The genius of product design — how Blockchain creates systematic value
With a look into how Satoshi Nakamoto used computer science, mathematics, cryptography, and behavioral economics to design the Bitcoin Blockchain
The value propositions offered by Blockchain, build the foundations of a system of values that could build the blueprint for the next era of the digital economy and Internet 2.0. The seven areas that Blockchain have proven to create value include:
- A network built on integrity
- Distributed power
- Aligned, value-driven, motives
- Digital security
- Preservation of rights
- Economic inclusion
When one initially hears about Blockchain, they tend to think of Bitcoin and its implicit benefits of privacy and security. But the underlying technology of Bitcoin (i.e. Blockchain) can protect much more than just money. It can document property rights, ensure citizenship, or defend a person’s participation in the government, culture, and economy.
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While the first era of the Internet was driven by emerging computation and communications technologies, the new era will be powered by a combination of computer engineering, mathematics, cryptography, and behavioral economics. And there are seven core value propositions associated with Blockchain that need to be treated as guidelines when creating software, services, business models, markets, organizations, and governments on Blockchain.
Value proposition 1: A network built on integrity
Problem: ‘the double-spend’
On the Internet, we haven’t been able to do business directly because assets such as money in general, aren’t like the information we share online. For example, if we send a selfie to a friend, the photo can be shared with others. But we can’t give a dollar to many friends — it must leave our account to go into our friends and can’t exist in two places at once. If the Internet treated money like information, there would be a risk called the double-spend problem which is terrible for our online reputations and the overall economy.
Traditionally, the double-spend problem has been solved by clearing every transaction through a third party such as a bank, money transfer service, credit card company, government, or an online payment portal. This means we give all of our information to a middleman and payments are settled on their schedule, not on ours.
Solution: ‘Proof of work’ protocols as consensus mechanisms
On Blockchain, trust doesn’t come from an outside source but from the participating peers within. This means that honesty, integrity, accountability, and transparency of interactions and transactions are baked into the Blockchain’s decision rights, incentive structures, and operations and distributed among nodes, not vested in a single member. This in effect means that acting without integrity is either impossible or it costs far too much time, money, energy, and, or reputation.
In the case of Bitcoin blockchain, the network timestamps the first transaction where the owner spends a particular coin and rejects any more spending of the coin, eliminating a double spend. Miners — people who run Bitcoin nodes — gather up recent transactions, order them into blocks of data and add it to the chain with each block referring to the previous one to be valid. Furthermore, since the Bitcoin blockchain is peer-to-peer and public, it is more traceable than cash.
The Bitcoin network relies on what is called a ‘proof of work’ to reach a consensus on how to record the data. Because the network can’t rely on the identity of the miners to select who creates the next block, it instead creates a puzzle whereby miners use their resources — computing hardware and electricity in the case of Bitcoin — to solve the puzzle by finding the right hash of the transaction — a unique fingerprint for the text or the data file.
Solving the puzzle requires a lot of computational power, but when someone solves it, everyone else can check the work quickly. Whoever solves the problem first, gets to create the next block and for each block miners create, they receive a bitcoin as a reward. There are no shortcuts to solving the problem, so when the rest of the network sees the answer, everyone trusts a lot of work went into producing it.
On the current version of our Internet (i.e. Internet 1.0), most of the information is malleable and short lived, where the exact date and time of its publication isn’t critical to past or future information. On a blockchain, the truth of the present relies on the details of the past. A Bitcoin’s movement across the network is permanently stamped from the moment of its coinage. For a Bitcoin to be valid, it must reference its history and the history of the Blockchain. Therefore the Blockchain must be preserved in its entirety, ensuring network integrity through clever code rather through human beings.
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Rather than trusting big companies and governments to verify people’s identities and vouch for their reputation, we, the people, can trust the network. It’s checkable, accurate, and unchangeable. The networked platform ensures trust in transactions and recorded information no matter how the other party acts. This will have enormous implications for social, political, and economic activity. It can tell us who owns what, such as physical or intellectual property, who graduated from which school, who bought which gun, who made your smartphone and its parts, your shampoo formula, or the Romaine lettuce you will be eating for lunch. With the help of Blockchain, we’ll soon be able to verify all of these things.
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Value proposition 2: Distributed power
Problem: centralization of power
In the first era of the Internet, large institutions that a lot of people depended on to conduct online commerce, rarely considered social contracts. Central powers and monopolies have proven that they’re willing to treat users poorly, implement large-scale changes without user consent, and warehouse and analyze their personal and at times private data, and share such data with governments without users’ knowledge. Because these institutions are so powerful, they can implement actions without many repercussions.
