Episode 6 – Back to Basics: What is Blockchain?

“Here I have a block. And here’s another one. And another. They’re linked forever in an unbreakable chain. Each one has been embedded with data that cannot be rewritten after the fact. But see how easily I can just remove this one block and break that chain? Now imagine this is digital, each of these blocks is carrying vast sums of financial data. Nobody can do what I just did, the chain can’t be broken BUT anybody, anywhere can inspect it and see exactly what’s going on at any moment in the chain’s history. That, in a very very simple way, is a blockchain. And that very simplicity is why it’s so powerful. But of course it raises many more questions as well, like what can we use it for, why hasn’t it been possible before and what exactly do we mean by consensus? If you’re the kind of person that demands to have ruddy answers then you’ve come to the right ruddy place. Because this… is School of Block.

Way back in the mists of time… well, a few weeks ago… we touched on blockchains in Episode 4 “What is a Cryptocurrency?” If you’ve not watched that yet then I recommend you go back and brush up. But if you already have and have since forgotten, or simply can’t be bothered… Let’s do a quick recap. 

Any form of financial system needs to record how much people are spending, and how much they’re receiving. Historically this has been done using a ledger. Which, at its most simple, is just a table with two columns. One for transfers in, one for transfers out. You used to get one of these sent to you every month, before everything went paperless. Bank statements! Remember them? 

Now try and imagine that, instead of one unique source of truth, there are thousands of identical copies of that ledger, spread all over the world. Any time a transaction occurs it’s broadcast to each and every one of them with the new state reflected accordingly, across all instances, instantaneously. And each piece of paper is as OLD as time itself, having a record of every transaction that’s ever been made in this financial system. It’s basically the longest receipt you’ve ever seen – and growing rapidly as new transactions occur. 

Each place that stores one of these ledgers is called a NODE – essentially a computer running software specific to the blockchain. Best of all, anyone can run one and actually earn rewards for doing so. The ledger, well that’s the BLOCKCHAIN. And because it’s spread out across many different nodes all over the world we call it a distributed ledger. Which is why you might hear people talking about DLT, which isn’t a new lunchtime classic but stands for Distributed Ledger Technology. Not all DLTs are blockchains, there are some pretty fancy technical ideas out there which don’t use blocks but the vast majority of them use the same system originally devised by Satoshi Nakamoto.  

Now imagine entries in a ledger are written in pencil. If someone comes along with an eraser it would be pretty easy for them to alter the state of the Ledger to anything they wanted. To cook the books. But not here. In blockchain the network will reject any copy that doesn’t match the others as being suspect. And this system is completely transparent and verifiable by you, me, anyone with a web browser. We can examine any given copy of the ledger and know that it represents an up to date record of all transactions ever in this system.

We talked about the double spend problem in Episode 4, so won’t go into it again here – only suffice to say that you can’t spend your money or tokens twice in a blockchain managed ecosystem. Each payment is unique and so is each part of each token you spend or receive.

Now if you’ve ever tried to send some crypto anywhere, you might have noticed it takes a little while for the transaction to get confirmed. This is the time it takes the blockchain to verify that you haven’t tried to spend the same tokens twice, what’s known as FINALITY. This varies between networks but whenever you send a transaction the blockchain will tell you how many confirmations are required for finality and how far along you are in that process. Have you ever seen that with your own bank?

This is known as the CONSENSUS system and it’s what makes a functioning BLOCKCHAIN possible. Because, while decentralization is a huge plus point it still creates some major headaches. How are any decisions made? How does anything get done?

If you think of a normal centralized organization, all big decisions are taken by the leader or a board of decision makers. This isn’t possible in a blockchain because a blockchain has no “leader”. For the blockchain to make decisions, they need to come to consensus using “consensus mechanisms”. While voting just settles for a majority rule without any thought for the feelings and well-being of the minority, a consensus on the other hand makes sure that an agreement is reached which could benefit the entire group as a whole. 

But before we get too ahead of ourselves, now we’re on top of what a blockchain IS, let’s go back – right back to 1982. In a world where there was no Justin Bieber, Justin Timberlake was still in nappies, when a young computer scientist by the name of David Chaum wrote a dissertation titled “Computer Systems Established, Maintained and Trusted by Mutually Suspicious Groups”. 

His big idea was thus: a system could be verifiable from end to end, even if you didn’t trust the other parties in the network, the system would be verifiable from end to end. And this is what’s meant when you hear the word ‘trustless’. Not that it can’t be trusted, just that there’s no trust required at all. No funny business possible. Chaum’s vision was that this could create a secure voting system, where individual ballots could be kept private but anyone could verify that the tally was counted correctly. Quite a feat. 

Chaum’s protocol was the seed of the idea that was to become blockchain. Then, a whopping 9 years later, mathematicians Bayer, Haber and Stornetta proposed adding MERKLE TREES to the design. No, not fruit trees that grow you German chancellors, but a clever way of incorporating more data into each block of the chain. 

