to get the authority to make the change. This quality then ensures integrity to the database creates inherent trust. That’s why the blockchain is sometimes referred to as the trust protocol. Next, when I made the change to my phone number, the change was accepted and reflected almost immediately. A small delay does exist, only because participating requests for changes to the blockchain are queued up and processed in the order.
To summarize, this new model has no central database. A blockchain database is installed on all the computers that use the database. Any transaction in that database must be validated by all the participating members. It has the power to be almost hack-proof. It eliminates central authorities, significantly reduces transaction costs. It quickly processes complex transactions and more. To fully understand the blockchain requires us to understand its origin story, and it begins with Bitcoin.
What new opportunities does the blockchain enable?
Blockchain supports immutable transactions and currency movements like Bitcoin which is secure, frictionless, undisputed, without a central authority, and only modifiable by agreement from all the participants. Similarly, this can be extended to manage a whole range of financial assets such as stock trades, bonds, and others.
The business sector is exploring and experimenting with the blockchain. Let’s take a simple example of the challenges of proving ownership of a digital product. While digital products such as photos and music have made it really easy to acquire, store, and move across devices, the same advantage makes it really easy to copy them. Blockchain can store their copyrights and help in fighting against the illegal distribution of digital assets.
A startup called Everledger has begun to use blockchain to store information on almost one million diamonds. Each diamond is scanned to glean 40 unique points that are then condensed into a digital footprint. This is then entered into the blockchain. Each time a diamond moves say from a seller to a buyer, a new block is created and over time a full, secure digital trail of ownership is established. The adoption of this solution is growing and Everledger is attracting attention from investors. Beyond diamonds, the same tool may soon be expanded to manage and track art, expensive watches, luxury cars, and other unique items of value. This blockchain solution potentially solves a longstanding intractable challenge. For the next example, how about a venture capital firm without essential owner, where funding decisions are made by shareholders, not the Chairperson. The DAO which stands for decentralized autonomous organization raised $168 million from cryptocurrency and is entirely run by those that are invested in it. Its governance is completely transparent, unlike traditional venture capitals where functions and rules are private and opaque. The DAO has not been without serious challenges including several security breaches. Not necessarily dispelling the security promise of blockchain, but more a reflection on its particular implementation. It’s fair to say the bonus of innovation exhibited by the DAO is subject to the same teething problems that introducing any new high-risk product and service experiences.
For the final example, we’ll look at voting on the blockchain. In 2016, Colombians voted on a peace treaty between the government and FARC, the Revolutionary Armed Forces of Colombia. There were a variety of limitations on enabling the six million Colombians living abroad to participate in the vote. So an organization called Democracy Earth experimented with the blockchain to capture their voices online. As we discussed earlier, the inherent challenges of online voting in any context is proving an identity to be true. Using this new technology-enabled authenticating votes. In addition, to push voting innovation, Democracy Earth gave citizens more than a no and yes choice to the peace treaty. They were given sub-themes to indicate by vote the relative importance of each one. While the votes could not be added to the official ballot, this voting experience did give a voice to a larger group of Colombians and has triggered a rigorous debate in Colombia about the use of online voting in the future. The experiences and results are being studied by many around the world. If you’re like me, it’s hard not to be impressed by these first attempts to innovate using the blockchain. In each of these instances, historically big and difficult problems are finding a fresh and innovative solution. As with any new emerging technology, these first movers are taking risks and laying the groundwork for everyone else who follows.
Future of Blockchain
The Blockchain is a work in progress. Being open-sourced, it is continually being updated. In addition, how the blockchain is being applied continues to evolve in surprising and compelling ways. Here are just a few of the innovations that the blockchain is enabling. Up until now, we’ve been talking about discrete data being stored in blocks in this distributed database or distributed ledger as we prefer to call it. But what happens if instead of simple data, a block contains some instructions that under certain circumstances are executed? In this way when a certain blockchain transaction takes place, some set of actions are triggered. This is one of the most exciting areas of the blockchain and we call it Smart contracts. While a Smart contract actually is a software code executed on the blockchain, the terminology use of the word contract indicates that the code enforces some form of governance or rule.
There is no doubt that the future of Blockchain contains many uncertainties and challenges. While it’s here to stay, how it eventually matures, how it is widely used and under what circumstances it gets adopted are all questions to be answered in the future. These challenges are not in any particular order. The first challenge is simply that most people have no idea what the Blockchain is and have never been exposed to it. Building on that, even those that have heard about its struggle to understand it. In a 2016 survey of business executives by Deloitte, a Big Four consulting firm, 40% had little or no knowledge of it. Of those that had some understanding, many didn’t understand its potential. When a new technology emerges, the first obstacle is knowledge and understanding.
In the near term, it’s financial organizations that are grappling with the disruptive nature of digital currencies. For example, banks make huge profits on financial transactions. They are motivated to exert control. There’s little incentive for massive and disruptive innovation. Financial organizations also have huge investments in their technology infrastructure so there’s less appetite for more investment that could make their systems obsolete. It’s not an easy sell to convince all the many millions of stakeholders in the global financial ecosystem to upend what they do and worse yet make much less money doing it.
Conclusion
Within a decade, many new digital currencies appeared, open-sourced and without any traditional governance, captured our imaginations. Currencies existing entirely on the internet, completely unobligated to regulations and governance. A way to pay each other and organizations immediately and securely and without financial intermediaries such as banks. Its implications continue to confound and its long-term impact still to be determined, but underneath it, powering the new digital currency is something even more intriguing and potentially game-changing.
A new distributed database called Blockchain, a technology so disruptive to have the potential to be more impactful in the long run than the internet itself. But as we’ve discussed, the blockchain has many obstacles to overcome, but none seem insurmountable.
Reference: https://www.linkedin.com/learning/blockchain-basics by Jonathan Reichental
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