The Communications Revolution
40 year ago, if you needed to learn the size and population of Buenos Aires, you went to the library and opened up an encyclopedia Britannica. Today, you simply crack open your laptop and jump on Wikipedia, where you can fit the entire encyclopedia onto one page. In a single generation, a centuries-old institution became completely irrelevant all thanks to the decentralized information distribution platform we call the Internet.
One of the most fundamental differences between Wikipedia and an old encyclopedia is how the content is created and accessed. One is centralized; the other is decentralized, distributed, and constantly updated. And not to mention, free.
Britannica would gather experts, write a book, and require that you go directly to them to buy one. And within a few years, there was a good chance the information would be outdated, so you’d have to purchase the updated version once it came out. With Wikipedia, anyone from anywhere can access the information and update the content at any time. It’s essentially a living, breathing document not controlled by a single entity. And with hundreds of thousands of volunteers constantly auditing the content, you can be sure the information is always accurate.
The Internet revolutionized the way we share information with each other. Now it’s time to embrace a new revolution built on a technology that will fundamentally change the way we trust each other: a technology called blockchain.
The Trust Revolution
Trust is at the core of every transaction we make. If we trust someone, we’ll trade with them. If we don’t, we won’t. It’s that simple. It is the most important social currency, especially in business, and we take it very seriously. When you vote, how do you know it’s actually been counted? When you buy fair-trade coffee, how do you know it’s really fair trade? If you buy a vehicle, how do you know for sure that the damage report hasn’t been tampered with? The way we’re accustomed to verifying these types of things is by creating intermediaries or middlemen such as banks, title companies, and credit reporting agencies, who control a centralized copy of what’s called a ledger between two parties.
A ledger is a document that stores a series of transactions which are all somehow related to each other. Most commonly, ledgers are used to document financial transactions, but they can be used for any kind of record keeping as well. The purchase of a house, the transfer of a car title, or even the rights to intellectual property or a patent can all be documented on a ledger. Most often, ledgers of any significance are controlled by a single entity. With restricted visibility, abuse can be easily inflicted, and errors can occur and quite frequently do.
You might remember a few years back there was a massive crash in the economy. A lot of people lost trust in their centralized financial institutions after that. This event spurred on an anonymous person or group going by the pseudonym of Satoshi Nakamoto to launch an experiment to see if a decentralized online currency network utilizing blockchain technology could be created and completely eliminate the use of a middleman. Thus, Bitcoin was born.
Bitcoin is based on the concept of an open ledger, which is nearly identical to any other ledger. The only difference is that it is visible and accessible to everyone within a network instead of controlled by a single entity.
How it works
Let’s say we have a network of four people: we’ll call them Alan, Brian, Cecil, and Doug. These people want to move money among one another. There is an open ledger that states that Alan has $10. This info is visible to all four people. Alan then decides he wants to move $5 to Brian, so he announces to everyone that he’d like to move $5. Once announced, this is called unvalidated transaction. After this transaction is validated by the network, the transfer is then completed and added to the open ledger.
Now Brian wants to transfer $3 to Doug. The process begins again, and that transaction is then recorded in that same ledger, linked directly to the first transaction between Alan and Brian. Finally, Doug moves $1 to Cecil, and again the ledger is updated after it is validated and linked to the previous transaction. This is the basic concept of an open ledger. It’s essentially a chain of transactions that are visible to everyone and verifiable by all.
With 100 percent transparency, everyone on the network can see where the assets are at any given time. It also gives everyone the chance to come to a consensus on whether or not a transaction is valid or not. This is the checks and balances process that blockchain uses in order to keep its ledgers pure. No longer is there a need to turn to a centralized entity whom we might not fully trust. If Alan only has $5 but tries to move $15 to Cecil, everyone on the network can immediately see it and remove the transaction.
In order to avoid falling into the trap of centralizing these open ledgers and ending up where we started, blockchain distributes copies of these open ledgers to everyone involved in the network. With no central book of transactions, the records become permanent and immutable.
Imagine a massive bank vault in which is held all the world’s money, information, and anything else of value. If thieves were to find a way to break in, they’d be able to take everything. But what if there were thousands or even millions of copies of this vault all over the world? The thieves would have to break into each and every one of the vaults at exactly the same time in order to successfully pull off the heist and leave no trace. It’s an impossible feat. Thus, the crown jewel of blockchain its incomparable security.
