Understanding Blockchain Technology
It’s no surprise there is hype around blockchain technology right now, mostly due to cryptocurrencies like bitcoin, built on a blockchain, reaching record high prices. To say that price speculation and rumor is barely scratching the surface of this incredible new technology, is a severe understatement. Blockchain is the future of technology, commerce, governments and civilization. Today, blockchains are eliminating the requirement of trust among individuals for simple transactions involving accounts and balances. Individuals only need to trust the blockchain design. We are in early days. If you take the time to understand the features and benefits of blockchain, you will be better positioned to profit in your personal life, career and business, well beyond the rise of cryptocurrency prices.
What are the features of blockchain?
Blockchains are a compilation of several technologies including: PGP encryption, distributed computing, merkle trees, game theory and proofs. The most interesting feature is emergent consensus. The field of consensus study related to blockchain has been called many things, notably cyptoeconomics and mechanism design. Consensus is responsible for individuals using the blockchain trusting their actions will be recorded, updating the state of their account and any other accounts affected by their transactions. For brevity I will summarize these features and include links to further reading.
PGP encryption: public / private keypairs that allow for individuals to prove their ownership over an account in a system or secure communications.
Distributed computing: the study of systems where components are networked computers communicating their actions through messaging protocols.
Merkle trees: the hashes of child nodes in the tree help verify contents for parents and generally large data structures.
Game theory: the behavior economics of actors in a system. Blockchain design attempts to find a Schelling point where natural actions will converge to create stability and consensus.
Mathematical Proofs: mathematical proofs are necessary across all aspects of blockchain design in order to ensure the system is safe and secure.
Consensus (blockchain): reaching a shared agreement on the current state, update function and future state in a distributed, multi-actor system.
What are the benefits of blockchain?
Blockchain technology is enabling public, global, trusted systems of digital assets and exchange with no central authority, where individuals completely own their assets and power to control that asset.
We don’t need to trust other individuals or institutions to intermediate or audit our transactions in a blockchain, because the system is designed to achieve consensus on what is a valid transaction, even if there are bad actors.
Unpacking Bitcoin Consensus: Proof of Work
Bitcoin uses a proof of work method of consensus in order to randomly select who will win the next block reward. Transactions are put into blocks by miners who are using a cryptographic hash + random number to find a special nonce (single use number) that satisfies a mathematical constraint (specific number of zeros). This operation uses electricity. The first miner to find the nonce, announces this to the network and everyone can verify the nonce is valid and the transactions within the block are also valid. This operation is trivial and fast. If the miner has attempted to lie about the transactions, the block doesn’t hash correctly using the nonce, the block reward is revoked and the miner has now spent electricity without achieving any compensation. This punishment helps ensure that Bitcoin achieves consensus. Upgrades to the Bitcoin network are hotly debated topics because this changes the ability for certain miners to reach the Schelling Point achieving maximal block rewards, damaging their ability for future compensation.
Mathematical Proofs and Merkle Trees
The benefit of using merkle tree data structures is that any modern personal computer can verify the history of millions of transactions with ease, and therefore any individual is assured that their copy of the blockchain is complete and tamper free. Proofs are provided as part of the core blockchain code and ensure that public private keys are valid, transactions are being signed correctly and transactions are valid all the way back to the root.
Game theory is the meta layer of blockchain consensus design, ensuring a stable system for any individual users, rewarding good actors and punishing bad actors. Actors are tasked with maintaining the blockchain system and network. The more game theory can be applied to issues of governance and protocol upgrades, the more we can benefit from more advanced and sophisticated blockchain design.
Blockchains have no central authority and no borders. They are immediately global systems and allow for the inclusion of anyone. A public blockchain such as Bitcoin or Ethereum are public and permission-less, meaning anyone in the world from any background can create an account, receive some of the currency, sign a transaction and send the currency.
Today, the ability to own your assets is given to you by a state and a bank; you do not own a thing. Using PGP encryption, blockchains give individuals the benefit of ownership and power over digital assets. No one can impersonate you, censor you or take your assets. In some new blockchain projects no one will even know what transactions you are making. Lose your keys though… and that’s it.
Why Should I Care?
With every technology comes massive disruption in the way any society functions. Think about the internet. Out of the top 20 internet companies only 2 existed before the internet, and they’re both Microsoft companies. Think about smart phones. It didn’t take long for these internet enabled devices to make their way into the hands of nearly every person on the planet, covering more areas on earth than have potable water. Blockchain is coming to dis-intermediate all industries.
While artificial intelligence and automation may be the darlings of the “future of jobs” discussions in most tech and business circles, it seems that the world is sleeping on blockchain. Remember the benefit of not needing to trust an intermediary to verify or audit transactions. Banks and accounting firms are huge employers of millions of people all over the world. It doesn’t stop there.
Imagine Airbnb or Uber without the company, only the network and software. It’s not so difficult to imagine. You might think, “who will settle disputes?” That’s simple, insurance providers on the blockchain will offer users of these networks protection and dispute resolution. They will also have no central authority. Instead of our slow, flawed and corrupt insurance providers, we will simply trust the wisdom of the crowd, who will of course be incentivized to act in the best interests of all users by you guessed it, game theory.
Globalization of Capital
Remember when Alibaba introduced instant translation between American businesses and Chinese factories, making it possible to design and order new products quicker and bring them to market? Probably not. But we felt the impact of the globalization of information and trade. We are now undergoing the globalization of capital. A public blockchain is global by default, downloadable by anyone, the ability to create accounts open to everyone.
Since bitcoin the currency has been in existence, there are numerous stories of “crypto-refugees” who achieved freedoms by learning to buy or earn bitcoin, later enabling them to leave their country. In Afghanistan where women have no rights to own an individual bank account, they are learning to program websites and receive payment in bitcoin, storing it in a multi-signature wallet so no one woman can be threatened and forced to transact the shared funds. These women are now using bitcoin to achieve safe passage to other countries. This is the globalization of capital.
Did you know that a Mexican has to spend hundreds of dollars to try and visit America? With more blockchain systems fulfilling various services around the world, power and assets will be in the hands of individuals. Sovereign individuals. Governments will take a smaller role and the fear of job loss to foreigners will become a thing of the past. I am not naive to think this is simply going to happen overnight, it will take many years for blockchain technology to unseat incumbent government power, but it will happen.
The Cat is Out of the Bag
Blockchain technology is out there. Bitcoin has proven that a tamper proof system, running in the open with no central authority can be trusted and believed in by millions of individuals who own their own assets. Now we’re expanding the conversation of what type of assets and power can be encoded in blockchain systems. Smart contracts on the Ethereum blockchain are enabling a breadth and depth of use cases we’ve only begun to wrap our heads around.
This technology is individually enabling, empowering and cannot be stopped, by anyone. You won’t find discussions about blockchain empowering individuals or the myriad of use cases on Bloomberg or CNBC. The real conversations are among the programmers on GitHub, Medium, Twitter, Reddit and Gitter. Programmers with successful jobs are quitting them in droves to start a blockchain company and reinvent industry. While prices may be soaring, fundraising running rampant, hacks and scams here and there, the blockchain space abounds with inclusive good will and social impact projects. That is why I believe blockchain technology is the future of commerce, governments and civilization.