There is Cryptocurrency. And there is Blockchain. They are not one and the same.
In this version of New Tech, we distill the details of ‘the tech’ away from the wildly volatile price movements of the currency to try and figure out where this is taking us in the future.
Roughly one week since cryptocurrencies collapsed in price in epic fashion, it seems that the mood around the ‘blockchain’ has soured midway through 2022. But “crypto” is not “blockchain”. Irrespective of feelings towards Bitcoin, Ethereum, or any other major blockchain, the underlying blockchain technology is not going anywhere anytime soon.
That’s because it has created a major innovation in the world of consensus and decentralization, paving the way towards major applications whereby bias and risk are removed from agenda-based central entities. W
We have seen many such applications launched related to ‘DeFi’ (decentralized finance) and ‘NFTs’ (non-fungible tokens); yet, the core of these applications were completely dependent on the price of the attached token – as soon as the price of the underlying token for each respective application collapsed, it seemed that so did the application itself.
In other words, the Future of Blockchain is not based on tokenized applications with underlying financialization that resembles many modern-day Ponzi schemes. The Future of Blockchain is based on the scalability of the technology itself.
What Is Blockchain?
In its early days, blockchain was commonly referred to as ‘distributed ledger’ technology, whereby the databases of a given ‘chain’ were distributed across many different locations instead of being in one centralized location. This common definition – which is only partially correct – then led to the ‘decentralization’ wave where everyone thought of it as a effectively a database with no single point of failure.
In actuality, blockchain technology is much more closely associated to cryptography, whereby you have a private and public key for a given ‘address’ that can used to securely send information from one party to another across an encrypted connection. Every time a transaction is ‘sent’ to a public blockchain (ie. cryptocurrency is sent from one party to another), a cryptographic signature between the sender’s public/private key is swapped with the cryptographic signature of the receiver’s public/private key.
Historically, we would not send ‘money’ via a cryptographic transaction, but rather information. Think of encrypted email and messaging services as the most mainstream application of cryptography. The blockchain takes the whole application a step further by grouping multiple transactions into “blocks” and verifying the validity of each and every single block of transactions onto a publicly visible and verifiable “chain”.
Thus, with public blockchains like Bitcoin and Ethereum, we can publicly view every transaction in the history of their respective blockchains because each transaction has been verified by a network of nodes. Taking the debate between Proof of Work (ie. Bitcoin Mining) and Proof of Stake (Ethereum concept) aside, the main security mechanism of these blockchains over the last decade has come from essentially supercomputers that work 24/7 to verify the validity of each transaction and publish it to the network.
Because a consensus is required by multiple nodes of supercomputers, the network can’t be bluffed into accepting fraudulent transactions. The main way this could happen is via an attack by a nefarious actor, such as it 51% of the nodes were compromised (51% Attack)
And so a blockchain is basically a trusted chain of financial information, publicly verifiable at any moment in time, enabling money to be sent from one party to another in the blink of an eye without any intermediary needing to authorize, approve, or validate the transaction. Hence the term that many use in relation to blockchain – ‘trustless’. This type of trustlessness was always the dream of the ‘cypherpunks’; but it took until Bitcoin to design a system of economic incentives to maintain integrity among multiple actors at scale.
Blockchain – The History
Satoshi Nakomoto launched the Bitcoin Whitepaper on October 31, 2008 in the throes of the Global Financial Crisis (GFC). The Bitcoin network and the Genesis Block itself was launched in January 2009, with the initial price at $0.0008. The main thrust of the Whitepaper was the need for:
A purely peer-to-peer version of electronic cash would allow online payments to be sent from one party to another without going through a financial institution
Bitcoin Whitepaper
This idea of a ‘peer-to-peer version of electronic cash’ was not a new concept, however, especially among those cypherpunks who were on the mailing list when Satoshi launched the Whitepaper. DigiCash, Hashcash, B-Money and several other iterations of the P2P electronic cash were launched in the 90s and through the 2000s. They all failed.
Satoshi’s envisioned Bitcoin application was unique in both its unique way to prevent double spending and its removal of a centralized ‘mint’ that would continuously print more Bitcoin. Instead, a ‘block rewards’ system was created that rewarded miners (supercomputers) with 50 BTC to start for each block (every 10 mins.) for securing and maintaining the integrity of the network.
Against the backdrop of a fixed supply of only 21 Million Bitcoin, the price incentive was enough for many people in the cypherpunk community to become miners of Bitcoin when it was launched. The more nodes in a network, the more stabled and secure it is.
The main properties:
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Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending.
The unique proposal for the double-spend problem that plagued all earlier versions of decentralized currencies was related to a novel solution to the Byzantine General’s Problem. The consensus mechanism – as mentioned above – was achieved when the majority of nodes (participants in the network) agreed that one party sent another party Bitcoin.
