In the digital age, many new innovations have disrupted several industries and the incumbent players involved therein. However, all the cumulative impact of these innovations fall short of what the Blockchain technology is capable of. Shubham Patel explores the working of blockchain system and the problems that gave rise to such a technology. A comprehensible definition is contemplated along the way.

“The most compelling reason for most people to buy a computer for the home will be to link it to a nationwide communications network. We’re just in the beginning stages of what will be a truly remarkable breakthrough for most people – as remarkable as the telephone.” – Steve Jobs

In 1985, in an interview with the Playboy Magazine, Steve Jobs had predicted that the internet will inspire people to buy computers. The prediction has turned out to be true. The essence of the prediction lies with the fact that it did not refer to the increase in communication between humans. What Steve Jobs was hinting at was the oncoming widespread adoption of a disruptive technology called “the Internet” that would sell Apple computers. The Internet facilitated communication in a much more fast, secure and widespread manner which in turn led to the increase in communication.

The blockchain technology is a similar form of disruption which can change not only the online interactions but also the way offline interactions happen over the internet. Before we delve into the technology further, it is essential to look at existing definitions of the same. Vitalik Buterin, a co-founder, and inventor of Ethereum defined blockchain as –

“A magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong crypto economically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies.”

This definition might not appeal to a strict scientific analyst, as the term ‘magic computer’ is questionable. However, this definition comes close to what a blockchain is. Definitions by several other scholars synonymize blockchain technology to the bitcoin cryptocurrency. Analyzing the above definition can help provide a better one by looking at the problems which gave rise to the first blockchain solution in the form of virtual currency called – Bitcoin. Like the World Wide Web of information, bitcoin is the World-Wide Ledger of value (the cryptocurrency) – a distributed ledger that everyone can download and run on their personal computer.

The advent of the blockchain technology was the result of problems existing with the current financial system. The current system works on a trust based model. The need for trust arises from the problem of double spending, reversibility of transaction and hacking. Therefore, in his paper, Satoshi Nakamoto used the blockchain technology to lay down the framework of a first digital currency which is immune to such problems.

Double Spending

The need for verification of transactions arose due to the problem of double spending. This problem goes hand in hand with the digitization of currency or any information. Let us look at the following scenario –

A has a digital currency of value of Rs 5000. Since it is a digital currency, it is in effect nothing but a series of code which represents that money. Now, he sends this cash to party B. Since it is digital cash, A can also send the same amount to party C. However, he should not be allowed to spend the same amount twice as it should get exhausted at the first instance of expense. This is the problem of double spending.

Therefore, to ensure that A is not double-spending digital cash, there is a third party put in place. This third party takes up the job of maintaining a ledger which will be edited when A makes his first expenditure. If A tries to double-spend the money now, the ledger can be checked before the next transaction to ensure that A has the required money available. The role of the third party is played generally by a trusted financial institution. However, this centralization of the ledger opens the system to many risks.

Reversibility and Hacking

The primary risk is the possibility of the trusted party committing a fraud. Further, the platform is completely digital hence, the third party can make backdated changes to the ledger. While such backdated changes might be helpful for the party which was defrauded, it becomes an infinite liability on the party which received such payment, since a dispute arising later can have the effect of reversing transactions. Such a system is also open to attacks from hackers, who can edit the ledger with backdated entries. The blockchain technology solves this problem in an efficient manner.

Decentralization

The first step to solving the problems of the existing system is the decentralization of the ledger or any other information. This means that in a blockchain system there is no single party maintaining the ledger. Every entity in the network will have a copy of the ledger, as agreed upon by the network. When a transaction is entered by a party, the payee can check it with the public ledger available, to ensure that the person making payment possesses the requisite amount. Since the ledger is stored not on one but several other servers, it is much more difficult to hack it as the hacker would need to hack and edit all such servers simultaneously. The computation power required for hacking such a blockchain system, for instance, the bitcoin network, is impossible to gather.

Currently, to break into the bitcoin blockchain, one would require a computing system with a power of 1,753,694 petaFLOPS to make a fake block. The world’s fastest supercomputer, the Chinese Tianhe-2 has “only” 33.9 PetaFLOPS. A better way to measure the capacity of the network is the hash rate (a hash is usually a 64-character hexadecimal string that represents a one-way encryption of data, usually transactions). The current bitcoin network hash rate is 150,000,000 Giga hashes per second. Firstly, it is enormous computing power and it would be extremely expensive to replicate. Secondly, even if a hacker constructs a fake block, the block would be ignored by the system (called a fork in the blockchain).

Synchronized Blocks

Connected parties to the blockchain network keep track of the ongoing changes and create a new set of information generally called a ‘block’. The public ledger in the bitcoin network must be edited at some point of time to account for the new transactions by attaching to it a new block. The parties on the bitcoin network compete to attach such new blocks to the public ledger by solving complex mathematical problems. Once a party has solved the problem, the block they have created must be approved by more than 50% of the network so that it can be attached to the block chain. An extra layer of security is added using cryptography, to secure the transactions of bitcoins on the bitcoin blockchain.

Another added feature of this technology is the synchronization of the blockchain. This essentially means that the whole network will be on the same page as to the agreed upon public ledger and hence nobody can double spend on the network.

Simplified Blockchain

Analyzing the properties of blockchain system a much appropriate definition for the blockchain technology can be proposed –

“A Blockchain is a decentralized system of information which is stored in the form of a chain of blocks with each new block containing a new set of changes to the information. The entities connected to the system approve of any new set of changes that is added to the chain and the whole network works as per the protocols set by the entities and secured connections via cryptographic encryption of all the data.”

List of citations and references.

1. https://www.ethereum.org
2. Vitalik Buterin, Visions, Part 1: The Value of Blockchain Technology – Ethereum Blog Ethereum Blog (2017), https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/ (last visited Apr 1, 2017).
3. Don Tapscott & Alex Tapscott, Blockchain revolution 7 (1 ed. 2016).
4. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. [online] http://www.bitcoin.org. Available at: https://bitcoin.org/bitcoin.pdf [Accessed 30 Apr. 2017].
5. Vitalik Buterin, Visions, Part 1: The Value of Blockchain Technology – Ethereum Blog Ethereum Blog (2017), https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/ (last visited Apr 1, 2017).
6. Vitalik Buterin, Visions, Part 1: The Value of Blockchain Technology – Ethereum Blog Ethereum Blog (2017), https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/ (last visited Apr 1, 2017).