Introduction to Blockchain and nahmii

John Derbyshire
Jun 24 · 10 min read

The hubii team have been particularly busy over the last few months, with the first nahmii smart contracts for trades (and trading) deployed to the Ropsten testnet last weekend. As part of a new series of articles about nahmii and our wider product portfolio, we’re starting with a short introduction to blockchain technology and why we built our own scaling protocol. Stay tuned over the next week for more updates from the team; we’re expecting a major upgrade to land in the next few days, with a new website and product updates to follow soon after.

Today’s article focuses on what blockchain means for the content industry, hubii’s original home:

Introduction to Blockchain

Blockchain technology is big news, with analysts predicting a business value-add of over $3 trillion USD by 2030 (Gartner, 2017). Despite the huge hype surrounding blockchain and the explosion of media interest over the past few years, the technology remains remarkably poorly understood. In this paper we take a look at the basics of blockchain, explaining the key concepts in simple non-technical language and what it means for the content distribution industry.

What is Blockchain Technology?

Blockchains are all about data, with a special focus on who controls that data and how new information is added to the record. As you might expect, blockchains are made up of connected ‘blocks’, with each block representing a new batch of data. Over time, new blocks are added to the blockchain with the data becoming part of the permanent record. Any changes, including the addition of new blocks, must be approved by the network. For a typical blockchain like Bitcoin, the network is made up of ‘miners’, these are people who contribute computing power to help run the network in exchange for rewards.

While there are many varieties of blockchains, mainly depending on whether they are public or private and how transactions are validated by the network, we will concentrate on the most common form. For ‘Proof of Work’ blockchains like Bitcoin and Ethereum, participants in the network who contribute the most resources to validating transactions receive the majority of the rewards. What this means in practice is that these blockchains are decentralised; decentralisation is a key concept for blockchain technology and it refers to a lack of central controlling agent who decides which transactions to accept.

Blockchains are also permissionless; in other words, anyone can participate in the system without the need for a license, accreditation or membership. Why should we trust a system with no central operator and no barriers to entry? This is explained by the third and most important concept in blockchain technology — trustlessness.

The best use cases for blockchain technology involve multiple parties who do not necessarily trust each other. Without the assumption of trust, each party must have access to the full transaction record which can then be validated to ensure compliance. For a public blockchain like Bitcoin, anyone can view the whole blockchain — every single transaction ever made, ordered by block — at any time. Each party can choose to hold their own copy of the data record, which can then be compared to all other copies to ensure that no unauthorised changes have been made. As such, the distributed nature of blockchain technology provides incredible security.

Taken together, these three concepts — decentralisation, permissionlessness and trustlessness — highlight the primary features of blockchain technology. Next, we will look at these concepts in action through a typical use case.

A Typical Use Case

As mentioned earlier, blockchain technology is best used when there are multiple stakeholders in a process who do not necessarily trust one another. The first and most obvious blockchain use cases came in finance, where the decentralised blockchain network would take the place of a trusted intermediary when handling transactions. Using the example of a simple payment between two accounts, the blockchain version requires no accreditation and no bank. Not only can this transaction be radically cheaper to process, it is effectively impossible for either party to defraud the other — the blockchain record clearly shows whether the payer has the funds to send the payee, when the payment was made and the starting/closing balances for both parties.

Our payment example raises an interesting question: something is being transferred from one account to another and recorded on the blockchain, but what exactly is that thing? Just like with a bank, which transfers ownership of digital money, the blockchain transfer is moving ownership of a token from one account to another. This ‘token’ can represent any asset, both digital and physical, and this leads us to the next use case: digital asset ownership.

The Tokenisation of Everything

Blockchain technology allows companies to create and control digital tokens, where these tokens can represent both digital and physical assets. Consider the example of a ticketed event, where the promoter creates one hundred tokens, each representing a ticket. Users can purchase these tokens in exchange for digital currency, then use the tokens in exchange for entry. As the user redeems each token, it is transferred back to the promoter who then removes it from circulation. This process is fully transparent, with the option to verify all transactions at any time using the blockchain. Importantly, the supply of tokens (tickets) is strictly controlled; no duplicate or fake tickets can be created.