Such is the length of gestation for this wondrous innovation that N-Sync was ancient history and Bieber was already besmirching the charts when our favourite anonymous enigma SATOSHI NAKAMOTO implemented the first functioning blockchain in 2009. BITCOIN.

Why did it take 18 years for the smartest minds in computer science to get from Merkle Trees to a functioning blockchain? Because of the Byzantine Generals Problem.

THE WHAT!?

Stay with me here. It’s going to make sense, I promise. 

Imagine a military operation in the East Roman Empire – Byzantium, more than 1,000 years ago. Several byzantine generals surround the city in separate camps. In order to successfully take over the city, they all have to collaborate and act at the same time. But what if they disagree? What if one of the generals decides not to attack, or to attack at a different time? What if one decides their agenda is best served by saying they’ll attack – and then not doing so?

This failure is known as a Byzantine Fault, and represents a situation in computing where it it is unclear whether a component in a network is working properly or not. For the purposes of the metaphor, each ‘general’ represents a NODE. And the complexity of this problem is why it took 18 years for anyone to solve it. 

Ultimately Satoshi’s creation of the PROOF OF WORK system enabled successful CONSENSUS amongst the nodes – or generals – by rewarding them according to which one solves a mathematical ‘proof of work’ problem to create a new block every ten minutes. 

This block is TIME-STAMPED and the other generals can then easily and individually check that the new block has been correctly mined, and reach agreement on whether to add the new block to the existing blockchain. 

The system is chronologically enforced as each transaction receives a code – or HASH – containing the TIMESTAMP of the previous block – thus forming the chain.

Now this is why if you’ve ever tried to send some crypto anywhere, you might have noticed it takes a little while for the transaction to get confirmed. This is the time it takes the blockchain to verify that you haven’t tried to spend the same tokens twice, and typically six confirmations from different nodes are required to make sure the transaction is complete and fully legit. This is how important a functioning CONSENSUS system is, as it stops rogue byzantine generals messing with the blockchain and maintains its integrity.   

One more distinction to make is between public and private blockchains, also known as permissionless and permissioned blockchains. Both are distributed ledgers, run on consensus mechanisms and theoretically immutable, that is to say – no rogue byzantine generals. But while permissionless – or public – blockchains allow anyone to transact and join as a validator, permissioned – or private ones – do not. These permissioned blockchains might be used by companies like Maersk to manage their shipping logistics, and they might not want to have their blockchain transparent and anonymous. They may also want centralised control and governance. 

But this does not apply to the permissionless ecosystem in which all the crypto tokens we know and love exist. So we can see how what was originally envisaged as a secure yet transparent voting system in 1982 has evolved into a sophisticated consensus mechanism that is the fundamental building block of all cryptocurrency. Those voting roots are still embedded in every blockchain out there, just functioning in a slightly different way. 

THE EVOLUTION OF BLOCKCHAIN

And speaking of different functions, the evolution of blockchain doesn’t end in 2009 with the launch of Bitcoin. That’s because Bitcoin is generally considered to be a FIRST GENERATION blockchain. Here the focus is primarily around value transfer, and whilst the protocol has seen some upgrades in the last 12 years, the blockchain design is still fundamentally the same. 

But as time went on, developers began to believe that a blockchain could do more than simply document transactions. Vitalik Buterin first proposed Ethereum in 2013 with the idea that assets and trust agreements could also benefit from blockchain management. 

The major innovation in Ethereum was the smart contract, which could self manage on the blockchain without outside input, able to trigger when certain pre-set conditions are met. This APPLICATION LAYER on the blockchain defined the SECOND GENERATION  of blockchain protocols.

And now we’re starting to see the THIRD GENERATION, defined by improvements in scalability, interoperability with other chains and advances in governance. Examples here being tokens like Polkadot and Cardano, although it should be pointed out that the second generation chains are developing quickly too and we haven’t still seen the limits of what can be achieved with very smart, smart contracts.

So there you have it. What is BLOCKCHAIN? A transparent, verifiable, immutable record of all transactions made within a given system, of which no single person or group has control. It is fundamentally DECENTRALIZED and once an entry is made, it will be on there forever. It’s the longest bank statement you could possibly imagine, carved into hardened digital granite.

And for what it’s worth, blockchains aren’t just clever stuff when it comes to digital money – they’re the next generation’s dog’s danglies when it comes to bizzo as diverse as:

SHARING MEDICAL DATA, TRACKING MUSIC ROYALTIES, PERSONAL IDENTITY SECURITY, MONITORING SUPPLY CHAINS AND LOGISTICS, VOTING – yes, big proper vote your next government into power type voting, ANTI MONEY LAUNDERING, CONCERT TICKETS, QUANTIFYING ADVERTISING PERFORMANCE and even REAL ESTATE CONTRACTS

So you’re going to be hearing much, much more about blockchain in this decade and the next. Whether it’s the private chains set up by IT companies or banks, or the public chains you’ve already heard of like bitcoin – this is one cat that’s not going back in the bag. And next time we’ll be going deeper into some of the most important uses for blockchain in  the world right now.”