The Blockchain: Business as Usual?

My last blog covered the much-buzzed about “Bitcoin”; today’s blog will deal with something that has slightly less buzz – the Blockchain.

 

Bitcoin and Blockchain are often discussed together, and with good reason – the Blockchain is the program that allows the Bitcoin to exist. The Blockchain technology was introduced when Satoshi Nakatomo posted a link to the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System”. In his paper, Nakatomo advocated for a “trustless” environment – a system of verification whereby people entering into transactions didn’t need to trust those verifying the transaction, because the system dictated by the technology would not allow for fraud.

 

Before we get too deep into a discussion on whether or not the Blockchain is truly trustless, first let’s briefly discuss what exactly the Blockchain is.

 

The Blockchain is a distributed ledger. It’s a network of computers (called “nodes” in Blockchain terminology) all operating on the same program (the Blockchain program). This program allows the nodes to all connect to each other and to see all the transactions taking place within the Blockchain platform.  (The diagram below was taken from Quora).

Now, you may be asking why anyone want to do a transaction that everyone can see, and that’s where the Blockchain can be a bit of a dichotomy, because while the transaction is public (or at least seen by everyone on the Blockchain), it’s also encrypted (so it cannot be read unless you’ve got the proper code). The way in which Blockchain users log into the network allows for a certain (but not complete) degree of anonymity.  So the Blockchain is a public, but anonymous, ledger of transactions.

 

People using the Blockchain are given a public “key”, which identifies them in a transaction, as well as a private key, which is how they can personally log into the Blockchain (kind of like a password). So Seller A logs into the Blockchain using her keys in order to sell merchandise to Buyer B, who uses his keys to log in and complete the purchase.

 

However, before the goods (and any cryptocurrencies) can be transferred between the parties, this transaction needs to be verified.  Otherwise, Seller A could sell the same merchandise to Buyer C, and perpetrate a fraud on Buyer B. So how does the Blockchain solve this issue of fraud (and create a trustless environment?)  That’s where the administrators (people who sit at the nodes) come into play…

 

Let’s say three transactions happen:

Each of these transactions will be grouped into a “block”:

All of the administrators on the Blockchain are now looking at Block 1, and what happens next is where the “magic” of Blockchain lies.  The administrators use their nodes to check the transaction against validation rules set by the creators of that Blockchain. Once there is a majority consensus that the problem solved (and the transaction) is correct, then each node runs the Block’s header through a cryptography program which results in a “hash”—this is the verification process for which the Blockchain is known.  The power to verify is not concentrated in one centralized unit, but rather is spread across the decentralized nodes and administrators.

 

When a Block is hashed, the resulting hash is then used as the base of the next block in the sequence, thus forming a link between two blocks, like so:

VOILA – a chain of blocks, a.k.a. the Blockchain!  

 

Once transactions are verified and hashed into the Blockchain, it’s near impossible to break the encryption and change a record. An administrator may try to insert a fraud transaction, but there will be a competing, correct transaction. You would need to have control of over 50% of the administrators to have the fraud block verified.

 

Of course, while this sounds amazing and easy (the computers do the mathematical problems to figure out the hashes), there are certain drawbacks. As more people join the Blockchain platform, it takes more computing power to solve the problems. What once could be done by a home computer now takes some serious, expensive hardware. And this hardware is power-hungry. Bitcoin mining using the Blockchain has gotten to the point where there are large warehouses packed with thousands of dollars of hardware (including cooling devices) set up in countries where electricity is cheap.  Currently, Iceland is on track to have more electricity used to mine coins than to power homes in 2018.

 

While the Blockchain was developed for Bitcoin, the technology for the decentralized network of ledgers can be, and has been, applied to other situations. For example, certain counties in the U.S. have experimented by using Blockchain technology to keep records of real estate transactions. While one would think that having a system of verification which provides for unalterable real estate records on a public, distributed ledger would be a slam-dunk, however, the Blockchain technology experiment in Cook County, Illinois did not receive permission to be implemented on a wider scale. The technology just isn’t there yet. Consequently, it will be interesting to see how South Burlington, Vermont’s Blockchain pilot program for real estate records turns out.

 

The real value in Blockchain (outside of cryptocurrency) likely lies in the storing of corporate records.  Think about it — companies are so large these days that one entity can have multiple offices in several states, if not several countries.  While corporate record-keeping aims to be centralized through networks and systems, mistakes occur.  Take the situation of Dole Foods had when their corporate books showed they had 36.8M shares of stock outstanding, but when it was time to join a class action lawsuit, shareholders owning 49.2M shares came forward.  Clearly there had been an error, which could have been prevented if all computers had been connected to a system where all administrators had to verify each stock transaction.

 

Some states have recognized the value of distributed ledger technology with regards to corporate-record-keeping, and have legislated accordingly.  Delaware recently enacted a statute that went into effect August 2017, and now corporations are allowed to keep records via Blockchain technology. Nevada has a law which recognizes smart contracts as valid, while Vermont has a law stating that Blockchain technology and its records are presumed to be valid. Arizona is currently the most Blockchain-technology-friendly states, with a law on the books that allows Blockchain records acceptable for use by the state, and several bills in play that are Blockchain-technology friendly, including one that would allow payment of state taxes via Bitcoin, recognition of smart contracts as legal, and a bill that wouldwould actually prevent local municipalities from passing ordinances preventing the running of Blockchain technology nodes. New York has also followed with five Blockchain-related bills in various committees, looking to use Blockchain to secure voting records and election results, to include smart contracts and Blockchain technology into current laws, and establish cryptocurrency taskforce and regulations.

 

What was it that I mentioned about smart contracts in the sentence above? Stay tuned for the next blog to find out!

Leave a Reply