The Double Spend Problem

Historically, when we performed transactions with physical value (gold or fiat), it was a simple mechanism that involved the physical exchange of value in exchange for goods or services.

Definition of ‘Fiat’:

“Fiat money is a currency without intrinsic value that has been established as money, often by government regulation.”

We mentioned in the previous post that these types of instruments are called “bearer instruments”.

Bearer Instruments

“Bearer instruments are assets, where we automatically assume that the person in possession of this asset is the owner and there is no record of ownership.”

As these instruments are physical, it is not possible for this value to be spent by the same party more than once. Once you’ve relinquished physical ownership of this value, it no longer belongs to you.

A very simple example would be the purchase of an apple for a $1 coin; once you have handed the $1 coin over in exchange for the apple, you cannot spend that same $1 again on something else, as you have physically relinquished the value to an alternative owner.

With digital value, this becomes more difficult. You can not physically hand over digital value, so how do you keep track of the true owner of that value? This is a similar conundrum to our discussion regarding assets which can’t really be “physically” handed over (for example property). How do you prove who owns what?

A Property Double Spend Example

If I were to sell my house, (before property registers existed), I could accept $100 from Sally and give her the physical deed to the property. Before moving out, I could then accept another $100 from Bob and give him a forged version of the physical deed to the property. Then I disappear, and leave Bob and Sally to argue over who bought the house first and who is the true owner. I have essentially sold the same “unit of value” twice and a double spend has occurred.

It becomes even more complicated with digital currencies, as not only can we not physically hand over these units, but a user could create digital copies of a digital “unit”, this would dramatically devalue the currency and would result in the ability to spend more value than you truly own.

This problem of users essentially being able to defraud others and spending the same unit more than once, is what we call the ‘double spend’ — when an owner of value can spend the same unit of value more than once, and one or more of the recipients will actually not own the true original unit of value, but a copy.

A Digital Currency Double Spend Example

If I own a unit of digital currency, I could make a copy of the unit and send this to another user (the recipient). The recipient will think they have been transferred the original unit of currency, while in fact, they will only have a copy. Without a ledger that records every single transfer of value, there is no way for the recipient to verify that the ownership of that unit has been transferred into their name.

This is why when it comes to the digital transferral of value, we have always used trusted intermediaries — banks — to manage ledgers which essentially record who owns what. We trust banks implicitly to ensure that no double spends occur; that when party A, pays party B, the correct debits and credits are made, and each unit of value is spent only once.

While the banking system works, it is incredibly expensive, inefficient and creates a dependency on third parties, where ideally there would be none. Payments can often involve multiple transfers, through various banks or third parties, and each transferral incurs a cost of both value and time to the owner.

The Challenge

The challenge was how could a system be designed that eliminated the need for a third party? How could we create a system that could facilitate transfers directly between two people, while providing the recipient with the certainty that the transaction was validated?

Until 2008, this was a major problem that had never been solved, although many people tried to do so. But then Satoshi Nakamoto released the bitcoin white paper, and with it, the description of the first blockchain, that finally provided a solution to the double spend problem.

The Introduction of Blockchain

So what is blockchain? To put it simply, blockchain is a ledger, and a copy of this ledger is held on multiple servers in a network we call a peer-to-peer network. The ledger is decentralised, which means that there is no central authority of the network.

The ledger records a history of time-stamped transactions which once added to the ledger, can never be changed or deleted. Every peer in the network is incentivised in some way to participate in ensuring the validity of the ledger and preventing the double spend problem that had previously prevented the digital transferal of value without intermediaries.

Cryptography is used in a very clever way to firstly, ensure that only the true owner of value can authorise a transaction and secondly, to ensure that if anyone tampers with the ledger it will immediately be picked up. The way it does this is by linking these sequential transactions or groups of transactions together cryptographically, forming a chain of transactions. This gives a blockchain the characteristic of immutability and tamper resistance.