The benefits of full transparency are even easier to appreciate when the asset in question is scarce. Consider a content distribution company selling a fixed number of ‘season passes’ for a certain show. Potential buyers can see the passes, represented as limited-issue tokens, and verify exactly how many are in circulation. By opening up the management of digital assets in this way, companies can create real value through provable scarcity.

Here at hubii we believe in ‘The Tokenisation of Everything’, where all assets classes — digital and physical — can be tokenised and represented on a blockchain. As with the finance use cases discussed earlier, digital tokenisation is simply a matter of moving existing inefficient processes onto a better blockchain-backed system. Thus digital tickets, coupons, gaming items, currency, licenses etc. become similarly digital tokens on a blockchain. Physical asset tokenisation has received less attention, with the most prominent pilot schemes focusing either on closed supply chains or slow moving processes like land registration. In each case, the limits of current blockchain performance have restricted the potential applications of the technology.

Scalability Problems

Despite the enormous hype surrounding blockchain, we are yet to see any commercial-scale applications of the technology. This disparity is explained, in part, by the surprising lack of scaling options for blockchain. Current blockchain performance for the two most popular networks, Bitcoin and Ethereum, stands at fewer than 15 transactions per second across the whole system. Given that the VISA network averages over 100 times that number, it is clear where the main problem lies.

Lacklustre transaction processing ability is not the only thing holding blockchain technology back. Using the Ethereum network as an example (Bitcoin performs worse on this metric), each transaction takes a minimum of 15 seconds to be processed. That assumes that your transaction is ‘mined’ in the next available block, which does not always happen, and that your block eventually becomes part of the permanent record. Perhaps even more damagingly, Ethereum currently has unpredictable fees; a simple $1 payment today might attract a fee of $0.01, but tomorrow the same transaction might cost 20 times as much. Taken together, the combination of painfully low transaction throughput rates, high latency, unpredictable fees and delayed transaction finality means that Ethereum (and Bitcoin) are currently unsuitable for anything but the slowest of commercial applications.

The challenge of improving blockchain performance is often referred to as the ‘scalability problem’ or the ‘blockchain scalability trilemma’. In the blockchain trilemma, we must choose two of the following three desirable system properties: scalability, security or decentralisation. A traditional database is secure and fast, but lacks decentralisation and is therefore reliant on the trusted operator. In contrast, blockchains are decentralised and highly secure, but lack scalability.

The Solution: Second-Layer Scaling

The scalability problem has attracted significant attention and two main strategies have emerged to help solve it. First, attempts are being made to improve the basic performance of the main blockchain. Second, working alongside the first, companies are building second-layer solutions which move the majority of transactions off the slower main blockchain. This second approach is akin to building a motorway bypass, taking traffic away from the slower roads.

Our company, hubii, have recently deployed the first ever commercially-viable scaling solution for Ethereum. We use the slower main Ethereum blockchain to handle deposits and security validation, moving all other transactions ‘off-chain’ on to the second layer. Our protocol, named nahmii after the Thai word for water (‘nahm’), allows transactions to flow at commercial speeds. Not only does nahmii fix the transaction throughput problems of Ethereum, it also offers low latency, instant finality and predictably low fees.

Our solution to the ‘blockchain scalability trilemma’ is to combine a centralised system (like a traditional database) with the decentralised Ethereum blockchain. This unique, patented approach provides radically increased performance without sacrificing the valuable decentralisation benefits of the blockchain.

So far we have discussed the basics of blockchain, what typical use cases might look like and the potential future of the technology. With the advent of scalable blockchains, entirely new use cases become possible. What does this bright future look like for the content distribution industry? The answer lies in revolutionary payment networks.

