Blockchain… What is it? Why should I care?

Many of you reading this have either downloaded a movie illegally, or have been given a hard-drive or a USB stick with a series or movie on it, or at least know someone that has.

This is called “theft”, but this hasn’t always been the case, it took some time for the law to be redrafted to cover “digital theft” in the definition of theft.

A common question asked is:

Why did laws have to be redrafted to encompass digital assets, did the original definition not suffice?

The answer to this question is an important step in understanding technologies like Bitcoin and Blockchain, and their need in our new digital economy.

In traditional theft (physical world), if someone steals your mobile phone, you no longer have possession of this device.

In the digital world however this works differently, when someone downloads a movie illegally, for the sake of example let’s assume it is a movie produced by Universal Studios, Universal Studios still has possession of this movie.

What you have effectively done is made a copy of it, and this differs from traditional concepts of theft.

So who is actually harmed in this transaction?

If they still have a copy of the movie, why should the person who downloaded it be criminally liable?

The answer to that question is due to the fact that you may have either bought the movie or used a paid for service to watch it, thus they may have lost the potential revenue from those watching it illegally.

There are other legalities regarding copyright but those are outside the scope of this article.

Why did it take so long for a digital currency to be introduced?

As stated above, when there is digital theft, more often than not, the original owner of that digital asset (money, movies, documents etc) still has a copy of that digital asset in their posession, and many times are unaware that it has been taken in the first place.

This is a dangerous scenario when one decides to introduce a digital currency to the internet.

If you, for the sake of example, have $100.00 worth of digital currency, let’s call it Coin “X”, and someone steals / copies 1 of your Coins, there would be 2 Coins in the system, causing rapid inflation, and the eventual degradation of value in that digital currency.

What is Blockchain and how does it solve this problem?

Blockchain is quite simple conceptually.

Imagine you have a group of people that would keep their own personal record of every transaction, and every time someone in that network transferred funds, they would all agree that the transaction was legitimate, and that the funds had in-fact been transferred from person “x” to person “y” at a specific time and date.

That in theory is what blockchain is, it is a distributed record of transactions, where the miners (or consensus nodes) verify and keep record of all transactions on that network (or in blockchain’s case over 50% of miners have to agree that a transaction has happened).

In the Blockchain model, it isn’t people that are doing the verification it is machines or miners and these records are kept secure using trusted mathematics and cryptography that would guarantee the trust in these records.

Ok, so I think I understand Blockchain, but what is Bitcoin or Ethereum etc?

If you are just tracking a digital token (coin) from one persons records to the next, and that is all the network is capable of, this is termed “First generation Blockchain” and that is what Bitcoin is, it is just a token that you are able to trade, and it’s price is driven by supply and demand, where supply is tightly controlled by mathematical algorithms, and the work the miners do to verify the transactions (miners, are just the consensus nodes that keep the ledgers / transaction records in sync).

First generation Blockchain was great, but people wanted to start trading more complex digital assets on the network, and they wanted to be able to build contracts into the transaction, so if condition x and y are met, then allow this transaction to go through.

This was the birth of Second Generation Blockchain technologies, like the original release of Ethereum, and these conditions of trade were called “smart contracts”, and they allowed a lot more flexibility on the Blockchain, you could now start implementing complex business rules and track any type of digital asset.

This brings us to the current generation of Blockchain technologies, these allow developers to build applications directly on the Blockchain (DApps), once you can develop apps on a platform the level of flexibility becomes almost limitless, you can define all sorts of rules on how digital and even physicial assets need to be managed, some current projects running as a third generation technology platforms are projects like AION, NEO, EOS, CARDANO etc.

I think I am finally getting it, but what is Proof of Work and Proof of Stake?

If you have been hearing the news, and any information around technologies like Bitcoin, you might have heard that it takes time for transactions to be verified, and the reason for this is because the number of nodes on the network.

When there are a few million nodes, it takes a long time for all these nodes to be synchronized in terms of the transactions that have happened on the system, the miners need to do a lot of work in order to keep this system updated and stable.

Miners get paid for each block of transactions they complete, so they tend to choose the more valuable transactions first, as they will get more commission on these transactions.

The economics of this protocols leads to time lags of hours or even days, for transactions to be verified specifically when the network is congested.

This system is what Bitcoin runs on, and it is called proof of work.

So some of the clever engineers on these platforms had to come up with a solution, and the solution (even though there are many flavors of it) is simple, you select a few “trusted nodes” to represent the network, and let them verify the transactions.

This allows a more efficient processing of transactions, as less work is required and it keeps the network stable, this is called “Proof of Stake”.

How do these nodes get selected?

Generally they are selected because they own the most amount of coin on the network, so they have the most to loose if things go wrong, they have a vested interest in keeping the network stable.

There is inherent risks that need to be considered and these protocols are not congruent in their level of security.

In proof of work (PoW) there are more nodes and thus the network is more secure because of the number of immutable ledgers and the number of machines involved in the verification, it would be very costly to attack millions of machines.

In proof of stake (PoS) there are far fewer nodes and thus it introduces a higher level of risk in the form of attack or abuse on those nodes.

Where to from here?

The future of Blockchain technologies is bright, there is a lot of activity in this area, and many projects are targeting real world problems and coming with ingenuous solutions to those problems by developing Blockchain solutions that meets those needs.

From being able to put ones house on the Blockchain and allowing you to transfer it nearly instatly without the need for expensive legal processes, through to governments implementing blockchain, allowing you to transparently track every cent of your tax dollars throughout the process, creating the ideal, transparent governance model that will drive economies forward.

I would implore all of you to start reading up on these projects, as Blockchain will transform our future.