Public and private chains will merge into a shared database

After leaving JPMorgan Chase to become CEO of Digital Asset Holdings, renowned economist and trader Blythe Masters officially began his global blockchain-themed speaking tour. During the Exponential Finance Conference on June 2, 2015, Blythe said, "The value of financial blockchain applications will be in the trillions." After making this astonishing statement, professional digital investment companies received calls, all asking, "How can blockchain technology help us gain industry dominance?" Now everyone is curious. But first, we need to take a good look at Bitcoin, Ethereum protocols, and blockchain technology.

Where did this blockchain boom come from? Among many factors, the rapid development of blockchain company investment/acquisition is the main catalyst. R3CEV blockchain alliance not only owns 60% of the relevant institutions, but also has a market value of $600 billion. For the financial and insurance technology industry, 2015 is truly the "year of blockchain". In October 2015, The Economist made a special cover story for this, which caused a sensation in the media circle. Even considering the tightening of laws and policies, the overall environment is still favorable, especially in the European Union, which has implemented a tax-free policy for the use of digital currencies.

The birth of a technology

Blockchain was born with Bitcoin. The general public simply regards Bitcoin as a currency, but fundamentally, it is a technology for building the main structure of a computing protocol. Compared with the usual currency, Bitcoin is more similar to the transmission control/internet protocol (that is, the Internet).

In theory, a blockchain is a shared backup record between users and validators. Information that flows through the platform is gathered into a block, each representing a page of the ledger. The blocks are automatically stacked together in chronological order, stamping the information with a timestamp. While creating new blocks, validators protect and block existing information, including information that refers to the previous block. Therefore, it is impossible to tamper with one block alone without changing all other blocks on the chain. As a result, blockchain has gradually become a reliable auditing tool and allows trust to be established between participants in the system. However, in practice, not all blockchains are tamper-proof. How can we ensure that the data that has been time-stamped on the blockchain will never be changed? To understand the answer, we need to look back to the situation when the Bitcoin protocol, the source of blockchain, appeared.

For decades, many large ledgers have been kept and stored in computers by independent private institutions, such as banks and financial institutions. This centralized management is particularly necessary to combat fraud and "double spending" (multiple transactions with the same amount of currency at the same time). Closed systems can prevent any manual manipulation, such as adding a large amount of money to the account. Although highly concentrated power has its risks, strict institutional control can ensure its compliance and stability.

Blockchain technology was developed in the context of the 2007 financial crisis. At that time, banks were in a panic, interbank transactions were almost stagnant, and people's trust in financial institutions had reached rock bottom. The idea of ​​establishing a public ledger to ensure decentralized power resurfaced in this specific context. However, the vulnerability of public records to fraud remains unsolved. How can we ensure operational transparency while protecting the public's write access to open databases?

In November 2008, a developer named Satoshi Nakamoto provided a solution by publishing a white paper titled "Bitcoin: A Peer-to-Peer Electronic Payment System" in an encrypted mailing list. The paper described a server (later renamed "blockchain" by developer and activist Hal Finney) that had a timestamp function and required "proof-of-work" to provide write permissions.

Seven years later, this proof-of-work method was used to ensure the immutability of transaction data in the Bitcoin blockchain.

Bitcoin blockchain

The difficulty of "proof of work" is similar to that of Sudoku, which means that it is very difficult to test but quite easy to verify. This operation (also known as "mining") is based on consensus rules and verification procedures (also known as "miners") spread all over the world. The main purpose of mining is to ensure the security of the blockchain, that is, to ensure the security of the public database.

There is a lottery mechanism in mining, and the more computing power miners (validators) develop, the more tickets they can get to win the game. Therefore, the winners of the game can be rewarded in account units, which are "Bitcoins" (with the first letter not capitalized). The security level of the Bitcoin protocol increases proportionally with the number of contributors. Account units are combined with mining and blockchain principles to establish a decentralized governance system through consensus reached by anonymous participants.

Therefore, as long as the majority of honest miners control more computing power than malicious miners, the security of the blockchain can be well guaranteed.

All blockchains using proof of work are potentially vulnerable to Goldfinger attacks. These attacks aggregate just over 50% of the total computing power, arbitrarily invalidating or validating transactions on the Bitcoin network within 10 minutes. However, Bitcoin is now the most powerful network in the world, with a hash rate of over 1,200 Peta Hash per second (PH/s), which means that even if an attack of over 51% of the total computing power is theoretically possible, it would cost a lot of money (nearly $5 billion for a 10-minute attack).