What we have explained so far is incredibly powerful; it provides a way for a group of entities which may not have the same interests, to collectively manage and maintain a distributed database. They don’t need to trust each other, all they need to do is trust the mathematics and code of the software that powers the network. This code and mathematics is usually open source, and this means it is completely transparent.

It is a technological advancement that provides us with a way to eliminate trusted intermediaries who usually prevent the double spend problem.

Once a transaction is validated and subsequently added to the ledger, there is no undoing it or changing the details of the transaction, it is essentially an append only decentralised database.

Everyone who submits a transaction on a blockchain has a public key, which can be compared to an account number. Every transaction submitted to the blockchain includes a digital signature. The digital signature is a special combination of the contents of the transaction and the password, which we call the private key, of the account owner.

This digital signature is incredibly secure and essentially is a very safe way for the network to validate whether the true owner of the public key gave permission for the transaction to occur. If the digital signature is invalid, the transaction is rejected by the network.

What this essentially creates is an ecosystem where no-one needs to trust each other. All we need to trust is the underlying blockchain protocol, the code that makes everything work and the decentralised nature that provides immutability and tamper resistance.

“Blockchains can help us advance from a don’t be evil world, to a can’t be evil world”.

While the initial concept of blockchain was to remove the requirement of a bank in the transfer of value, innovators, computer scientists and entrepreneurs started to realise that this decentralised ledger which Satoshi had originally applied to record digital monetary value ownership, could be used for much more.

This ledger of “value”, could represent a product in a supply and the blockchain could track the movement of value from one entity to another; it could be a security, and instead of requiring a 3–5 day settlement period, we could settle securities trades instantaneously; or it could be a record of digital identity transactions, where only the true owner of that identity can give permission for a transaction to occur.

Since its inception, blockchain has undergone significant development. While the original blockchain was built specifically for the transferal of monetary value, Blockchain 2.0 moved into the deployment of smart contracts, blockchain 3.0 utilised these smart contracts within decentralised applications and blockchain 4.0 sees the actual application and use of blockchain in industries.

In the next article, I’ll be explaining the original bitcoin blockchain and we will try to understand all of the pieces that make blockchain as powerful as it is today.

Introducing Blockchain | Blockchain Basic Part 2 was originally published in Crypto Alexa on Medium, where people are continuing the conversation by highlighting and responding to this story.

As we have moved the storage of data from physical ledgers into digital, there have been various advances in the available architectures of how we actually store data or ledgers.

Understanding the benefits of the distribution of blockchain data requires having the context of why prior data architectures were not adequate to create a blockchain.

The main data structures descriptions that you will usually find discussed online are centralised databases, decentralised databases and distributed databases. They normally come coupled with the diagram below and often contradictory definitions, which can be very confusing.

There are actually three types of decentralisation that you need to be aware of, in order to understand the difference between all of these data architectures.

Three Types of Decentralisation

Physical Decentralisation

The actual physical architecture of how the data is stored. If it is stored on more than one physical computer, this can be considered as physically decentralised. If however all data is stored on one computer, it is physically centralised.

Logical Decentralisation

Logical decentralisation refers to how the data is distributed on the nodes (multiple computers). If the data is replicated (so every copy is identical) it is considered logically centralised. If it is fragmented, so different parts of the database are stored on different nodes, it is logically decentralised.

Political Decentralisation

Political decentralisation refers to how control is decentralised. If one central entity is in control of the database, no matter the logical or physical decentralisation, then the database is politically centralised. If however control is distributed among the multiple nodes in the system then it is politically decentralised.

Centralised Architecture

As discussed, prior to computing, banks and registries used to maintain physical ledgers to keep records of ownership of value. These were centralised physical ledgers. The entire ledger was stored in one location and one entity was in charge of this ledger.

A centralised physical ledger is:

Physically centralised — There is a central location that stores one copy of the ledger.

Politically centralised — There is a central controlling entity

Logically centralised — As the data is not physically decentralised, the data cannot be fragmented.

After the introduction of computers, these physical ledgers moved to digital ledgers. These digital ledgers essentially had the same data architecture. They were physically, logically and politically centralised.

