Hoax, niche or “steam machine” of our age? — Blockchain Demystified

By Maciej Marut, Krzysztof Bury, Bartosz Dluzen

Published in

DigiNA X-PLORERS

5 min readFeb 27, 2018

Year 2017 was undeniably a year of cryptocurrencies — a lot of people have made and lost fortunes. Bitcoin which was called “digital gold” (well said btw.) was second biggest search in “Global News” category “How to buy Bitcoin” was third biggest search term in “How To…” category of google trends search history [1]. However, it’s just unfair to name the cryptocurrencies and not to know the concept behind it which is blockchain (originally block chain).

History

Two points in time are relevant here. First, a work on a secured chain of blocks described in 1991 by Stuart Haber and W. Scott Stornetta [2], and second an implementation of blockchain concept by Satoshi Nakamoto (anonymous person or a group of people) in 2008 as a core component of the digital currency bitcoin.

Concept

Blockchain is a technology that enables moving digital assets (such as coins) between individuals, based on open (for public blockchain) ledger which is distributed between the nodes in the network and synchronized across all the parties, it emerged from one gap that society as a whole have — lack of trust between one to another.

To be more specific, blockchain network store information across the network of computers making it distributed, nodes (people / computers) who run the system use their systems to hold and keep track of records submitted by other parties — such records (or specifically group of records) — in so called blocks, that are in a chronological chain. Block itself is an aggregated set of data. Each block consists of many items that are collected and processed to fit into the block size — this process is called mining. Each block is signed / identified (same as primary key in database) using a cryptographic hash and once the block is processed, it will also contain a digital fingerprint (hash) of the previous block so that each block is connected with one another creating a chain of blocks.

In general, blockchain as a concept can be described based on 3 principles [3]:

Principle 1: Chain of transactions — Ledger

By default, blockchain was created as an open, public to everyone solution where every party can see every transaction. In real world as noble as it is, complete openness would not suit everybody, thus private and hybrid blockchain networks are emerging.

Principle 2: Distribution (distributed ledger)

Distributed copies of a ledger are synchronized — all the participants in the network sees the same copy. In simple terms each user of a network that is running a full node will download to a computer, full copy of the whole blockchain, which will include all transactions data for particular network (currently size of Bitcoin Blockchain is 150 GB) [4].

Principle 3: Understanding and synchronization of nodes

Steps to be taken to have a synchronized network:

1. Transaction is being published and broadcast to network

2. Transaction is waiting to validation

3. Nodes are working (as per Proof of Work algorithm — there are also other consensus algorithms, this one is the most common one) to validate transaction — add it to chain and get financial reward (network token)

Below is an illustration of a blockchain network and a transaction which will be a simple money transfer, to get simplified view of 3 principles described above.

Example of a transaction (money transfer):

Principle 1 & 2:

Principle 3:

Failures (Hoax)

Although blockchain technology sounds promising, and working concept of it — Bitcoin — stays firm, it has its flaws, both from security and technological standpoint. Below is a list of 4 flaws that are haunting blockchain:

1. Ethereum hack and split into Ethereum and Ethereum Classic [5]. Result of this attack is a $156 million in frozen and inaccessible digital currency.

2. CoinDash ICO (Initial Coin Offering) Hack [6].

“Payment and shipment start-up CoinDash launched an initial coin offering (ICO) campaign early this summer, but it quickly had to pump the brakes after its Ethereum address was compromised.”

3. Transaction costs and network speed — network performance and scalability of decentralized solution compared to current market players: VISA (~ 1700 transactions per second (tps)), PayPal (~ 115 tps in late 2014), Bitcoin (~ 3–4 tps), Ethereum (~ 20 tps);

4. Scalability — all blockchain consensus protocols (eg. Bitcoin, Ethereum) have a challenging limitation: every fully participating node in the network must process every transaction [7];

Existing Solutions (Niche)

Now that we know that blockchain is not sunshine and rainbow all the time, it is worth to mention 3 projects that are successfully adopting this emerging technology.

1. The Golem Project — company naming themselves as Airbnb for computers. Golem will let you rent your unused CPU/GPU cycles and get paid in cryptocurrency. [8]

2. ABRA — a bitcoin-based digital currency wallet. ABRA lets its users invest in bitcoin and ether easily, quickly and securely. [9]

3. Blockchain — a catchy name, you must admit. Blockchain same as ABRA is a platform for digital assets where users can (among others) analyze the blockchain and transact digital assets. [10]