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Solution: distributed power
Blockchain re-stacks the deck by distributing power — for example, there is no central authority controlling the Bitcoin Blockchain. For example, the energy costs of taking over the Bitcoin blockchain outweigh its financial benefits. The proof of work method requires users to expend a lot of computing power and electricity to defend the network and mint new coins. In the case of Bitcoin, the proof-of-work method defends the blockchain network. Anyone can download the Bitcoin protocol and maintain a copy of its Blockchain. It’s fully distributed across a volunteer network such as BitTorrent, shielding the network from external interference, such as the government.
In other words, the Blockchain resides everywhere with no central authority. Volunteers maintain it by keeping their copy of the blockchain up to date and lending spare processing power to mining power. Every transaction or action is broadcast across the network to be verified and validated. Nothing passes through a central third party or stored on a central server. Network participants or miners in the case of Bitcoin, control their data, property, and level of participation. By distributing computing power, blockchain enables distributed and collective human power.
Distributed platforms such as the Bitcoin Blockchain can enable new distributed models of wealth creation and new forms of peer-to-peer human collaborations that target humanity’s most vexing and intractable social problems. By shifting power towards citizens and giving them real opportunities for prosperity and participation in society, we could work together to build confidence in today’s institutions or even build new public and private institutions.
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Value proposition 3 : Aligned, value-driven, motives
Problem: A destructive incentive system
In the first era of the Internet, power was concentrated in large corporations. They could extract enormous value from the system making them more powerful. Large banks nearly broke the financial system because their leadership was rewarded for risk-taking and short-term thinking with the 2008 financial market crash causing a host of bad behaviors including predatory loans targeting the poor.
Additionally, large dot-coms pretend to offer something for nothing by advertising “free” services in retail, search, and social media, while the real unseen cost is user data, which they exploit to boost revenues. But whenever these firms get hacked, consumers are left to deal with a stolen credit card and their bank account information. And at times, these costs can be dearly expensive to a large number of users such as with presidential elections.
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Solution: Internally coded, aligned, and networked incentives
Blockchain is set up to align the incentives of all its stakeholders. It uses a token of value, such as a Bitcoin, to promote behavior benefiting the Blockchain as a whole, while also building the participant’s reputation. Bitcoin is programmed to reward people who work on it and use its tokens and with everyone having a stake in the network, they make sure the network remains healthy.
Bitcoin gives no additional benefits for users to acquire extra identities. The source code is programmed so that no matter how selfish people act, their actions benefit the system. The resource requirements of the consensus mechanism (i.e. proof of work), combined with Bitcoins as a reward, compel participants to do the right thing — that is to act with integrity.
When miners create a block and link it to the previous one, the miner who completes the block first gets a set quantity of bitcoins for their efforts. Because they now own Bitcoins, the miners are invested in the platform’s long-term success. So, they buy the best equipment to run mining operations, spend energy as efficiently as possible, and maintain the ledger.
Bitcoins also represent partial ownership of the blockchain itself. Participants are not just incentivized to mine and transact with others, but by owning and using Bitcoin, they are financing the Blockchain’s development. By acting in their self-interest, Bitcoin miners serve the overall network and gradually build their individual and collective reputation.
Before blockchain technologies, people couldn’t easily leverage the value of their reputation online. In the offline world, our reputations are multifaceted and generally disconnected. We keep documents to prove our ID, such as with passports and driver’s licenses. But on the blockchain, our identity is inherent and recorded with every action.
In the case of Bitcoin, its Blockchain preserves value by programming its monetary policies right into the software. Bitcoin supply is capped at 21 million, to be issued over time which should all be in circulation around the year 2140. This creates a currency that is more secure, immune to counterfeiting and theft and is inflation resistant.
Unlike fiat currency, each bitcoin is divisible to eight decimal places, and this allows users to combine and split value over time in a single transaction. That means that users can set up smart contracts to measure the use of the service and eke out tiny fractions of payments or micro-payments. This kind of divisibility is great for the Internet of Things when the physical world becomes smart and starts exchanging information and doing transactions autonomously.
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With blockchain, people can have internally built financial incentives to collaborate effectively and exchange any types of assets. If digital reputations were to become valuable and trackable, bad behavior would be too costly and online discussion groups wouldn’t be inundated with trolls. Home-owners could receive real-time payments for using solar panels to generate sustainable energy for their network and open source software developers could pay contributors for acceptable deliverables.
