Digesting Blockchain

Silas Neal, C. (2018). [Blockchains with binary codes]. The Wall Street Journal.

The blockchain concept has been around for quite some time now, but somehow it still remains a mystery to many of us. To the general public, this technology has been brought up mostly along explanations and discussions surrounding the hype of the cryptocurrency world. But blockchain is not only related to cryptocurrencies. It could apply to many sectors of our daily life. It possesses great potential, and that’s why we should all have a sense of what this technology can bring to the table.

The aim of the present article, therefore, is to provide some approachable explanations for this technology to anyone interested in its potential.

Let’s start with a straightforward definition, for example, IBM’s:

Blockchain defined: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.

Primarily, blockchain could be pictured as digital accounting sheets (replicated more than once and stored in different devices) that can help us follow the track of transactions and exchanges.

The potential of blockchain is that it can help provide secure, fast, and reliable information. Information runs the world, and this technology can optimize its exchange and distribution in a trustworthy manner.

IBM Technology. (2019). Blockchain Explained. YouTube.

Main characteristics:

1) Blockchain is a type of distributed ledger technology (DLT) that works as a database and organizes the data in blocks —broadly speaking, DLTs use independent computers to record and synchronize transactions in their electronic ledgers, therefore the data is not centralized in a single ledger. The hosting and recording of the transactions are not stored in a single server but in many (distributed) servers. Although blockchain is generally known to be a decentralized technology —and the present article puts the emphasis on the decentralized format—, it could eventually also work as centralized technology or with different levels of decentralization, depending on its design. The R3 Research newsletter Blockchain Byte presented by Emily Rutland states:

“A blockchain can be either centralized or decentralized. It is important, however, that decentralized not be confused with distributed. While a blockchain is inherently distributed (meaning that many parties hold copies of the ledger), it is not inherently decentralized.

Whether a blockchain is centralized or decentralized simply refers to the rights of participants on the ledger, and is, therefore, a question of design.”

2) The servers (or nodes) within the blockchain network receive the same information about a transaction. The servers are located in different computers around the network, therefore being distributed (peer-to-peer or P2P). Once a transaction is made, the new information is replicated and received by the nodes within the P2P network and added to the corresponding block open at that time. The block will contain the transaction information and each transaction will be assigned a "hash" once it has been validated by the network nodes —the cryptographic hash is like the digital fingerprint of the transaction and is represented by a sequence of numbers. A hash is a function that converts one value into another, and the latter contains a fixed amount of numbers or figures.

The information about the transaction recorded in the block can include details regarding who, what, how, how much, or when the transaction happened. The information contained in the block can neither be changed nor its hash. Accordingly, If the information in a block is changed the whole sequence of blocks will become invalid.

Once the block is full —each block contains many transactions— it will be closed and a block hash will be required to validate the block.

3) The distributed nodes work towards validating the block once it is complete and all its associated data. The validation of the block ends up with the obtention of the hash of the block. Once the hash has been obtained, the block is closed. Each block contains a cryptographic hash that identifies the block itself and the previous block to which it is linked. The only block that does not have a previous hash is the first one in the chain. This block is called the “Genesis block”.

Dot CSV. (2021). HOY SÍ vas a entender QUÉ es el BLOCKCHAIN - (Bitcoin, Cryptos, NFTs y más) [Video Screenshot, min. 17:11]. YouTube.

The process to validate a block may vary. There are two very common validation methods:

i) proof-of-work which entails that the different nodes “compete” to solve a mathematical problem that, once solved, verifies the block and closes it. For example, for Bitcoin, which works with proof-of-work, this process is called "mining." Every time a node releases a block it obtains Bitcoins as a reward.

ii) proof-of-stake where one of the nodes is selected randomly and is then requested to verify the block. Once the block has been verified by the selected node, it obtains an economic reward.

There are other validation methods such as "proof-of-burn" and "proof-of-authority," amongst others.

4) Once a block has been closed, it "chains" with the latest previously existing block and it will chain with a subsequent new block. That way, the blocks are linked between them forming a long chain of information.

Investopedia. (2022). [Illustration indicating the blockchain steps]. Investopedia.

In order to provide a bit more context about blockchain, let’s take a look at some of the main benefits attributed to this technology so far:

• Non-centralization of the data stored. Less likelihood of technical failures. This translates to reducing the concentration of power and control over the data to a few companies or agents. Decentralization also prevents the shutting down of services due to technical failures, meaning that since each server (or node) in the network contains the same information as the rest, if one of them shuts down, the rest can continue to function normally. For example, the shutdowns that sometimes happen with social media platforms due to problems with their centralized servers will no longer occur.

• Immutability. Easy to distribute, hard to edit. Once the information has been stored within a block, it becomes very hard to hack or amend. This stability of the information can be very useful for data such as health care or financial data.

• Easier to verify the trustworthiness of a transaction. A lower degree of intermediate agents. In line with the point above, since the same information is stored in several nodes at the same time, it becomes very hard to change or tamper with. If one of the blocks is hacked, the change of the information will change the entire set of block sequences, therefore making the whole blockchain invalid. Also, since the overall transaction can be verified from the beginning to the end, the need for an intermediate agent who verifies the truthfulness and veracity of the transaction will not be necessary.

