Understanding The Blockchain

I’ll be the first to admit that I am no blockchain expert. I’m looking forward to seeing how my views change on this in the weeks, years and decades to follow. I hope to get constructive criticism because my real goal with this post is to better understand the fundamentals – hopefully, others can help me. With that said, this is such a new concept that even my word processor doesn’t recognize the word “blockchain” :).

The emergence of blockchain technology is somewhat baffling to me and probably most people. It feels like it’s really important, but I can’t quite get my head wrapped around all of it. Yet.

It can be useful to do some introspection from time to time. Hopefully, this introspection on why I have been struggling with understanding blockchain technology’s implications will resonate with you. It’s already helped me understand what I do and don’t know, and why.

Blockchains Are Now Where The Web Was In The Early 90’s

For some of us, we can remember a time before the “Internet”. We had to slowly understand what the “net” was, what “surfing the web” was and what browsers, ISPs, bandwidth and a host of other things were. Much of it is second nature to us now, or so mature that we have again been able to thankfully forget the distinction between the technicalities of all the competing tech of the time.

Google, circa 1997
Google, circa 1997.

Many Paradigms

There are quite a few paradigms that you need to wrap your head around. Because this is still an emerging field, a lot of the discussion revolves around the technical aspects of implementing blockchains. This is why, if you follow cryptocurrencies and related topics at all, every other week there’s some consternation around a “fork” of one technology or other. A fork happens when developers of one technology are using the underlying technology of another protocol (e.g. Bitcoin) and take it in a new direction, hoping for adoption. The forks that seem to cause the most nervousness are those that seek to usurp the original technology that they forked from. Forks and new systems also seem to be centred around improving the technical aspects of them, but can also be because people want to take a protocol in an entirely new direction.

What this means for you, is that you are hearing about the technical arguments surrounding blockchain, without any basis for understanding the paradigm we are moving from, never mind which we are moving to. So don’t worry too much. Popular protocols will emerge, become useful in your daily life and then you’ll start understanding the scope of what can and can’t be done with blockchains. You’ll also then become aware of when a new blockchain is available, or the one you are using “forks” and an alternative version is available – at which point you’ll be able to decide whether to stick with you current chain, or move to a new one. Or use both!

Protocol

Maybe you’ve heard of this before a few times, maybe even used it. However, in blockchain circles, this word is used A LOT. That’s because the implementation of a blockchain is just a set of agreed rules, or protocols, that the system uses to operate. These protocols are not subject to any external laws, norms, standards or anything else. The protocols are set down by those developing it. That’s also why there isn’t “the blockchain”. Just “a blockchain” , as one of many. Even I can sit down now and develop a blockchain protocol to suit my needs. Whether I can get anyone else to adopt it is another story!

You may not realize it, but email is a great example of a protocol. Email needs to be sent between different systems and servers, each with their own technologies and processes, but the standard protocol allows each email client who chooses to (and why wouldn’t they?), to set up their systems to process the emails when they arrive. Calendars have the same thing. That’s why I can send an Outlook calendar invite to someone using Gmail and the two email clients treat it the same way.

Distributed, Secure, Immutable Database

This is a central component of a blockchain. The first problem you have is your working knowledge of databases is basically zero. The most experience you have with personally designing and maintaining a database most probably looks like this:

Microsoft Excel
Excel, baby!

Distributed

You may have some knowledge that Google and Facebook have large data warehouses that store data centrally in secure locations. You may even have heard of content delivery networks – which is what a lot of companies use. A company stores copies of data on many different servers around the world, to make sure that you get your content really quickly by accessing it from your nearest server. This is how YouTube and Dropbox are able to get data to you super fast no matter where you are. However, all the servers belong to the individual companies. The databases are not shared between companies or individuals.

In a blockchain, exact copies of the same database are stored on many different servers i.e. “nodes”. It’s the same database across all of them, storing data that the nodes neither own nor have access to. Each time data changes, all the nodes get the same copy of the database once a majority of them agree that the transactions in the new database are valid. Destroying one, or many, nodes will not affect the blockchain. The entire history of transactions will be there. As more nodes join the network, the blockchain becomes ever more distributed.

Secure

As mentioned above, blockchains store copies of the same data on multiple servers (as with content delivery networks), but the difference is that each of these servers, or “nodes”, can be hosted by anyone (as far as I know). Using Bitcoin as an example, the transaction records are stored on a lot of different servers owned by different people or companies. This is unlike banks for example, who only store transactions on their own servers. I’ll try not to use Bitcoin too often as an example, because it’s such a specific use case that may confuse you further – more on that later.

