Blockchain technology reshaping the world

The technology behind Bitcoin allows people who don’t know each other to create a reliable ledger, which goes far beyond the significance of cryptocurrency itself.

Mariana Catalina Izaguirre had lived in her modest house for three decades when Honduran police suddenly wanted to evict her in 2009. Unlike many of her neighbors in Tegucigalpa, Honduras’ capital, she owned the land title to her house. But records from the National Institute of Property showed that another person had also registered the house, so that person convinced a judge to file for an eviction order. Although the courts eventually figured out that the real owner was Ms. Izaguirre, her house had already been demolished.

This is not uncommon and happens every day. This is because land registries record information haphazardly, are poorly managed, or even corrupt - and this is true in many places around the world. Lack of security in property rights is a source of insecurity and unfairness. It also makes it difficult to use a house or a piece of land as collateral, investment, or capital to start a business.

Bitcoin, a digital currency based on a clever encryption algorithm that has a loyal following among mostly wealthy people, anti-government activists and the occasional criminal geek, seems to be the answer to these problems. The encryption technology that underpins Bitcoin is called blockchain, and its applications extend far beyond cash and currency. It provides a way for people who don’t know each other to create a record of their assets that everyone can view. It is a truth keeper.

That’s why the government of Honduras has taken an interest in blockchain technology, and politicians have sought out the American startup Factom to provide a prototype for a blockchain-based land registry. Greece has also expressed interest in the idea, as it has no proper land registry, with only 7% of the country’s land properly recorded.

Other applications of blockchain range from protecting against diamond thieves to streamlining stock markets: Nasdaq will soon begin using a blockchain-based equity trading platform to record transactions of private companies. The Bank of England, which has traditionally been conservative and reluctant to embrace emerging technologies, seems to be swayed this time: a research report from the bank at the end of last year pointed out that distributed ledgers are a "significant innovation" with "profound implications" for the financial industry.

Politically minded people see blockchains further into the future. At this year's OuiShare Fest in Paris, where partners and leftists gathered to talk about how grassroots organizations could shake up giant databases like Facebook, the topic of blockchain was a constant theme throughout the conference. Libertarians dream of a world where more and more government regulations will be replaced by private contracts between individuals, which will be automatically enforced by blockchain technology.

Blockchain was conceived in the mind of Satoshi Nakamoto, a genius and still unknown creator of Bitcoin. In 2008, he published a paper titled "Pure Peer-to-Peer Electronic Currency". For Bitcoin to work like cash, it must be able to avoid double payments while not mis-issuing accounts. To achieve Satoshi Nakamoto's vision of a decentralized system, it is necessary to avoid dependence on any third party, such as banks that support traditional payment systems.

What replaces the trusted third party is the blockchain. The blockchain is a database containing the history of every bitcoin transaction. This distributed ledger is replicated across thousands of computers - bitcoin "nodes" - and is both open and trustworthy to everyone in the world. It works through sophisticated mathematical algorithms and the massive computing power of a "consensus mechanism" - a process in which nodes update every transaction that has ever flowed through the blockchain.

For example, Alice wants to pay Bob for a service. Both have Bitcoin "wallets" - software that accesses the blockchain, not a browser that connects to a web page, but does not identify the user of the system. As Alice activates her wallet, the transaction is initiated, and the altered blockchain shows that Alice's wallet balance has decreased, while Bob's wallet balance has increased.

The network will go through several steps to confirm this change. As this change is broadcast to the entire network, different nodes will check the ledger to confirm whether Alice has spent these bitcoins. If everything is correct, the miners responsible for maintaining the operation of the Bitcoin network will package Alice and other credible transactions into a new block in the blockchain.

This requires repeatedly feeding the data through a cryptographic "hash" function that breaks the block into strings of numbers of a given length. Like much of encryption, this hash calculation is one-way. It is easy to deduce the corresponding hash from the data, but it is impossible to deduce the data from the hash. Although the hash does not contain the data content, each hash is unique. You can change the content written into the block in any way - change a single byte - and the corresponding hash will be different.

The hash and other corresponding data are written to the generated block header. The block header also derives the mathematical puzzle to be calculated using the hash function based on itself. This puzzle can only be solved through trial and error. Miners across the network have to try trillions of possibilities to find the answer. When a miner finally gets the answer, other nodes will quickly check it (this process is also one-way: solving the problem is difficult, checking is easy), and each node that confirms the answer to the puzzle will update the blockchain accordingly. The hash of the block header becomes the identification string of the new block, and then that block will become part of the ledger, and Alice's payment to Bob and other transactions will be included and confirmed by the block.