• Anonymity. Secure transactions: when using blockchain, the identity of the parties interacting in a relevant transaction is not available to the public (the information shown in the transactions is the "wallet" associated with the users, not the name or personal ID of such users). The transaction can be verified as trustworthy without the need to know who the users are.

Davis, A. (2021). [Abstract elements interconnected] [Illustration]. WIRED.

On the contrary, some of the downsides that blockchain technology carries with it are the following:

• Anonymity. Risk of money laundering and other economic crimes: Although anonymity can be good when it comes to the privacy of the transactions, it can also represent a succulent opportunity to launder money, since the identity of the parties remains unknown. Also, it is very attractive to cybercriminals who are getting better at stealing crypto wallets or other assets related to activities that run with blockchain. Once a wallet is lost, it becomes almost impossible to track down the identity of the person who stole it and, hence, to seek indemnification of any kind.

• Immutability. Lack of adaptation: Even though the lack of possibility to change or amend the characteristics of a blockchain transaction can be good in certain sectors, some others may require a certain degree of flexibility that the blockchain may not be ready to provide. For example, in complex contracts where not just two or three conditions apply, but many more, or activities where there are “grey areas” that require specific interpretation.

• Inefficiency. High maintenance costs: Having multiple servers in the network that are working on the same transactions multiplies (and replicates) the energy and computational costs associated with a single operation, generating massive environmental impacts. All the network nodes will work on mining towards verifying an operation. Also, as the use of blockchain increases, more data and storage will be required, adding up to energy and environmental costs.

• Losing private keys: High levels of security may sometimes end up playing against our imperfect human essence. Accessing blockchain-related information can become a nightmare if the private keys associated with a user are lost. So far, many people have lost their private keys to their Bitcoin wallets, resulting in the loss of large amounts of money. As Nathaniel Popper notes in his article for the New York Times, Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes:

“But the structure of this system did not account for just how bad people can be at remembering and securing their passwords. As complicated and simple as that."

• Unclear regulations: as of today, blockchain technologies —mostly associated with cryptocurrencies— have been made the subject of arguments surrounding the question of whether or not specific regulations for them are required. So far, the activities using blockchain may require new specific regulations, but not the blockchain technology itself.

As anticipated at the beginning of the article, information runs the world, and blockchain technology has the potential to speed up information exchange and provide a secure, trustworthy and transparent way to transfer it, leaving no room for doubt about the reliability of the transactions, thereby contributing to the development of trust amongst individuals, businesses and organizations.

All the above is just a preliminary approach to blockchain and surely much more insight is needed for people to become comfortable with how it works. However, since this new technology is here to stay, we had better start becoming familiar with these concepts and others that will be brought up in the following articles.

References:

IBM. (n.d.). "What is blockchain technology?" IBM. https://www.ibm.com/topics/what-is-blockchain

Binance. (2018). "Blockchain advantages and disadvantages" Binance. https://academy.binance.com/en/articles/positives-and-negatives-of-blockchain

BBVA. (2018). "What is the difference between DLT and blockchain?" BBVA. https://www.bbva.com/en/difference-dlt-blockchain/

Álvarez, C. (2019). "BBVA advocates for the regulation of Distributed Ledger Technology, including blockchain" BBVA. https://www.bbva.com/en/bbva-advocates-for-the-regulation-of-distributed-ledger-technology-including-blockchain/

Rutland, E. (2017). Blockchain Byte. R3. https://www.finra.org/sites/default/files/2017_BC_Byte.pdf

Murphy, A. and Stafford, P. (2018). "Blockchain explainer: a revolution only in its infancy" Financial Times. https://www.ft.com/content/6c707162-ffb1-11e7-9650-9c0ad2d7c5b5

Mondragón Tenorio, E. (2021). "Advantages and disadvantages of blockchain" BBVA. https://www.bbva.ch/en/news/advantages-and-disadvantages-of-blockchain/

Popper, N. (2021). "Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes" The New York Times. https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html

Wired. (2017). Blockchain Expert Explains One Concept in 5 Levels of Difficulty | WIRED. YouTube. https://www.youtube.com/watch?v=hYip_Vuv8J0

BBVA. (2018). "¿Cuál es la diferencia entre una DLT y 'blockchain'?" BBVA. https://www.bbva.com/es/diferencia-dlt-blockchain/

Image References:

Davis, A. (n.d.) [Block chains simulating blockchain technology]. Ariel Davis. https://arielrdavis.com/Wired-1

Silas Neal, C. (2018). [Blockchains with binary codes]. The Wall Street Journal. https://www.wsj.com/articles/the-eureka-moment-that-made-bitcoin-possible-1527268025

Dot CSV. (2021). HOY SÍ vas a entender QUÉ es el BLOCKCHAIN - (Bitcoin, Cryptos, NFTs y más). YouTube. https://www.youtube.com/watch?v=V9Kr2SujqHw

IBM Technology. (2019). Blockchain Explained. YouTube. https://www.youtube.com/watch?v=QphJEO9ZX6s

Investopedia. (2022). [Illustration indicating the blockchain steps]. Investopedia. https://www.investopedia.com/terms/b/blockchain.asp

Davis, A. (2021). [Abstract elements interconnected] [Illustration]. WIRED. https://www.wired.com/story/crypto-pump-and-dumps-gamestop-dogecoin-fomo/