Imagine that before the Bitcoin blockchain – which was the world’s first publicly viewable blockchain – one party could essentially double spend a quantity of Bitcoin or any other form of digitally-created money. They could send 1 Bitcoin to one party, and then cheat by saying they didn’t send that 1 Bitcoin away, before then sending that same 1 Bitcoin to another party.
Prior to Bitcoin, there was no decentralized mechanism to prevent this. The consensus mechanism behind Bitcoin made ‘double spending’ almost impossible because once a transaction was published to a block it could not be reversed, or spoofed, in any way.
By the time Bitcoin had its first major, media-attention-capturing, run-up in price in 2013 there were several other ‘copycat’ blockchains with associated tokens, hence giving birth to the global cryptocurrency marketplace.
By the time that Bitcoin had its next set of major run-ups in price in 2017 and 2021, there were hundreds if not thousands of other blockchains, each with their own associated tokens and promised applications. Ethereum is one such competing blockchain, offering the potential for dApps (decentralized apps), smart contracts, and a Proof-of-Stake blockchain consensus mechanism that would supposedly be less energy-intensive. Other competing blockchains try to brand themselves around ways to verify transactions more quickly, additional privacy mechanisms, etc.
In a long-term sense, we are very early in blockchain adoption. Whether or not Bitcoin remains the dominant chain over the next decade is to-be-determined. And whether or not there are new innovations in blockchain technology relative to quantum computing and other meta-innovations in computational technology will also need to be seen in the future.
Blockchain – The Innovation
There are so many ways to slice the underlying innovation behind Bitcoin and blockchain technology. Layers of innovation were built on top of layers of innovation, especially since all Bitcoin development was open-source and without payment.
Bitcoin was never funded by 3rd parties. Once the network was launched, a tradable market was established on exchanges. The liquidity created by early-stage speculators created a pool of liquidity for miners who could then convert their Bitcoin into local currencies.
This money was then reinvested into buying more miners (ie. supercomputers) and paying electricity bills, along with other operational costs. Thus, the big innovation behind blockchain technology is its incentive structure to ensure honest behaviours between network participants over time.
As mentioned above and discussed more below, the technologies that underpin blockchain existed before Bitcoin was launched. Naturally, ongoing innovations in cryptography, computing, and other adjacent fields help to advance blockchains’ capabilities, but without the right incentive structures these technologies would have always been sitting latent in relation to what is possible when they are combined into a unified blockchain technology.
Prior to Bitcoin, this problem was considered perhaps impossible to solve. Computer scientists declared in 1982 that the generals’ problem can at most be reduced to a “commander and lieutenant” problem, in which all lieutenants must act in accordance with the commander’s orders, as long as they are loyal. They have shown that the problem can only have a solution if more than two-thirds of the generals are loyal.
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Inevitably, the main innovation behind blockchain involved resolving the complicated problem referred to as the Byzantine General’s Problem.
To solve this problem specifically requires ‘hashing’ of blocks and rewarding the miners economically for doing so. Hashing occurs when the miners’ computers crunch the numbers behind a complex mathematical equation designed into the Bitcoin blockchain algorithm. Each block happens every ten minutes, which means that miners compete with one another to hash blocks and win the block reward (was 50 BTC at launch, post multiple halvenings every 210,000 blocks it is now 6.25 BTC).
Every general is working on the most frequently expanded plan known to him, in order to extend the longest living solution that he has heard until then. After a solution has been expanded multiple times, the attack time contained in the longest chain of calculations (e.g. in the longest plan) is considered to be the true attack time, because it necessarily required more than half of the calculation capacity of all the generals to create it. Put differently, the mere existence of this longest block-chain is proof that the majority of generals (over 50%) were involved in its creation.
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To try and make a very difficult and complex problem – the Byzantine General’s Problem – somewhat simpler, we just need to imagine that in a battle for ‘consensus’ on financial transactions, if a set of generals could be bribed into publishing plans that were essentially fake, then the whole operation would be sabotaged.
In the case of a public blockchain like Bitcoin, this would mean that $Billions of dollars would be essentially worthless in an instant because no immutable, verifiable record exists. But on Bitcoin and other similar networks – where the consensus is a probabilistic (not absolute) majority – it would take a rogue actor acquiring 51% of the network to achieve this level of chaos. The miners have no incentive to sabotage their own operation because they would lose their own investment (computers, etc).
The issues of forking come into play and have occurred in the past. This is where, essentially, a new consensus occurs in the form of a new chain. Nevertheless, the immutability and verifiability of Bitcoin and other public blockchains remain. Transactions are pseudonymous, meaning that identities can be traced to digital wallet addresses, but not individual names, at least not without cyberforensics.
Those wallet addresses are each associated with a public key that is in public view and a private key that is kept secret by the wallets owner(s). No person or entity can take those coins from that wallet, and anyone with the public key can see how much a wallet holds. Thus, the innovation is the facilitation of peer-to-peer money transfer across a public network without any central intermediary needed to certify transactions or individual balances.