Distributing copies of the database is a way of securing it. Weird, right? All the nodes talk to each. The security feature is that the majority of nodes will need to agree on which version of the database is correct before they copy it. This means that as the network grows and more nodes come online, the more secure it becomes. The scenario is this – imagine someone hacks one of the databases and changes the data. They would need to do this for at least 50% plus one of however many nodes there are, and within an extremely short timeframe. There is practically not enough computing power in the world, under singular to group control, that could enable this to happen. Maybe hackers (private or Government-sponsored) could make a concerted effort to hack a bank or any other central database, but they just couldn’t do it to a widely adopted blockchain.

Immutable

A blockchain also stores a copy of the database which is immutable i.e. records cannot be changed. I am not sure if this is a necessity because I imagine I could just make a blockchain protocol which allows changes to past records. Something tells me this defeats the purpose though, maybe it makes node consensus impossible or insecure.

Anyway, this property of immutability means that only new records are added to the database. If you want to edit an old transaction or record, it needs to be done by entering a new one that either reverses or overrides a previous record. This is one of the more nuanced properties of blockchain databases, and I’ll need to write a separate post about the implications of this for more widespread adoption in other industries outside of digital assets. A good way to think of it is that every record is recorded forever.

Cryptography

You will often hear about blockchains being “cryptographically secure”. This introduces another area where you have no expertise i.e. cryptography. I think of it as encryption of each database at every node, as well as on the transfer of instructions between devices/clients and nodes when a transaction takes place. I didn’t include cryptography in the section above on the “secure” aspect of blockchain databases, as cryptography can be and is applied to many other databases as well.

Distributed or not. Where it does help directly is that anyone hosting a node can’t hack into the copy of the database they host and even it if they did, they can’t do much with the info. The little bit I understand of cryptography makes it seem like both a science and an art. For most of us, its ok to assume that cryptography experts know what they doing e.g. even the might of the US Government couldn’t get Apple to let them have access to data on an iPhone (as far as we know:) ).

Tokens, Coin Base And ICO

This is potentially a large topic but luckily for you, this is where I understand the least – so I’ll be short :). In essence, a token is a way of giving you some stake in something and allow you to trade it – it’s literally a token. Not sure how else to say that. A coin base is the total collection of tokens. As an example, your dollar bill is a token, and the coin base is in a way, the US economy. From what I gather, not all blockchains need tokens, unless the blockchain is the basis for a currency. This will be explored further when I explore the application of blockchains for physical assets in another post.

The coin base design can take any form – it can be grown to a finite volume (like Bitcoin, with its 21m bitcoin limit), it can include inflation and deflation, it can be issued all at once and then decrease over time, it can be designed eventually be bought back with real money and then disappear, or grow – it all depends on what the blockchain is being used for, what the purpose is.

This is where new business models will come in. Unfortunately, there seems to be the potential for a lot of scams here, similar to the dotcom boom. Luckily, I’ve found that it is possible to discern how some tokens will derive value over time.

When you hear of an Initial Coin Offering (ICO), or Initial Token Offerings (ITO), this is where companies are pre-selling tokens for later use on their blockchain, or to trade on other blockchains. Whether those tokens will be worth anything to anyone else at any point in time, is left as an exercise to the buyer!

Data Doesn’t Have To Be Just Data

What you do know about databases is that they store records of things, right? Well, here again, the blockchain goes beyond that. Data that is stored can also be basically anything, including instructions i.e. code. This is where the idea of Smart Contracts come in. The data that’s held in the blockchain doesn’t just have to be transactional i.e. 10 things of this go from Account A to Account B. Logic (in the form of coded instructions) can also be built in. This is what allows contracts to execute on their own without human intervention.

As a simple example, you could trigger that certain transactions take place only when certain conditions are met. Those conditions will be jointly agreed by the contracting parties and automatically executed according to the terms. And remember, the data is immutable. No one can go back and retrospectively change the conditions. New conditions would need to be agreed upon and entered onto the blockchain. Until then, the existing contracts will continue to be executed. Kinda-of weird right?

Dealing Directly With Non-trusted Parties

This is also a weird one. Blockchains are most-applicable where there is a trusted intermediary necessary – and the blockchain replaces them with this distribute, secure, immutable ledger (database) of records and a protocol that goes along with it for how parties interact with it.