Fortunately, Bitcoin is an open source project. A simple software patch is enough to fix the problem and restart all network nodes. The Bitcoin source code can be reviewed by anyone who knows a programming language such as C++. Therefore, everyone can participate in it, modify, compile or even rewrite the code to create their own blockchain. In the Bitcoin ecosystem, there are thousands of new blockchains, which are regarded as "alternative" altcoins.

The Cambrian Explosion of Blockchain

We are now experiencing a Cambrian explosion of blockchains, allowing for a lot of experimentation. Today’s blockchains are diverse, with characteristics that vary from project to project. Anyone can create their own system: the starting conditions are simple and not difficult to implement.

As we have seen, at first, a blockchain is a public database. In other words, everyone can read the stream of information. This is a huge improvement in terms of fighting corruption, but from the perspective of an individual, these benefits create many obstacles.

Participants such as IBM or Digital Asset Holdings are working on private blockchains that require permission to participate in consensus. Although private blockchains that are decentralized in micro-supplies and centralized in the overall are already emerging, some characteristics of public blockchains are still retained: such as a strong architecture, because the database is decentralized, such as the permanence of the system, because the data is immutable, and its uniqueness, because each system and the overall ledger are unique.

These features bring significant advantages, such as reduced systemic risks related to participant insolvency, and off-chain asset management provided by smart protocols or virtual machines (Turing completeness), which can optimize or innovate services.

For example, banks can use this type of technology to minimize maintenance costs. As computer technology matures and continues to upgrade, private blockchains are developing rapidly. The R&D departments of major banks are highly interested in blockchains. They develop private blockchain prototypes within the legal framework of their regions, either individually or through alliances such as R3CEV.

In contrast, public blockchains, such as the Bitcoin protocol, can be used to ensure data security using asymmetric encryption techniques: financial information and user identities need to be protected. Citizens' data is still at risk of being illegally stolen by state agencies or companies, just like the Sony information hack in 2014 and the US public information leak in 2015. Blockchain may help the government find a solution.

In general the differences are:

- The overall ledger of a public blockchain is public. These blockchains are secured by using a proof-of-work method, which requires a certain amount of computing power to gain write access to the blockchain. However, new methods such as proof-of-stake are also being tested, which require a large amount of digital assets to generate new blocks. In addition, proof-of-transaction and proof-of-block are also being tested, with the intention of using several security methods in parallel or in sequence in the future.

-Private blockchains are also called "permissioned blockchains" because their overall ledger is closed. Today, these blockchains have not yet been implemented, but it is not difficult to imagine that they will use either a proof-of-stake method or some known and authenticated verification process, as is the case with IBM's public blockchain. These are developed by enterprises and are dedicated to certain specific uses, such as joint credit reporting, trade finance, compensation or repurchase. These commercial blockchains will obviously not affect general consumers.

Blockchain hybrid

That’s not all. The private blockchain landscape is taking shape, but it’s already starting to diverge. Richard Brown, CTO of the R3CEV consortium, says the term “blockchain” is a broad concept. He says his partners and colleagues think they’re talking about the same thing, but are talking about something completely different. Rather than using the term “blockchain” indiscriminately, he suggests using “shareable, replicated register”: shareable because multiple participants can look through or write to different parts of the register; replicated because everyone can get a copy of the register if needed, rather than relying on a central authority.

However, it would be unfair to treat all sharable, replicable registers as private blockchains. Most of these records come from updates to bank computer records, so only certain aspects of blockchain technology need to be simply adopted. These sharable, replicable registers that we started developing two years ago are very different from the original blockchain, which did not fully exploit the potential of blockchain. Therefore, this is likely to be a transitional step in the long-term digital transformation of the banking, finance and insurance sectors.

The most interesting developments in the public blockchain space are happening at the transaction script and smart protocol level. The Ethereum Smart Protocols project is a great example, but there are also other projects, such as Philips’ Streamium, which allows people to watch streaming video, that show how Bitcoin technology can be used to create interactive models that are simply not possible with existing financial platforms.

As we can see, both public and private blockchains will lead us to the same place: a world with shared databases that can operate independently.

Author: Alexander David / Trainer and Consultant at EUREKA

Alexandre David started his career in the video game industry and then joined Eureka as a trainer and consultant in blockchain technologies, including Bitcoin and Ethereum. As a self-taught expert, he continues to dabble in other fields, such as web and mobile design. So far, he has published articles in several professional magazines, including ITR Manager.