Distributed Architecture

Companies often decide to distribute their databases over multiple servers and locations. This can provide improved reliability as it removes the single point of failure in a centralised database and provides fault tolerance. It can provide overall higher computing power as well as cost reduction.

Sometimes the data in distributed systems is replicated and synchronized, but more often the database is fragmented over the multiple locations.

The key thing to remember with distributed architecture is there is still one central authority that governs the entire network. So while data that is distributed may be physically decentralised, it is still politically centralised as there is a central authority who owns the data and makes decisions regarding this data.

Apart from the often distributed architecture of large businesses operating over multiple locations, another example of distributed database architecture could be the first content delivery network, Napster. Napster was physically decentralised, logically decentralised but politically centralised (owned by a central authority).

General Decentralised Architecture

With the invention of the decentralised database, otherwise known as peer-to-peer technology, you now had the ability to have a distributed database, but without a central authority.

A decentralised network or peer-to-peer network is made up of individual computers (called nodes), which offer their computational resources to the network (storage capacity, data, processing power or network bandwidth). The rights and roles of each node in the network are equal and each node can sometimes be both a supplier and consumer of resources of the network. The more users/customers that participate as nodes within the system, the more powerful the system becomes.

The data within decentralised networks is:

1. Physically Decentralised (Many copies of the data over multiple locations)
2. Politically Decentralised (More than one controlling entity)

Prior to blockchain, networks existed which managed to achieve these two types of decentralisation, but as they were usually content networks, the data was decentralised (logically decentralised). An example would be BitTorrent or any file-sharing/content distribution network.

How is this different to blockchain?

In order to ensure all nodes within a blockchain network are aware of the latest transactions (in order to be able to properly ensure the validity of a transaction), blockchains need to be logically centralised, i.e. every node in the network had to maintain an up to date copy of the ledger. They have to have an up to date account of who owns which value. This means that a blockchain ledger cannot be logically decentralised.

Blockchain Architecture

Physically decentralised

No one person has control of the server, as if this was the case they would essentially be trusting a third party. In a blockchain, when we physically decentralise, we call every server holding data a node. Every node in this network holds a replica of data.

Politically centralised

We want to remove the trusted third party who would usually have control of the data. We do this by distributing control of the data to all nodes in the network.

Logically Centralised

The same data is stored on every node in the system. All changes to the ledger are propagated to all nodes within the network.

Vitalik Buterin noticed the confusion with decentralisation and suggested a classification network for identifying the type of data architecture you are dealing with. https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274

What is decentralisation? | Blockchain Basics Part 3 was originally published in Crypto Alexa on Medium, where people are continuing the conversation by highlighting and responding to this story.

So last year I spent some time writing a course on how blockchain actually works. I had the ‘brilliant’ (and super original) idea that I could turn my course into an online video series and would make gazillions.

Unfortunately, but also fortunately, life happened, and I was invited to work on a few incredibly exciting and promising projects (check out the Global Citizen Foundation and The Delta Studio), both of which have been launched to the world in 2019. I also helped found the Blockchain Entrepreneurs Club South Africa, and spent much of 2018 organising events for the blockchain community in SA.

I now get to spend most days at The Delta Studio, building amazing products (check out Revix), developing product strategy for new startups and working with some of the smartest people I know. I am currently working on another one of the GCF’s products (more details to come soon) which is incredibly close to my heart. So it all worked out amazingly in the end. However, I still have an entire course that I never turned into a multi-million dollar online business!

I thought that with Bitcoin deciding to come back from it’s hangover after it’s massive party in 2017, that I would share it with the world and hopefully help others understand more about the technology that I am lucky enough to work with on a daily basis.

Over the next few weeks I’ll be posting the course on my Medium channel and sharing it via Twitter, so keep your eye out. First post coming out this weekend.

Crypto Alexa Shares Blockchain Basics was originally published in Crypto Alexa on Medium, where people are continuing the conversation by highlighting and responding to this story.