Blockchain for Business, opportunities beyond the hype. Immutability

There are quite extreme positions on which are the real opportunities of blockchain beyond cryptocurrency. There’s the enthusiasts party who believe that blockchain technology can be successfully applied to almost anything and there’s the critics party who believe that blockchain can only be used for cryptocurrency or even maximalist that actually claim that there is only one BlockChain, the Bitcoin BlockChain (Bitcoin Core Implementation) all the rest being just a scam.

In order to understand those extremes we must figure out what’s the core innovation and promise of blockchain technology: Trustless Trust.

It’s such a property of the Bitcoin blockchain that fires up imagination on an unlimited domain of applications of a technology that can reduce the need for trust in human and business interactions. Trust always has a cost and it’s a necessary part of most if not all exchanges, being able to limit the need for it opens up a wide range of opportunities..

Bitcoin demonstrated that it’s possible to build an electronic monetary system which does not rely on any Trusted third party, neither for the emission of the mean of the exchange — the coin itself — nor for the transmission of it. Before Bitcoin there was no example of such a system, there was no way to generate and transmit a scarce electronic asset without the intervention of at least two Trusted Third Parties: one for the generation of the scarce mean of exchange — e.g. a Central Bank — one for the transmission of it — e.g. PayPal -. Bitcoin achieved this objective designing a system which combines cryptography with a very clever economic incentive system which compensates the network maintainers — the miners — with the mean of exchange itself. Security of the network is guaranteed by the enormous amount of computational power that is needed in order to update the transactions database. The miners who invest in hardware and electricity to generate the hashes necessary to add blocks to the Bitcoin transaction database are in turn payed in bitcoin, so they have all the interest in not altering the code that maintains their mean of payment, the bitcoin, scarce and valuable.

Security and trustlessness is all about the combination of the quantity of hash power needed to forge a new block and the use of bitcoin itself as mean of remuneration for the maintainers of the network, namely the miners. There are also consensus algorithms other than Proof of Work on which Bitcoin is based, such as Proof of Stake and Delegated Proof of Stake, all of those are indeed based on the cryptocurrency itself as mean of remuneration or punishment.

Given this high level description of the Bitcoin, the first and currently most successful implementation of the blockchain technology, do the statements like “Blockchain is good Bitcoin is bad” or “I’m interested in blockchain but not in cryptocurrencies” make any sense?

Well the answer, as always, is : It depends…

But first of all let’s follow the orthodox and straightforward line of thought: clearly there can be no Trustless Blockchain without having the capacity of engaging such a big amount of hashing power that no participant in the system has the ability and enough economic incentives to modify or forge itself the blockchain. At the same time without using the native cryptocurrency for the remuneration of the miners there is no trustless guarantee of scarcity of the mean of exchange that underpins the whole system.

Given those premises there cannot be blockchain without cryptocurrency, the two concepts cannot be separated without sacrificing the most fundamental and hyped emergent aspect of the blockchain, the capacity of storing and exchanging data and value beyond trusted third parties.

Is it possible to imagine something like a permissioned/private blockchain that is more than a marketing trick?

The answer is again no… A permissioned or private blockchain will never be able to guarantee to any external entity that the data in his blocks has not been tampered since the gatekeeper or the consortium itself do have the capacity to do so. It maybe argued that also in Bitcoin some miners could decide to alter the blockchain if they have enough hashing power, that is true but the total capacity of the network is so big that the cost of such an attack — that btw would destroy the value of bitcoin — is huge, so economic disincentives guarantees against such an occurrence.

While the aforementioned arguments are formally correct in the adversarial landscape of cryptocurrencies those should not bring us to the conclusion that blockchain technology has no meaningfull application other than cryptocurrency, or other than Bitcoin as maximalists may argue.

Cryptocurrency blockchains are designed to operate in an extreme adversarial landscape, they are engineered to be censorship resistant using high levels of decentralization and redundancy as means to resist to government-scale attacks.

To understand the magnitude of resources that are deployed to secure cryptocurrency blockchains against attacks, let’s consider the Bitcoin Network, the hashrate per second is currently* 42.878.510.014 GH/s.. how much is that? It’s 42,878 quintillions of hashes each second, to put things in perspective, it’s estimated that the quantity of grains of sand on earth is 7 quintillions.

Is such a censorship resistance level what companies need to benefit from blockchain technology? Can we imagine some use cases in which we can make trade-offs inside the so called blockchain trilemma — security, decentralization, scalability — and still result in a useful usecase?