This puzzle-solving phase introduces three things to Bitcoin’s security. The first is randomness: you can’t predict which miners will solve the puzzle, so you can’t predict who will update the blockchain at any given time, only hard-working miners can do it, not random interlopers. This makes cheating extremely difficult.

The second is history. Each new block contains the hash of the previous block, which contains the hash of the block before that, and so on, all the way to the genesis block. It is this interconnection that links the blocks together into a blockchain. It is easy to derive all the blocks from the genesis block of the blockchain again. But change it anywhere - such as going back to an early block - and subsequent blocks will change as well. This means that the block after the change, and all subsequent ones, will be completely different. The previous ledger no longer matches the latest block identifier and is rejected.

Is there a way to reverse this situation? Imagine that Alice suddenly changes her mind about paying Bob and tries to rewrite history so that her bitcoins remain in her wallet. If she is a capable miner, she will solve the necessary puzzle and produce a new version of the blockchain. But while she does this, other nodes will continue to extend the original blockchain. Nodes always choose to trust the longest blockchain. This rule prevents the dilemma of two miners solving the puzzle at the same time, while avoiding short-term forks of the blockchain and eliminating cheating. So if Alice wants to force the system to accept her version, she needs to create a longer blockchain than the original blockchain. Controlling more than half of the computers in a short period of time - known in the industry as a "51% attack" - should be impossible.

Putting aside the difficulty of trying to subvert the network, there is a deeper question: Why should you be a part of it? Is it because you can get rewards in the process of solving problems? Mining new blocks can get new bitcoins, and miners can get 25 bitcoins, which are currently worth $7,500.

None of this makes Bitcoin a particularly attractive currency. Its value is volatile and unpredictable (see chart), and the total amount in circulation is deliberately limited. But the blockchain mechanism works very well. According to blackchain.info, a website that tracks blockchain activity, an average of 120,000 transactions worth about $75 million are written to the blockchain every day. There are now 380,000 blocks, and the ledger takes up nearly 45Gb of space.

Most of the data on the blockchain is about bitcoin. Nakamoto has built what geeks call an “open platform” — a distributed system that is open to testing. The archetype of such a platform is the Internet itself; other examples, including operating systems, are Android and Windows. Applications that rely on the basic functions of the blockchain can be developed without asking anyone for permission or paying anyone for the privilege. “The Internet is finally an open database,” says Chris Dixon, a principal at venture capital firm Andreessen Horowitz, which has backed several bitcoin startups, including wallet provider Coinbase and 21, which makes bitcoin mining hardware.

Blockchain-based products can now develop in three directions. First, use blockchain to transfer various types of assets. One startup betting on this idea is Colu, which has developed a "mechanism" that can "stick" extremely small amounts of Bitcoin transactions (so-called "Bitcoin dust"), making them represent bonds, stocks or precious metal units by binding additional data to the "dust".

Second, it is used to protect land ownership. Applications using blockchain can be seen as truth machines. Bitcoin transactions are combined with other pieces of information and then embedded in the ledger. It is therefore used as a register that can track everything in detail. Everledger uses blockchain to protect precious objects; for example, it "ties" some distinctive features to blockchain data to provide an irrefutable proof of identity. Onename stores personal information in a way that requires cracking a password; CoinSpark specializes in "notarization", etc. Note that although these applications are different from pure Bitcoin transactions, they still rely on trust in these third-party service companies. You have to believe that these companies can store data well.

Third, and most ambitious, is the use of “smart contracts” that can execute themselves under normal circumstances. Bitcoin is “programmable,” so it can be used to do things under certain conditions. One application of this capability is to defer payment to miners for solving a puzzle until more than 99 blocks have been added—the reward for solving the puzzle keeps the blockchain running smoothly.

Bitcoin veteran Mike Hearn has started a project called Lighthouse, which is a distributed crowdfunding service. If enough money is raised to start a project, it will start; if it doesn't reach the goal, it will stop. Hearn said his project will cost less than non-Bitcoin competitors and will be more independent because governments can't get involved in projects they are not good at.

