The Future of Trust
How Bitcoin Is Shaping Our Future.
Blockchain isn’t Bitcoin.
On the third day of January 2009, two important events occurred. Alistair Darling had been forced to consider a second bailout for banks in America and the first Bitcoin block was mined. These two events might seem to have no correlation, but in retrospect, have proved to be a turning point in the world as we know it. This was the birth of blockchain technology.
Technologies in place have a crucial flaw. Centralization. This means that our data is stored in large clusters and controlled by different organizations and institutions. A drawback of this architecture is the potential of data alteration. The centralized storage of data also drives aggressive targeted advertising and mass surveillance.
Satoshi envisioned a world of anonymous transactions over the internet without the need of financial institutions. Current systems work fine, however, they suffer due to lack of trust.
Third parties — banks, online payment services, mobile money providers — hustle us for more information than necessary in order to prevent fraud.
The Block
Blockchain consists of blocks of data which are secured by cryptography. The network is open to anyone and is maintained by its users (decentralized).
Each block consists of 3 main attributes: data, the block’s hash and the hash of the previous block.
In Bitcoin’s blockchain network, the data stored inside a block is a list of transactions capturing the sender, receiver and the amount transferred — this is where Bitcoin comes in.
Transactions are marked as pending until a node(user) on the network verifies them by mining a new block.
Mining
Satoshi took inspiration from Gold. Mining it is a resource-intensive process and its supply is limited.
The same applies to Bitcoin.
Mining new blocks require a lot of computational power. An algorithm — Proof-of-Work — is used to slow down the generation of new blocks. Nodes need to prove that they have invested computational power by solving a complex math problem.
Bitcoin’s network has a target of mining one block every 10 minutes by varying the difficulty of the process of mining. Satoshi anticipated that the power of computers will steadily increase over the years and therefore programmed this feature into Bitcoin.
Users who maintain the network are provided with a reward of a predefined number of Bitcoins for every new block of data they add onto the blockchain (6.25 BTC as of May 2020).
These mining rewards are the only source of new coins in the network.
The Avalanche Effect
The process of verifying transactions — mining — involves calculating a cryptographic hash. This can be thought of as a fingerprint. The hash uniquely identifies a block and is used to ensure that its contents are not altered.
Here is the hash of the string “Bitcoin”
b4056df6691f8dc72e56302ddad345d65fead3ead9299609a826e2344eb63aa4And this is the hash of the string “bitcoin”
6b88c087247aa2f07ee1c5956b8e1a9f4c7f892a70e324f1bb3d161e05ca107bThe two strings — Bitcoin and bitcoin — are most part similar but the hashes are worlds apart. This is the Avalanche Effect. A small change in the input of a hash function results in a drastic change in its output.
This characteristic of hash functions enables the detection of the slightest change in the data stored on the blockchain.
The Chain
Hashes chain blocks together forming the blockchain. To alter a transaction, one needs to recalculate the hash of the current block and all blocks before it for the new altered block to be accepted by other nodes on the network.
Given that the current height — number of blocks in the chain — at the moment is about 600,000, this will be quite difficult to do.
Fight Against Inflation
Satoshi’s goal was to create a new currency that would be inflation-proof by limiting the number of Bitcoins to a maximum of 21 million coins.
Given the state of the economy in 2008 — and the current situation we are facing at the moment — governments around the world are pumping more money into the economy to keep it afloat.
Rich dad poor dad’s author, Robert Kiyosaki compared the economy to a balloon:
The more air you put into it, the bigger it gets, and if you don’t stop, then when it eventually bursts the results will be catastrophic.
In fact, this has proved true in Venezuela. A large percentage of their population are seeking refuge in cryptocurrencies like Bitcoin after their Bolivars were rendered valueless due to hyperinflation.
The Bitcoin Blockchain fights inflation by periodically reducing the rate at which new coins are introduced into the network. This is achieved by halving the number of Bitcoins rewarded to miners every four years.
The latest halving occurred on the 11th of May when the reward was halved to 6.25 BTC from 12.5 BTC.
Limiting the production of Bitcoins to a predefined number and reducing the rate at which new coins enter the network, helps Bitcoin to appreciate over time due to more demand than there is supply.
Potential Flaw
With that said, the Proof-of-Work algorithm has a flaw. Mining Pools are being formed by users combining computational resources to mine more blocks hence get more rewards. This is centralizing the decentralized network Satoshi had envisioned Bitcoin to be.
On the flip side, other cryptocurrencies are making use of different algorithms to verify and secure data on their blockchain networks. For instance, Ethereum is making use of the Proof-of-Stake algorithm, to verify transactions on their network.
Applications
In the automotive industry, a car is more valuable the lower its mileage is. This is why there is a high motivation to manipulate cars’ odometers.
Bosch is making use of blockchain technology to curb car fraud. Using IoT, they are connecting cars’ odometers to the internet and are constantly updating their mileage to a blockchain network. This has the potential to improve trust in the automotive industry by preventing auto dealers from altering cars’ information to increase their profits.
Blockchain can also be used in voting. By getting rid of a central repository for information and nullifying the ability to alter data, blockchain will revolutionize the voting system. This has the power to increase people’s confidence in politics.
The Bottom Line
Bitcoin is only an example of data that can be stored on a blockchain. Transactions can be substituted with other pieces of information such as supply chain records, title deeds and inheritance documents.
Industries and companies around the world are taking up blockchain technology to fight fraud and increase trust among the human race.
The one thing you ought to remember is:
Blockchain is bigger than Bitcoin.
Be warned, prediction is a tricky business. Before investing/purchasing any cryptocurrency, first read about it to know its mission and the people behind it. If you believe in their vision, go ahead.
Here is a guide on what you require before making any purchase of crypto.
Important links
Interested in getting your hands dirty with the code behind Blockchain? I am developing my own blockchain network — Jamii Chain. You can get in touch if you’d like to help out or if you have any questions about the project.
The future of trust is blockchain.
