The Blockchain brings together three innovative technologies: decentralized architecture, cryptographic protection, crypto-currency issuance.
What is the Blockchain?
Literally, a blockchain designates a chain of blocks, digital containers on which are stored information of all kind: transactions, contracts, property titles, works of art … All these blocks form a database resembles to pages of a big accounts book. This book of accounts is decentralized; that means it’s not hosted by a single server but by a part of the users. The information contained on the blocks is protected by several innovative cryptographic methods, so that it is impossible to modify them. Finally, the Blockchain creates a crypto-currency that allows it to remunerate certain nodes of the network that support its infrastructure.
1st Innovation – DISINTERMEDIATION: Consensus replaces centralized validation
The first innovation of Blockchain is to generate the confidence necessary for agents (users) to exchange without control of a trusted third party.
Example – The banking system
International transfers are expensive and require several days of processing to be done. In contrary, a transfer with a crypto-currency like Bitcoin is almost instant, secure and free.
– In order for a transaction to be carried out on the Blockchain, its information (volume of available funds of the issuer, recipient, volume transferred) must be integrated into a block.
– To do this, the transaction must be validated by several nodes of the network (called “miners”) that verify its conformity by solving a complex cryptographic problem (and IT power consumption for Blockchain energy impacts). This result is certifiable thanks to “Proof of Work”. The whole operation, and this is the key word, is called “mining”.
– Once all the minors agree on the validity of the “Proof of Work”, the transaction is integrated into a block. This is added to the “chain of blocks”.
The addition of new blocks is the result of an agreement among the actors of the network, which makes the control obsolete by a reference institution. This agreement is the vector of disintermediation and it is incarnated by the collective validation of the “Proof of Work” or “Proof of Stake”.
2nd Innovation – SAFETY: The decentralized architecture and the code block guarantee the inviolability of the information
Two mechanisms guarantee the structural security of the information recorded within a blockchain: a cryptographic process and a decentralized architecture. I’ll explain them separately.
Example 1 – Time-stamping
The proofofexistence.org website demonstrates this inviolability “by design”. It allows to save documents on the blockchain of Bitcoin network to justify its possession at a given moment. Because the document is written on the blockchain, this is enough to prove that the document exists at time T and has not been modified in T + n.
The code of each new block is built on their previous block in the chain of blocks, so that modifying a block would involve changing all the blocks in the cord, which is impossible.
Example 2 – Wikileaks
Before their broadcasts in the press in the summer 2010, Wikileaks has recorded US State Department’s confidential documents on a multitude of worldwide servers. Instead of a single “cookie jar”, the decentralization of hosting makes it virtually impossible to delete all copies of documents. The same logic works for Blockchain.
Within a blockchain, all the blocks are replicated in the nodes of the network, not in a single server. This decentralized architecture acts as a structural defense against the risks of data theft.
These two mechanisms guarantee the security of the information recorded on a blockchain. The strength of the Blockchain allows its use for sensitive information.
The Blockchain and privacy
The list of blockchain transactions can be consulted by all: this transparency is necessary so that the members of the network validate the inscriptions on the blocks and makes it possible to fight against the fraud. However, the identity of each user is concealed behind a pseudonym of 27 to 32 characters. A blockchain is not anonymous but pseudonymous.
The transparency degree of a blockchain can be adapted to very high confidentiality requirements, which are then referred to as opaque blockchains. Conversely, if necessary, the identification may require several proofs of identity and must be completely transparent: the Blockchain is a modular technology.
3rd Innovation – AUTONOMY: The creation of a crypto-currency recompense the infrastructure costs
Today, online services (social networks, payment, hosting, etc.) are backed by platforms that assume the infrastructure needs. In the case of Blockchain, the computing power and the hosting space are provided by the nodes of the network themselves. The physical investment, the computing power and the storage space consumed by the mining are compensated by the emission of bitcoins (or other crypto-currencies).
Computing Power Example: BitShares.org
BitShares is an exchange and service platform backed by the Bitcoin blockchain. In June 2015, BitShares managed to execute more than 100,000 transactions in a second, a performance at global stock markets.
– “miners” allocate a part of the computing power of their personal machine to solve the cryptographic problems necessary for the validation of transactions (“mining”). This is a remunerated activity.
– The first “miner” to validate a block (set of transactions) wins “tokens” whose nature differs according to the concerned blockchain.
– This opportunity for financial gains leads to a competition between “miners” to be the first to solve the problem and to suggest a “Proof of work”. This competitive situation is pushing the “miners” to invest in powerful machines and thus increase the computing power of the blockchain.
Moreover, as seen in the previous point, the blockchains are housed by the nodes of the network: some of them have a local, exhaustive and identical copy of the whole concerned blockchain. Hence the analogy with an account book shared with the actors of the network.
Within a blockchain, the infrastructure is no longer concentrated in the hands of an organization but is, on the contrary, broken out in all the points of the network. De facto, a blockchain is self-supporting and independent from third-party services.
Understanding the debate between public blockchain and private blockchain
Blockchain technology is adaptable: the degree of blockchain opening can be limited to create a so-called “private” or “association” blockchain. This model is different to so-called “public” blockchains, such as the one behind Bitcoin, which anyone can consult and use. Within a “private” blockchain, block validation is performed by a more limited number of nodes on the network. As a reminder, only these nodes have access to all the information.
Financial institutions are preparing for the deployment of a “private” blockchain where the validation of blocks requires only the approval of 10 institutions, as opposed to validation by the entire network. If the majority consensus idea is undermined, this model has advantages in terms of timeliness and infrastructure costs.
The situation is similar to that of the Internet network where private intranets coexist with the public Internet: the public / private blockchain debate is ideological and technical issues. Some members of the original Bitcoin community have a negative view of the privatization of a technology thought and designed to be open.