Scalable Blockchains, Revolutionary Payments

The current content monetisation model is fundamentally flawed. With the rise of digital media, content businesses have tried to replicate the predictable revenues found in subscriptions with limited success. Generally, all digital content monetisation models can be grouped into one of three categories: advertising, subscription, pay-as-you-go. In this section we will look at the problems with each and why blockchain technology has the solution.

The first and most common method of content monetisation is through advertising, where content is offered for free in exchange for the inconvenience of advertisements. Advertising-based models divide into two camps, either targeted or not, with the former becoming increasingly controversial in the era of big data. Aside from privacy issues, volume-based advertisements have led to increasingly unpleasant user experiences; pop-ups, pop-unders, giant banners and unskippable videos are all examples of invasive and unpopular advertisements. In addition to ruining the user experience, advertisements have also driven content creators towards clickbait headlines — further undermining their own products. Perhaps most damagingly, advertising revenues have delivered only a fraction of their promised returns for the majority of providers; advertising revenue is now effectively controlled by Google and Facebook. This toxic mix has seen users turn to ad-blocking software, while unscrupulous operators have leveraged click farming and advertising fraud to inflate revenues.

In response to the advertising-based crisis, content networks have turned to paywalls and subscription models to improve the revenue per user. While this approach has seen some success with more niche publications, it has come at the expense of a radical reduction in customer numbers. Subscription paywalls demand a significant commitment from users, erecting substantial barriers to entry. As more sites lock their content behind paywalls, consumers are becoming more discerning about which sites (if any) to subscribe to. Clearly, the ideal situation is one in which all customers pay a fair price for the content they consume; this is the principle of pay-as-you-go payments.

Long heralded as the saviour of the content distribution industry, pay-as-you-go payments have been restricted by the existing financial infrastructure. The ultimate example of this is micropayments, where users make tiny payments on a per-article, per-song, per-second or even per-click basis. While certain songs, articles and videos may be worth much more than the minimum payment amount to users, the utility of a pay-as-you-go system is generally determined by the smallest payment size. Conventional bank accounts will only allow for payments in the minimum denomination of a currency, so $0.01, €0.01 or £0.01, which is often far too expensive for a pay-per-click or pay-per-second pricing structure. In response, payment aggregators have offered to collate many smaller payments together until sites reach a minimum payment threshold. This approach has also proven unsatisfactory, with payment aggregators charging punitive fees for a slow and unreliable service.

Blockchain-backed Payments

Using a scalable blockchain solution like nahmii, content providers can now have the best of both worlds: genuine micropayments from every user, which clear immediately without high fees. Our payment platform supports nano payments, 1,000 times smaller than a micropayment, with similarly low fees. What does this mean for the content distribution industry? Instead of forcing users to suffer through intrusive advertisements, we can now offer the premium ad-free experience to all users in exchange for micropayments. This approach transforms content monetisation, offering variable pricing for different content types and ensuring all users pay a fair price. Similarly, the blockchain removes the need for a trusted intermediary like a bank or payment aggregator, with the option to have payments enforced automatically by a smart contract.

When the principles of tokenisation and genuine micropayments are combined, content delivery networks have the option to radically transform their business model. Users, content producers and delivery networks all benefit from this fairer system; users will enjoy a vastly improved user experience, free from intrusive advertisements, while content producers and distributors will receive a fair and potentially instant payment for their work.

Summary

Blockchain technology has the potential to revolutionise many industries, but only if the underlying scaling protocols deliver on their promises. The team at hubii have built and deployed what we believe is the future of blockchain, taking the best elements of the secure but slow Ethereum network and combining it with commercial-grade performance. For the content distribution industry, the potential of the new technology is obvious; for the first time, distributors have full control over the licensing, tokenisation and distribution of content while also being able to charge fair fees to all customers.

The future of digital content monetisation is bright, thanks in no small part to the potential of blockchain technology.

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All about hubii and its Ethereum scaling protocol, nahmii

John Derbyshire

Written by

Product Lead for hubii AS.

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All about hubii and its Ethereum scaling protocol, nahmii