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Value proposition 4: Digital security
Problem: Internet 1.0 — Lax online security
The invention of the Internet brought access to people, institutions, and economic activities, but it also introduced a variety of new security risks such as hacking, identity theft, fraud, cyber-bullying, phishing, spam, malware, ransomware, etc. Today most people rely on flimsy technologies to protect their online presence, mainly because service providers don’t insist on anything stronger.
Moreover, the typical bank doesn’t specialize in developing secure technologies, but rather in financial innovation. The average cost of a data breach is nearly $3.9 million according to IBM and the average cost to an individual of medical identity fraud is close to $13,500. Today, we don’t know which aspect of our lives will be hacked next.
If the next stage of the digital revolution involves communicating money or any type of assets directly between parties, then communications and transactions need to be hack-proof.
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Solution: ‘Public Key Infrastructure’ (PKI) and Digital Certificates
Blockchain networks incorporate safety measures with no single point of failure. They provide confidentiality and authenticity of records, meaning that a digital signature, can’t be denied. Anyone who wants to participate in the blockchain must use cryptography. Any reckless behavior doesn’t endanger everyone, it only affects the person who behaved recklessly.
Bitcoin requires participants to use Public Key Infrastructure (PKI) to establish a secure platform. The PKI is an advanced form of asymmetric cryptography (invented in the 1970s) where users get two keys — one for encryption and the other for decryption. You have to keep track of your own two keys and you have to keep track of everyone else’s public key. There’s no password reset function if you forget yours; you have to start all over.
Digital certificates are another solution to our current flimsy digital security. They’re pieces of code protecting messages without the need for asymmetric cryptography, where users pay an annual fee for their certificates.
People still lack incentives to protect their digital privacy. Blockchains, like Bitcoin, solve nearly all of our digital security problems by providing the incentive for wide adoption of PKI for all transactions of value. Today, we can store and exchange bitcoins securely. If we can do that, then we can store and exchange highly confidential information and many other digital assets securely as well.
Moreover, as a blockchain grows longer and longer, it also becomes safer. Hacking a long-chain requires substantially more computing power than attacking short chains.
With the ever growing usage of digital solutions in our everyday lives, technological security will mean personal security. Today, hackers can can pick our pockets or hijack our cars from the other side of the world. With the secure design and transparency of a Blockchain such as the case of Bitcoin, we can make transactions of value secure and protect personal data.
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Value proposition 5: Privacy
Problem: Corporate Big Data monopolies
People should control and own their data, and have the right to decide what, when, how, and how much about their identities to share with others. We need to respect one’s right to privacy in action.
Privacy is a basic human right and the foundation of having free societies. On Internet 1.0, central databases, in both public and private sectors, have accumulated confidential information about individuals and institutions, sometimes without their knowledge. These corporations can now create virtual clones of people as they know more about us than we do because we can’t remember what we did or said or bought or ate a year ago. The problem here is that the ‘virtual us’ is not owned by us but by the large corporations.
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Blockchain helps disentangle user identity from transactions. For example, Bitcoin requires no identity for the network layer. No one has to provide a name, e-mail address, or any other personal data to use the Bitcoin Blockchain. This is similar to how SWIFT works when we exchange in cash — that is, there’s no reference to anybody’s identity in the transaction.
Compared to Bitcoin, our credit and debit cards are very identity-centric. They require our name, address, financial information, personal identification number, pin, etc. And when a credit agency gets hacked, millions of people’s addresses and phone numbers are stolen every time a database gets breached.
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On the blockchain, there is no mass storage of personal data. Blockchain protocols allow us to choose the level of privacy that we’re comfortable within any given transaction or environment, helping us better manage our identities as we interact with the world. The ideal scenario is a world where we have privacy for individuals and transparency for organizations, institutions, and public officials.
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If one wants to find an individual’s identity on Blockchain, it would be very costly as they would have to triangulate a considerable amount of data to figure out who or what owns a particular public key. With every transaction on the Blockchain, the sender can provide only the metadata that the recipient needs to know.
Today, many people are unaware of how much privacy they bargain away every day, online. We leave digital footprints and trails every day for tech giants and website owners to convert into detailed maps of our whereabouts. With blockchain technology, we retain much more ownership over personal information and give away only what’s required in any social or economic exchange. Moreover, anytime we choose to give data of value, we can demand something of value in return.
