Blockchain - Two major questions we need to understand
After reading hundreds of papers on Blockchain the question and choices are becoming clear. Companies are starting to get an insight of what Blockchain can do for them. I have discussed the possibility for not only as a financial system but also supply chains, government voting, medical record keeping, Identity, transport systems, security systems and the list goes on and on.
The possibilities seem to be a bit endless at this point and therefore my mind started to think about what is the next step. What are the questions we need to answer to get going on a project? I decided to write this whitepaper dissecting the hype word Blockchain and clearing up two major questions that lets us look at the different technology’s and some of the technical choices we need to understand to get started. This paper is intended for business strategist but techies might find it interesting too.
What is a Blockchain
First, a Blockchain in its simplest form is sets of data, called blocks, connected in some manner to form a chain. The data is usually transaction data but does not have to be. Transaction data gives information about “A” sending or moving something to “B” at what time and how much. The users keep track of their transaction’s by saving links to their transaction’s and storing them in there “wallet”, a small piece of software. The Blockchain organizes blocks with some predefined capacity e.g. 1000 transactions, 1MegaBite, all the transactions this hour or some other defined perimeter. The Blockchain mechanism’s, that will be outlined in this paper connect the block of data it to previous blocks and store them.
How are you connecting the blocks to each other? Or even more technical, if you want to give the impression you know something about Blockchains: What is the consensus algorithm?
Consensus algorithms vary a lot. There are thousands of methods for connecting blocks. I will explain the three most commend ones:
PoW – Proof of Work
This means that you have some work to do, usually mathematical. To give a real-world example of this, imagine walking in a dessert and suddenly, as you come over a sand dune, you see a pyramid. Before you know who has built it or even what it is, you automatically understand that it took a lot of work to set it up. That is proof of work. Looking at the Eifel tower it dawns on you that someone had to put all those nuts and bolts in place. That is proof of work. If proof of work is implemented correctly in a Blockchain this can be an extremely secure solution. Bitcoin uses PoW by using application specific circuits (super computers) to solve a hashing challenge, basically brut forcing an incomplete alphanumeric solution. This is kind of like solving a Sudoku puzzle. Because looking at a solved Sudoku it is easy to see if it is solved correctly and at the same time someone has obviously solved it and so its proof of work. To complete some work it requires energy, no matter if it’s the pyramids or the nuts and bolts in the Eifel tower or the hashing challenge on the bitcoin Blockchain, the all require energy. Bitcoin Blockchain PoW translates into using extreme amounts of electric energy. There-fore, since there is no guarantee that you’re the one that will win the challenge, you’re basically staking (gambling) your power consumption as an external factor from the Blockchain itself. With PoW the history, of all the transactions, is secured by the latest block, so any changes in technology will swiftly be compensated as newer technology, e.g. quantum computing, will help securing blocks. This type for Blockchain has one big draw back. You need a large amount of computing power before the blockchain can be considered secure. I believe decentralization is the only option that has a chance but more on that later.
PoS - Proof of Stake
This means that you have lottery tickets based on the amount of Power you hold on that Blockchain. Ethereum, Litecoin and Steemit are examples of PoS Blockchains. Compered to PoW, you are now on an internal stake in the Blockchain. So, say you have a vast amount of ether on the Ethereum Blockchain you win the lottery because the odds are in your favor. You then accept the block with your digital signature so that it is approved to connects to the Blockchain. There are to major challenges that arises with PoS. One, it is all done internally so the system is only of value to itself. Two, everyone in the system must watch and make sure that you are not cheating by corrupting the latest block, especially if your odds are so high that you’re signing several blocks in a row. However, if you’re corrupting blocks who are you hurting, if you have vast amounts?
PoA – Proof of Authority
This means that VISA, MasterCard, a Nations central bank or someone of authority puts their stamp of approval on the block. In this scenario, you could have a 1024-bit encryption code. This code is virtually unbreakable now in this day and age. However where will we be in 20 years. With quantum computers, right around the corner, someone could change a transaction 20 years back that could render the Blockchain corrupted.
How are you storing the information in the blockchain? Or even more technical: The blockchain is distributing the ledger, who is it distributing it to?
DLT – Distributed Ledger Technology
This means that someone is storing the copy of the ledger usually in real time. Everyone that has a copy of the ledger can see the information in it. Practically you would run a query or search as they tend to get very long. The examples that I have encountered are consortiums (a group of partners) of banks and financial institutions. The R3 Blockchain is one example. These are known as permission blockchains, as they are closed to the public you require permission to get access. Bitcoin, Ethereum and most cryptocurrencies are referred to as decentralized blockchains, as a play on the opposite of a central bank. As the term suggest it is permission-less and therefore open for everyone to get their own copy of the ledger.