The advent of distributed ledgers opens up "a whole new frontier," to borrow the words of Albert Wenger, whose New York venture capital firm has invested in startups like OpenBazaar, a peer-to-peer marketplace without middlemen. Because blockchain is open and exciting, skeptics say it will be subject to security bugs and won't scale. What worked for bitcoin and a few small applications may not support thousands of services for tens of millions of users.

While Nakamoto’s ingenious design has proven impregnable so far, academic researchers have figured out how to keep a few sneaky and wealthy miners from directly controlling 51% of the hashrate and thus maintaining the blockchain. Gaining control of a significant portion of the network’s resources is less likely than before. Bitcoin mining has been dominated by large “mining pools” that allow small miners to reap their own rewards, and many of these mining giants are operated in China, such as Inner Mongolia, where electricity is cheap.

Another concern is the environmental impact. The Bitcoin architecture forces miners to perform a lot of hard calculations, which is called the "proof of work mechanism". If miners do not mine, there will be no reward, thus ensuring that all parties related to Bitcoin will participate in the game. But this process wastes a lot of meaningless calculations. According to the blockchain.info website, miners across the entire network are performing up to 450,000 trillion calculations per second, and each calculation consumes energy.

Because miners keep the details of their hardware secret, no one knows how much power the network actually consumes. If everyone used the most efficient hardware, it would use about 2 trillion watt-hours of electricity per year—more than the 150,000 residents of King County in California's Silicon Valley use. If you make the most pessimistic assumptions about miner efficiency, you get a figure as high as 40 trillion watt-hours, which is two-thirds of the annual electricity consumption of Los Angeles' 10 million people. Of course, this is a bit exaggerated, but the more people use Bitcoin, the less waste there will be.

However, Bitcoin's power consumption is also limited. Because Satoshi Nakamoto set the upper limit of each block at 1Mb, which can accommodate about 1,400 transactions, it can only process about 7 transactions per second on average. In comparison, Visa can process 1,736 transactions per second. Blocks can be expanded, but larger blocks require more time to be broadcast to the network, which will increase the risk of forks.

Earlier platforms had similar problems. After the invention of the web browser in the 1990s, millions of websites came online, and pundits predicted that the network would collapse, but it didn't. Likewise, the Bitcoin system is not sitting still. Computers dedicated to mining can be made very energy-efficient, and energy-efficient alternatives to the proof-of-work mechanism have been proposed. Developers are working on a "lightning network" for Bitcoin that can handle a large number of small transactions outside the blockchain. Faster connections will allow larger blocks to be broadcast as quickly as before.

The Bitcoin perfection process is extremely difficult. Changes to the protocol require broad community agreement, and consensus is not easy to reach. Think back to the block expansion debate. One side advocates a rapid increase in the block limit, which will lead to further centralization of the mining industry and bring Bitcoin closer to traditional payment providers. The other side believes that if the current situation of waiting for transactions for hours continues, the system will collapse as early as next year.

Hearn and another Bitcoin guru, Gavin Andresen, are leaders of the big block camp. They called on mining companies to install a new version of the Bitcoin client that supports larger blocks. Although some miners have deployed the new version, they still seem to be under network attacks, and the system is pushed to the limit by a large number of small transactions, indicating the need for upgrading.

All this gives us the motivation to come up with a viable alternative to the Bitcoin blockchain, which is no longer a system for running cryptocurrency, but an optimized distributed ledger that can store data. Another startup, Coin Sciences, has created a platform for autonomously designing blockchains, MutiChain, proving that thinking in this direction is feasible. In addition to creating a public blockchain similar to Bitcoin, it can also establish a private blockchain that only allows audited users to access. If all users begin to disapprove of mining, there is also a proof-of-work mechanism that can reduce or even eliminate it, and the currency part of the ledger will become dispensable.

Since finance was Satoshi’s original inspiration, the first generation of enterprises to adopt blockchains may be financial institutions. In recent months, there has been a surge in enthusiasm for private, tamper-proof blockchains. The reason seems ironic that this technology, born from anti-government libertarians, can help banks better comply with government requirements by letting them know their customers and anti-money laundering rules. But the appeal goes deeper.

Industrial historians point out that new technologies only become widely used after they are well developed. When electric motors were first developed, they were deployed like the large, clunky steam engines that preceded them. It took decades for manufacturers to see how many decentralized electric motors could reshape every aspect of life. In its digital currency report, the Bank of England sees the same dawn in finance. Thanks to cheap computing, financial firms have digitized their internal work, but they have not yet made the corresponding changes to their organizations. Most payment systems are still traditionally centralized: transfers still require settlement at a central bank. When financial firms do business with each other, the heavy work of synchronizing their internal books can take days, a process that ties up funds and increases risk.