Let’s imagine a group of companies that wants to share between each other a defined set of informations about their operations, can they implement a consortium permissioned blockchain with no cryptocurrency or mining involved ensuring that no single actor in the consortium can temper with the data once written?

Absolutely yes.

They can build a blockchain with an arbitrary blocktime where each block needs to be signed with each participant’s private key in order to be added to the blockchain. Each participant has a copy of the entire blockchain and no single entity or even supermajority can modify it.

Is this blockchain tamper proof for someone that is not part of the permissioned consortium? Can such an actor be sure that the data contained in the blockchain has not been tempered with without trusting someone?

Formally no.. as mentioned before all the participants of the consortium could collude to modify the data in their blockchain, but is this also a likely event? In cryptocurrency blockchains there are huge incentives and very few external disincentives — participants identity is unknown — to misbehave, this is the reason why we need such a formidable amount of decentralization and resources (hashing power in the case of Bitcoin) in order to guarantee the security of the exchange of value. Things are very different in the business landscape, operators taking part of the consortium are all well known entities, operate inside a well defined and enforced legal system and a mass collusion in order to corrupt the blockchain data to fool an external party may have legal consequences for the participants which are part of the consortium. Companies are not operating inside an anonymous vacuum chamber.

But wait a minute, this is blasphemy! Blockchain technology it’s about trustless trust! We cannot introduce a third party with the monopoly of violence — the nation-state — as a necessary part of the system.. Only Code Is Law! Code and cryptography is the only source of authority in the blockchain space. Those arguments, which resonate with the cyberpunk and cryptoanarchist values where Bitcoin system was forged are vastly shared by the cryptocurrency community, and lead to quite counterintuitive consequences as was exemplified by the DAO hack case.

In 2016 a hacker was able to steal 40 mln $ in Eth leveraging a bug in a smart contract code, the majority of the Ethereum community, guided by the thought leader Vitalik Buterin, decided to fork the Ethereum blockchain in Ethereum Classic and Ethereum where the funds went back to owners. While the man on the street would clearly recognize the act of the hacker moving funds to his wallet against the will of the smart contract creators and contributors as a theft, things are not so straightforward in the formalist blockchain weltanschauung.. Code is law, so if the smart contract was poorly written and the contributors to it where not able to read it and discover the flaw.. to bad for them! Form should prevail over substance.

Of course this is totally unreasonable, but actually is again formally correct. What is interesting about smart contracts it’s the fact that they will execute without the need for intervention or interpretation of any parties, nor the ones part of the agreement nor a trusted third party interpreting the contract in case of dispute, the EVM will execute the code, that’s it. This concept is well condensed in the Ethereum payoff: “Built Unstoppable Applications”. The Ethereum fork clearly violated this principle, the code was not law… it has been interpreted by the community who decided to reverse the deemed fraudulent transactions. Is this a vulnus that totally destroys all the decentralization premises that we described so far?

Theoretically yes but more pragmatically definitely not. Looking to respective capitalizations of Ethereum and Ethereum classic we can easily observe how the market decided that the transaction reverting fork of Ethereum is more valuable than the ‘the hacker keeps the booty’ Ethereum Classic, while the whole cryptocurrency ecosystem showed staggering growth rate despite the DAO Hack accident. It can be argued that the market reaction has no meaning at all, so let’s try a different approach, let’s ask ourselves what is the world where the masses and the businesses want to live in. A world where the hacker keeps the booty or a world where over code and cryptography in extreme cases a community or a nation-state has the final say?

As well explained in this brilliant article , decentralization and censorship resistance is not a binary property but a multidimensional problem, even Bitcoin is not totally trustless.

Different levels of decentralization and censorship resistance should be applied to different use cases. Off-chain governance systems and disincentives to bad behaviour, weakens the Trustless Trust holy grail but are far away from obliterating the resilience of tamper resistance of permissioned blockchain solutions.

Finally let’s assume again that we are pure formalist and that we don’t believe in all this nonsense on different levels of decentralization. There is just one blockchain, the one powering Bitcoin, and that is really totally decentralized, informations on such a chain are the only really trustless.

Well nothing stops a permissioned blockchain to parasite Bitcoin blockchain periodically writing hashes of its last block inside Bitcoin blocks. Is that permissioned blockchain tamper resistant between the participants?

Yes

Is that permissioned blockchain tamper resistant for external parties?

The answer is yes again

There’s one more argument that is worth exploring when we talk about applications of blockchain for other than cryptocurrencies: the authenticity of data. Blockchain transactions and external data sources are onthologically different in terms of authenticity, but that is another TLDR story!