Blockchain – The Technology
While Bitcoin and most open public blockchains are open-source, a large percentage of blockchain development is for private blockchains, with funding coming from large corporations and certain state actors. The inception of blockchain technology has fueled a global arms race.
Thousands of patents exist. But as we have seen so far in 2022, it is difficult to separate the wheat from the chaff in the whole ‘blockchain’ space. Companies have raised 100s of millions – and sometimes billions of dollars – simply by creating a whitepaper and convincing a group of investors that they could create the next big thing in blockchain.
To begin to understand the technological side starts with a basic understanding of encryption. As mentioned above, cryptography was the baseline innovation behind public blockchains in many ways. But unlike sending a secure text message via symmetric encryption – as seen below – a public blockchain uses asymmetric encryption where parties have separate public key/private key combinations.
With public blockchains such as Bitcoin and Ethereum, each wallet has a public key and private key associated with it. To send a Bitcoin/Ether from one party to another, you need:
- A native digital wallet – ie. the appropriate wallet for the respective cryptocurrency. You cannot receive Ether with a Bitcoin wallet or vice versa
- A certain amount of Bitcoin/Ether – a balance of the native cryptocurrency, which can be obtained either from buying a certain quantity off of an exchange, or having someone send it to you
- The address of the receiver – typically, most digital wallets will have a QR code that can be scanned by the sender in the native wallet so that the receiving address can be quickly scanned. Other times the address is sent as 33/34 character hexadecimal string (for Bitcoin) as text, and inputted into the wallet. The Bitcoin/Ether address is associated to the public key
Once the sender has the required wallet and address of the receiver, they can send their Bitcoin/Ether/other cryptocurrency and have it received once it is validated on the respective blockchain. This process can take seconds to hours depending on:
- the amount of traffic on the blockchain – at peak load times, transactions can be slow to settle
- the bid for fees (ie. Gas on Ether) – miners in both Bitcoin, Ethereum, and other public blockchains make money validating the transactions. Thus many wallets give users the options to spend more in fees in order to have their transaction be sped up
- other factors – there are times when certain events happen on networks, such as forks, market crashes, or other events that can dramatically effect the amount of nodes on the network, and thus impact the speed of the transaction
Bitcoin uses SHA-256 (secure hashing algorithm) as its algorithm for miners. Ethereum uses Keccak256 cryptographic hashing algorithm.
The long process of SHA-256 is necessary for retaining the security of Bitcoin, ensuring there is no possible way of reversing the process. If a method of reversal were possible, attackers would have the ability to alter transactions on the blockchain to their choosing.
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The ‘hashing algorithm’ will likely be different for most public blockchains, as it is a key area of innovation. Tradeoffs occur between speed and security, which is why any potential ‘innovation’ to the cryptographic hashing algorithm needs to be tested in real-world conditions.
Nevertheless, as seen above, once the sender sends the Bitcoin/Ether to the receiver, it is essentially ‘hashed’ to a block where it can be visibly seen and verified by the sender, receiver, and/or any other 3rd party on the planet via Block Explorers (Blockchain Explorer).
Looking at an example transaction, we can see that even once a transaction is sent, it will likely be ‘UNCONFIRMED’ for several minutes. Even at the ‘UNCONFIRMED’ stage, the transaction has been broadcasted and accepted by the network; however, the user cannot access their funds officially until the transaction is ‘CONFIRMED’.
Each wallet and exchange will likely have a different number of blocks they accept before a transaction is fully confirmed. This step can create some anxiety, but is part of the public blockchain technology.
The user who receives the funds will have setup their wallet with a private key. This means that once they receive the funds, only they can access their wallet. That is, of course, unless someone else accesses their private key or seed phrase. Seed phrases are accompanied with most wallets in order to give users another backup plan to access their funds if they do lose their private key(s).
Can you access your funds if you lose the private key/seed phrase?
No. And this is one of the many reasons why we are so early in the inception of blockchain technology. Estimates vary between 20 – 30% of Bitcoin have been lost – the vast majority permanently – because of this simple fact. The reason for having this in place is so that no central party can ever force one person or entity to send their Bitcoin or Ether to another party.
The double-edged sword of needing to remember the associated seed phrase/private key is one of the reasons why technological innovation will persist in Bitcoin, Ethereum, and other dominant cryptocurrencies.
While one can imagine that future CBDCs (Central Bank Digital Currencies) will be centrally controlled and username/password driven – much like a bank – they will not be public, decentralized blockchains that are at the forefront of encryption, cryptographic hashing, and mathematical algorithms of consensus.
Overall, the Future of Blockchain will remain a controversial and much discussed area in the months and years ahead, especially with the chaos we have seen in the market in the last 6 months. But in looking at the history, innovation, and technology underpinning blockchain, we can surmise that the run has only just begun.