Distributed ledgers that can solve these problems and fulfill the promise of digital banking, completing transactions in seconds or minutes, could go a long way. They could save banks a lot of money: according to Santander, such ledgers could reduce the industry's bill by $20 billion a year by 2022. Vendors still need to prove they can handle transactions far higher than the price of Bitcoin, but big banks are already standardizing the emerging technology. One of them, UBS, has proposed creating a standard "settlement currency." UBS has joined Goldman Sachs, JPMorgan Chase and 22 other banks to invest in blockchain startup R3 CEV, whose first task is to develop a standard architecture for private ledgers.

Banks’ problems aren’t unique. Companies and public institutions of all kinds have trouble maintaining often-incompatible databases and the high cost of communicating with each other. Ethereum, an ambitious distributed ledger project, wants to solve these problems. Vitalik Buterin, a 21-year-old Canadian programming prodigy, is creating a new blockchain that can handle far more data than Bitcoin. It comes with its own programming language, allowing users to write more complex smart contracts that can create invoices when goods are received, or automatically send dividends to stockholders when profits reach a certain level. Buterin hopes to enable “decentralized autonomous organizations” — basically virtual companies that run on the Ethereum blockchain.

One area where such ideas could disrupt is the “internet of things” — a network of billions of previously static everyday objects, such as refrigerators, door latches and lawn sprinklers. A recent IBM report titled “Device Democracy” argues that it is impossible and unwise to centrally track and manage billions of devices. Such an attempt would make them vulnerable to hacker attacks and government surveillance. Distributed ledgers seem to be the way to go.

The programmability provided by Ethereum can not only be used to track and record people's property, but can also be used in other new ways. Car keys built into the Ethereum blockchain can be sold or rented according to the corresponding rules, creating a new type of P2P car rental or sharing. In addition, some people have proposed using this technology to make self-driving cars a social public resource. According to pre-set rules, this car can use the digital funds stored in its own private key to pay for fuel, maintenance and parking.

Not surprisingly, some people think such plans are too ambitious. Ethereum’s genesis block was only mined in August, and only a small number of startups have gathered around it. Buterin admitted in a recent blog that he is a little short on funds. The specific details of blockchain will not continue to resonate, but the enthusiasm is inspiring startups and established giants to continue to explore the potential of distributed ledgers. Although society often scoffs at the ability of accountants, the importance of ledgers is self-evident.

Today’s world is deeply reliant on double-entry bookkeeping. Its standardized system of recording both debits and credits is the only way to understand a company’s financial situation. Whether such bookkeeping is absolutely necessary for modern capitalism to thrive is debatable, claims German sociologist Werner Sombart. Although double-entry bookkeeping originated in Renaissance Italy, it is a coincidence that it spread around the world much slower than capitalism, and was not widely used until the end of the 19th century. But there is no doubt that this technology has a profound impact not only on corporate records, but also on the future of companies.

Ledgers no longer need to be maintained by companies or governments, which can prompt companies and governments to change their thinking about current operations and future expectations. Decentralized accounting systems are just as trustworthy and can bring about fundamental changes.

Such ideas are worth thinking about and looking forward to - blockchains are still new and only apply to a few areas, and it is still questionable how far they can go. They also face some unknown resistance. Some Bitcoin critics see it as the latest attempt to spread the "California ideology", which refers to the sense of mission to save the world with technology, ignoring and confusing real dynamics, and thus easily concentrating a lot of wealth in the hands of the elite. Blockchain uses coding to achieve trust, rather than democracy, legitimacy and accountability, so it is difficult to attract the masses or gain authorization.

At the same time, a world of mathematical accounting will be free from human manipulation, which will bring many benefits. Ms. Izaguirre will no longer suffer from forced eviction; other places suffering from injustice will be better off. If there is a fundamental contradiction in blockchain, it is this: it stores the past and present in an encrypted way that cannot be changed, but ultimately leads us to a different future.

Original article: http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable
Translator: ivanjianjian
BTC address: 3HAqfF9nrCMQHrBTgRe76BwxYreDxBG6RC
Editor: printemps
Source (translation): Babbitt Information