As mentioned before, Bitcoin was one of the first and most successful blockchain applications. In a white paper written by Satoshi Nakamoto, it states that Bitcoin is a “purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to the other without going through a financial institution.”
Here is what that would look like:
Bitcoin is different from PayPal, banks, or credit cards because there is no middleman or centralized financial institution involved. Instead, people from all over the world help move the money by validating all of the bitcoin transactions that take place, while earning a small fee by doing so. Bitcoin uses the blockchain by tracking records of ownership over this digital cash so only one person can be the owner at a time and the currency can’t be spent twice, like counterfeit money in the physical world can be. Most importantly, it eliminates the need for a middleman.
“It’s kind of like a google doc, but with no Google,” says entrepreneur Galia Benartzi. “No one can shut it down or change the terms of service. And the magic is in the math. Bitcoin was the first decentralized currency built on blockchain technology. It was the revolutionary spark that inspired thousands of entrepreneurs like me to think about a world without a monopoly on the transfer of value between people.”
Now you might think that services like PayPal and online banking already let us send money to each other online. But in fact, that’s not true. Money doesn’t actually move between people on the Internet. It sits in closed private networks owned by banks and governments. And every time you transfer money, you are asking those entities for permission, plus paying them fees, to move money around in their systems.
There used to be a good reason for this. The value stored in money is very different than the other types of information we share on a day-to-day basis, such as text messages, images, videos, and other things that can be duplicated and spread. However, with value, it can exist in only one place at one time. When you give money to someone, you no longer have it, and it’s essential to know that when you receive money, you’re not getting a copy. Years ago, there was no way to secure an open network in such a way that our money could not be changed, duplicated, or copied, so we had to trust banks. Now we have blockchain technology.
At its core, the blockchain is nothing more than a database—a database that is public, distributed, open, constantly synchronized, and efficiently secured by the use of the art of cryptography. These revolutionary ideas are essential features of the blockchain and make it exceptional, and the most efficient way of transferring assets to date.
“Digital currencies have immense potential to improve human welfare by strengthening the capacity of governments to deliver more responsive services and secure the rights of their citizens to property, identity and increase financial inclusion,” says Brian Forde, former senior advisor of science and technology policy to the president of the United States. “And because it is an open-source protocol for innovation, a wide range of services and products can be built by entrepreneurs and nonprofits on top of it.”
Digital miners sustain the blockchain. Their role is to process code and confirm transactions. Anyone can be a miner, but you’d need a special computer highly specialized design to mine cryptocurrencies. They solve math problems to ensure that no one is cheating or changing data on the system. For their work, they are rewarded with units of whatever cryptocurrency they are working on (e.g., bitcoin, litecoin).
There are a lot of parallels between miners of the earth and miners of information. The role of a digital miner is to build a block with a list of transactions that he or she has mined, validate everything, and then write the ledgers in “stone”—meaning that once they’ve completed their equations and everything checks out, their work cannot be undone or erased. Then it’s sent to the blockchain to live forever.
New problems to solve appear for these miners in different time intervals depending on what cryptocurrency they are working with. For Bitcoin, new transactions to complete appear every 10 minutes.
There is a competitive side to this to go along with the monetary motivation. Miners compete to solve the math problems needed to validate, which usually happen extremely fast. Combine competition with great reward, and you get transactions occurring at incredible speed.
Hashes and Merkle Trees
One of the most crucial aspects of mining is understanding how hashes work along the blockchain. A hash is a one-way function that has multiple uses in blockchain and other decentralized systems. All digital information like movies, images, or documents, are just strings of ones and zeroes. A hash function runs this information through an algorithm to produce a fixed length and unique digital output code representing that bit of info. This output is called the hash. Every time this bit of information is put through a hash function, it produces the exact same hash. When even just a single bit of the information is changed, an entirely new hash is produced. The math behind the hash function ensures there is no way to derive the original digital content from it’s generated hash, and change it, thus making the hash function one way.
Mining requires miners to solve a problem with a known partial input derived from the latest state of the current blockchain to create a hash target. Miners work to guess the digital input that can create the hash target, thus solving the problem. As the hash is one way, miners must try many different combinations of input to create the hash target and solve the problem. The first miner to answer the problem correctly wins.
Merkle trees are an essential part of blockchain for data integrity. Each block in the blockchain can contain multiple transactions.