We’ve become so conditioned that we ONLY deal with trusted parties (especially over the internet, amirite?) that it can be quite a mind shift to now be able to do away with the trusted intermediary. In this case, I am forced to use banks and Bitcoin as an example. If I want to send my money to you, I will give my bank the instruction to do so. If my money disappears, or the transaction never occurs, I hold my bank responsible, not you or anyone else. Now with Bitcoin, there is no bank or other central authority. I can send and receive bitcoins over the network without needing a trusted legal entity to verify anything. The network does all the work and isn’t owned by anyone. Everything is verified and is done at a fraction of the time and cost of traditional intermediaries.

This is another one that I need to ponder over a bit longer.

Blockchain Is Well-suited To Transfer Of Digital Assets

So far, the best examples of blockchain use deals with digital assets such as currency, music and so on. From your standpoint, it is hard to picture how things will be better because the result of the transaction is the same to you on many levels. Whether you pay for something via credit card, or download something from the app store, or pay for music streaming via Spotify – the process will probably look or feel the same from the point of your imagination. In the case of music, for example, it will, of course, make a HUGE difference to artists when they can release music via blockchain-based markets and do away with layers of middle-men, whilst also gaining a huge amount of insight into the purchase patterns of their fans.

Much of the excitement seems to be “behind the scenes” of many industries, which is why as a layperson, it’s hard for you to understand why there’s such a fuss.

I am planning another post dealing specifically with how blockchain can be used in non-digital assets, especially as it relates to my field of expertise – sustainability and sustainable development.

Bitcoin Is A Special Case, Not A General One

The most successful blockchain implementation to date is definitely Bitcoin. It’s the most recognized name, has been going for many years and has a sizeable market cap. The “problem” with this is that it is a very specific use-case i.e. cryptocurrency. What’s more, it's not even THE cryptocurrency. There are many others using blockchain technology that play by completely different rules. So when hearing about Bitcoin you are, from an implementation perspective, only hearing about one tiny niche in a yet-to-be-discovered endless array of applications for blockchain technology. Everything you are hearing about bitcoin, cryptocurrency, smart contracts and blockchains are also all being mixed together and interchanged. There’s not yet any intuitive understanding generally about the significance of each topic in each context- everything is just lumped together.

Remember when the internet was just taking off, and everyone had a “weblog” for the first time? Imagine traveling back in time and trying to explain that the internet can be used for more than just blogs. Blogs then = Bitcoin now.

And talking about Bitcoin being a “niche” product…

There’s No Ecosystem Yet

I think this is the biggest reason why this generally seems confusing. We are trying to picture the applications for a world where many of the services just won’t exist if blockchain is adopted in a given sector, or for services and products that will only be made possible because of blockchain technology.

Travel back again in time (getting good at this, hey?) to the pre-internet age. Imagine trying to tell someone who has only JUST learnt about about a blog (“What, I can just post something and anyone can read it? No newspaper editor? No submission criteria? Am I allowed to write nonsense? Are cat pictures allowed?”) and then try to explain that the internet will enable so much more. Streaming video, music – basically the on-demand content of any sort (“What’s on-demand mean?”). Instant messaging, pics, Snapchat, 1bn people using Facebook (“Sounds lovely!”), e-commerce (“Is that like electronic mail?”), the gig economy, outsourcing (“Huh? You’ve lost me ages ago”), online education, covering every topic, lots of it for free (“No way, people will always want a University education!”) and so on.

Beyond Democracy

I think this idea certainly deserves a lot of thought and its own post for another day.

I think blockchains have the power to move society beyond democratic rule as we know it. Maybe it will be called post-Democracy, or True Democracy – who knows? The essence of progressing human development and improved standards of living are tightly tied to trust. At the moment, societies place trust in centers of power, be that governments, corporations or individuals, all of whom have a long record of abusing that trust.

When broad sections of society are able to exercise freedom of choice by entrusting blockchains (that no one owns, no one can infiltrate, change or turn off, and can be easily joined or abandoned without personal sacrifice), and the order-of-magnitude improvement in the well-being and freedom experienced by those participating in these “digitised trust” systems becomes apparent – then there will be no stopping it. Don’t expect that the current centers of power will just roll over.

The End Of The Beginning

You get the picture – I think there’s a lot stacked up against the average person grasping the effect that blockchains will have on the world. We’re only just out of the starting blocks. Don’t worry too much about missing out – the 90s dotcom bubble showed us there will be more busts than booms and the real value for most of us will become apparent over time.

Keep your ears and eyes open and keep asking questions until you get satisfactory answers!

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