Blockchain Demystified

By Ben Hebert

In the financial world, the archetype of the wonky bitcoin guy is growing stronger than ever. These are the people secluding themselves in their basements trading tokens on Poloniex. The people who are known to bring up crypto in any and every conversation. Yes, those people exist. But those who understand blockchain technology know that it represents much more than token trading and speculative gambling. Still, it’s hard to escape the negative stereotype associated with the crypto-crazies. These are often the most vocal in the blockchain space and the most attention grabbing. Who wouldn’t want to learn how to make $20,000 a day trading tokens in from your home? However, behind this hype lies a nascent technology whose value to humanity is still being seriously evaluated. In fact, the technology itself has little to do with currencies or tokens at all. Fundamentally, blockchain is a new way to organize and interact with information, with monetary information being only one popular use.

Consider a company that wants to electronically store information regarding their clients. The company wants to be able to manipulate that data, but they want their clients to be able to as well, with permissions justifying who gets to edit what. This is at its core why websites are useful. The company can store data on the website, and anyone can visit the page to interact with it themselves, according to the given permissions framework. In this schema, the company will own a computer which stores all of the information, called a server. Computers from around the world can shoot the server computer a question such as “Can I get x information regarding y?” to which the server either agree, and retrieve the requested information, or disagree, and deny access to the information.

This is how the internet works in the modern day. Information is stored centrally. Blockchains, on the other hand, propose a fundamentally different approach. Instead of one server storing data and executing requests for users, there can be thousands of servers all storing the same information, and all interacting with different users. Users can access one of the thousands of computers, or nodes, to retrieve or manipulate data. Any change to the data on one node is then communicated to the rest of the nodes, which update their copies of the data accordingly. Many blockchain-like datasets such as the Bitcoin network are public, which means you could download them onto your own laptop if you pleased. Then, you could field data retrieval and manipulation requests yourself on behalf of the network.

The advantage of distributing the storage of data across numerous locations is the protection it affords the validation of that data. If you want to hack the information, you would have to fool hundreds of computers, as opposed to just one. Further, while allowing anybody to hang onto a copy of the data may seem like a major privacy issue, sensitive data can be encrypted into gibberish which only makes sense to the one user who possesses the matching “key.” Cryptography allows the blockchain to regulate who gets to do what, and much of this can be encoded computationally.

But how are all these copies of the data kept consistent? If one node decided to make a unique change to their copy of the data, how would the rest of the nodes know it was wrong? There are various validation strategies that are being played with in the blockchain space, though all of them are made possible by the nature of the blockchain’s structure.

Structurally, a blockchain is just a list. Each entry into the list comes after the previous entry. The list accumulates new entries in batches, which are called “blocks.” So a blockchain is just chain of blocks. At first glance, it may seem probable that storing data in this manner would require a massive amount of computer memory. Imagine if Facebook stored the data that made up in a massive list of every user action ever requested! Blockchains don’t need to worry about this problem, however, because the list is really a list of the cryptographic hashes of information, not information itself. It is sort of like hanging on to a list of book titles, instead of carrying all the books around themselves. Another concern that this structure may raise is the risk that individual holders of the list may maliciously change the contents of their list, then communicate that erroneous change to all the other nodes. For example, the person running a Bitcoin node could add a few entries to their list which show various users sending them all their bitcoin. Then that person could just communicate that false list with the rest of the nodes and trick everyone into sending them all their hard earned BTC. But the nodes that are sent this false list only see that version of the list coming from one node. All the other nodes are sending different data, so why trust the one that doesn’t look like the rest? In this way, only transactions which have sufficiently general acceptance are actually validated. Validation algorithms (the two biggest of which are called “proof-of-work” and “proof-of-stake”) are used to filter out invalid transactions. The one feature all such algorithms have in common, however, is that they mostly prevent one bad actor compromising the whole system.

So, a blockchain is a distributed list that exercises permissions through cryptographic functions and remains consistent across nodes through validation algorithms. But why is this so valuable? For public chains, anyone can run their own node, which can fend against the dangers of special interests influencing data flows. Also, as more nodes enter a blockchain system, the security of the blockchain necessarily increases, solving the pressing problem of scalability. A large growing institution need not build defense after defense against cyber malice if the computational power needed to ensure security were distributed among a network of nodes. Another valuable feature of lists is that they offer a complete picture of every entry that has ever taken place. This can allow for increased transparency and offers tangible benefits for large integrated ecosystems such as supply chains.

The decentralized nature of the blockchain also offers promise. Blockchain based crypto-assets offer payment options to underdeveloped nations whose currency is regulated by an untrustworthy government body. Decentralization also allows for the usage of trustworthy smart contracts: Snippets of executable code written into list entries that can automatically determine changes to the blockchain state without the need for human arbitrators or coordinators. For example, I could write a contract which stipulated the release of project funds to a particular product manager when the sufficient number of board members have given their approval. The funds could only be released with digital signatures produced by the right “keys,” which would mitigate the potential for things like embezzlement and human bias in general. The customizable nature of blockchain technology allows people to create all sorts of unique and carefully planned ecosystems, each with customizable sets of rules.

The last major implication of blockchain tech that I’ll touch on is its redefinition of the relationship between users and their personal data. The blockchain security model is different from current cybersecurity practices in that it places the burden of ensuring security primarily, though not entirely, on users as opposed to the big companies running servers. Keeping your own data private alleviates today’s unfortunate necessity to trust the Googles and Facebooks with your data. There have been various efforts to crack down on the misuse of digital consumer data. For the amount of legal complexity attached to that particular effort, it may be valuable to modify the structure of the system such that those issues never arise in the first place. This is what blockchain promises to deliver.

Blockchain is not just revolutionary banter. The first webpage went live in 1991, which means that the internet is not even 30 years old. What are the chances we got it right already? Our political institutions evolved throughout thousands of years of human civilization. We have plenty of new ideas with which to experiment. Hopefully, we can restructure the internet to resist institutional bias and restore data privacy decisions to the end user. While get-rich-quick schemes take up a lot of room in the current blockchain discussion, the practical implications of decentralized computing remain promising.