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Value proposition 6: Preservation of rights
Problem: Legal vacuum
We adapted digital laws and standards developed from the physical world and had to trust middlemen to manage online transactions. These middlemen had the power to deny, delay, or declear transactions only to reverse them later. In this migration of existing laws into online practices, legitimate rights got trampled such as those for free speech, reputation, and equal participation. Even as we shaped digital intellectual property rights, there was little risk to ignoring them. For example, filmmakers saw their revenue stream dry up as their fans uploaded digital files for others to download for free.
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Solution: Smart contracts
Blockchain technology can strengthen property rights by making them inarguable and unforgeable. For example, on the Bitcoin Blockchain, the proof of work requirement timestamps transactions so that only the first spend of a coin can clear and settle. Using public key infrastructure, the blockchain prevents a double spend and confirms ownership of the coin in circulation. Therefore, on the Blockchain, one can’t spend what isn’t theirs, whether that’s physical or intellectual property.
If the people who create and own content do not participate in its distribution and profits, the Internet will fall apart. As a ledger of everything, Blockchain technology can serve as a public registry through such tools as Proof of Existence, creating and registering cryptographic digest deeds, titles, receipts or licenses. Proof of Existence calculates and stores the hash of an original document on the user’s machine, ensuring the confidentiality of content. Even if a central authority were to someday shut down Proof of Existence, the proof would remain on the blockchain and at the owner’s disposal.
Moreover, Smart contracts can help handle more complex transactions involving bundles of rights or multiple parties. A smart contract is an agreement that self-executes. It is a piece of special-purpose code that encodes an agreement between parties and is based on certain conditions that execute a complex set of instructions. It’s a fleshing out of legal instructions executed by software. In the future, smart contracts aim to let software determine the legal course of action, whether between individuals, businesses, or even countries.
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Another capability of a smart contract is that it can provide the means for assigning usage rights to parties. For example, a composer might assign a completed song to a music publisher. The code of a contract could include the term or duration of the assignment, the percentage of royalties, and termination triggers. To set the smart contract in motion, the composer and the publisher would each sign using their private keys.
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Smart contracts could also handle difficult rights of shared resources among the community and provide users control and legal rights over their data that is currently used freely by big tech corporations.
While we need better education about our rights and better management systems better, clear and transparent rights and responsibilities can be codified in a smart contract and placed on a blockchain. This way, necessary decisions, and incentives will be transparent and be reached by consensus.
Value proposition 7: Economic inclusion
Problem: Exclusion, socioeconomic divide, and poverty
The economy will work best when it works for everyone, with low barriers to participation. Economic inclusion will in effect solve poverty. In 2019, the global internet penetration stood at 59% with most of the world’s population still excluded, from access to technology, financial systems, and economic activity.
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The internet has helped establish companies that provide jobs for millions in the developed and emerging economies and lowered the barriers to entry for entrepreneurs, but this is not enough. There are still 2 billion people without a bank account and social inequality continues to grow in the developed world. In developing countries, consumers at the bottom of the pyramid still can’t afford the minimum account balances, minimum payment amounts, or transaction fees to use the financial system due to high infrastructure costs and a lot of these people don’t have an identity.
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Solution: Banking, payment, and legal services for all
Blockchain delivers a stable payment system available to all, regardless of socioeconomic status or geography. The Bitcoin Blockchain system is designed to work on the Internet and offline via its Simplified Payment Verification feature, working on most types of cellphones. With this feature of Bitcoin, there’s no bank account required, no proof of citizenship, birth certificate, home address, or identity. With such properties, Blockchain can help drastically lower the cost of transmitting payments of any sort.
Blockchain can potentially have the largest impact in developing countries where entire banking systems may be inefficient or corrupt or where the central banks of failed states print money to keep the government running, further debasing the local currency. In such economies, if the local economy were to tank — as in the case of Venezuela — these central bodies could freeze the bank assets of citizens, while, the wealthy store their assets in more stable currencies, causing their local currency to lose even more value, leaving the middle class and poor’s saving to become worthless.
There’s also enormous potential in using blockchain to safeguard property records. In many emerging markets, there are no trusted entities where citizens can register land titles. Blockchain can allow people to claim land and property and back it up with verifiable proof. With these Blockchain ownership proofs, individuals can then use their land as collateral for loans, or credit to improve their livelihood.
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The first era of the Internet benefited many, our economies grew but the middle class shrank. The foundation for prosperity is inclusion. Inclusion means participation by people of all social, economic, health, gender, and racial backgrounds. Inclusion means dropping barriers to access because of where a person lives or how they voted. It means change for the better and Blockchain can help us get there.
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