Let’s look at an example:
Let’s say we have four transactions in a pile: A1, A2, A3, A4. Each one is passed through the hash function, generating four unique hashes, one for each transaction. Pairs of hashes are then combined and passed through the hash function again: A1 with A2 and A3 with A4. This process generates two separate and unique hashes, each based on the combination of their own two hashes, relating to the original transactions. The two hashes then are put through the hash function a final time and are combined into one hash. This results in a root hash, and the journey has formed a single Merkle tree. The Merkle tree allows for the easy detection of any changes in the data within the transactions of a block by simply running through the process for each transaction and comparing the results to the original hashes.
History and Future
You might be familiar with the story of the rise and fall of the Silk Road. This online marketplace for illegal goods once operated on the dark web and used bitcoin as its currency. In 2013, Silk Road’s creator was arrested and convicted, as were a number of federal agents who tried to destroy evidence of money laundering, extortion, and numerous other crimes.
The United States government was able to use the blockchain technology that Silk Road had built itself on to uncover what those corrupt federal agents tried to bury. If it hadn’t been for blockchain, those crooked government agents would still be out there. This was the first recorded case of the US government using blockchain technology to bring down criminals. And it won’t be the last.
There is also much potential for governments to do more public good with blockchain. We live in a world where the government you live under tells you what you own and who has the rights to what. The DMV has the title to your car while the county recorder keeps track of your home ownership. If you want to record a birth, marriage, or death, you have to head down to city hall and take a number. Not only is this process slow and inefficient, but it’s filled with the potential for fraud and tampering.
If the government started issuing formal documents digitally, like passports, birth certificates, marriage certificates, and so forth, and recording them on the blockchain, they could stop massive amounts of crime. Voting could take place on the blockchain as well, which would eliminate voting booths and allow the next presidential election vote to take place in the comfort of your own home. Doctors could upload health records and link your personal files to your ID so when you travel and have an accident, you will always have your medical information with you. It will take time for government and many other areas to get onboard, but most of those involved feel that it is inevitable.
On page 245 of Don Tapscott’s book, Blockchain Revolution, he writes, “Governments that wish to repress the voices of citizens everywhere and have captured technologies like the Internet to silence dissidents and block outside media will find blockchain technology significantly more challenging.” In other words, if governments, especially corrupt governments, will have to fight an uphill battle to resist this emerging technology. They might as well begin to adopt it sooner than later, and use it for good.
According to Kathryn Haun, federal prosecutor for the Unites States, “over 6,500 entities in this country alone issue birth certificates using over 14,000 different forms.” Since there’s no standard system of tracking and creating birth certificates, it’s very easy to forge one, head down the DMV, get a fake driver’s license, then take those documents and get a passport, allowing any number of crimes to be committed with those official documents. Not only would the blockchain keep all our legitimate public records safe, and prevent fraud, but it would also eliminate the need for some government agencies, once again cutting out the unnecessary middleman.
There are many applications now and on the horizon. Here is a small list, just to name a handful:
- Blockchain land registries are being considered by administrations in Honduras and Sweden.
- Diamond producing companies are starting to use blockchain to track production to make sure they’re not blood diamonds or manufactured illegally.
- The Nasdaq Stock Exchange will soon begin a blockchain system to track the trading held by private companies.
- The Bank of England has called distributed ledgers a “significant innovation” with the potential for “far-reaching implications” in the financial industry, and plan to utilize blockchain technology in the future.
- Financial institutions such as Barclays, Credit Suisse, and HSBC are all planning on making a single digital cryptocurrency to clear and settle transactions using the blockchain.
- Microsoft is utilizing Blockchain by building their own Etherium-based framework.
- Steemit and DTube, a competitor of YouTube, both are blockchain platforms where you can get paid with cryptocurrency for creating video content.
In summary, the blockchain is a form of keeping uncopyable information available based on an open, distributed, and rigorously vetted series of ledgers. People transfer information to maintainers describing where and how much information should move. Maintainers, such as miners, make sure that the information came from the true account owners by checking digital signatures, and the miners reach consensus with each other through a math-based voting process to authenticate the process.
Bitcoin is the most common use of blockchain technology at the present moment. In the future, blockchains that manage online data could enable us to launch companies that are entirely run by algorithms of trust, making things like self-driving cars safer, helping us protect our online identities and security, and even tracking and auditing the billions of devices on the Internet of things. This is the technology of the future, the next stage of the Internet, and the next digital revolution.