Illustration redesigned by Devin Thorpe
One of the most significant documents of the 21st century begins in earnest:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Just over ten years ago, one or more people operating under the moniker “Satoshi Nakamoto” introduced Bitcoin and formalized the concept of blockchain to the world. Satoshi is a figure mired in mystery. Their identity has been speculated over endlessly. Their innovation was nothing short of genius. And yet, the underlying idea that drove their invention was rather simple: we don’t need banks.
The series of articles that follow will break down what blockchain is by: telling its brief history (Bitcoin), explaining its evolution into a second-generation technology (Ethereum), and discussing what it holds for the future.
Blockchain is a paradigm applicable to just about any area of life you can think of: finance, medicine, government, retail, entertainment, and more. But for this–the first part of a series of three articles on the subject–we’ll be sticking with the original subject Satoshi Nakamoto brought to the fore: banks. Satoshi’s claim was that you could build a computer network capable of replacing the function of banks. But how would one do this?
Before we look into how to replace banks, we should first establish why that might be worth doing in the first place.
According to Satoshi, the issue boils down to trust. He argues that to participate in the world economy we must implicitly trust third parties such as banks –privately or government-owned–is an unnecessary burden. The consequences of the system may not seem obvious, because we’re so used to them.
But why should so much personal information be required to move money? Why is the risk of fraud simply accepted as a given? Why must we trust a middle man to do right by us and our money in the first place? In different areas of life, we’ve grown accustomed to middle-men and institutions that provide management services.
It has gotten us this far, but computer networks offer a real alternative. For example, there’s Bittorent–one of three technological paradigms which paved the way for blockchain’s invention. Bittorent was invented in 2001, and it solved the problem of downloading large digital files.
Say you want to watch Frederick Wiseman’s six-hour-long documentary film “Near Death” on your computer. By downloading it from the website of a company that sells movies, you’ll be engaging a server used by that company, and requesting that the film’s data be transferred to your computer. But downloading six hours of video is going to take a very long time and lots of horsepower because it’s 2001, and you’re probably using a bulky PC over a dial-up connection.
Alternatively, Bittorent engaged a network of computers that distributed the work. Every other computer that had used Bittorent to download “Near Death” would participate, in a small way, towards your download. Bittorent effectively decentralized the process of file sharing. So any time you wanted to kill six hours on a boring documentary, you could do so with the help of hundreds, even thousands of other similarly acerbic individuals around the world. The same rule applied if you were downloading Shrek, or Radiohead, or Adobe.
Decentralization was the first step to building Bitcoin. Just like Bittorent, Bitcoin is a peer-to-peer (person-to-person, or computer-to-computer) network, where information can be sent between any two people because everybody contributes to its operation. How do you build a network like this?
In its simplest form, the blockchain is a record. A history of interactions in a system, keeping track of who did what and when. Of course, without a professional bookkeeper charged with overseeing the records, you can imagine the freedom with which fraudsters might step in and tamper with the numbers. This presents a unique engineering challenge: creating an invulnerable ledger system without a single person or institution trusted to oversee it. It turns out, the process for building such a system was around long before Bitcoin.
Think of it like this: you have a line of people, and each person is given a number based on their position in line. The first person in line is 1, the second 2, and so on. You’re walking along…27, 28, 29…when, all of a sudden, person 14 abandons the line. Now person 15 is person 14, person 16 is person 15, and so on. The number associated with everybody that followed person 14 is altered, and you know exactly where the problem started.
In 1991, two researchers–Stuart Haber and W Scott Stornetta–sought a certifiable means of time-stamping documents. In an increasingly digitized world, where computer files could be easily tampered with, Haber and Stornetta knew the trustworthiness of data would be tested by those with malicious intent. In cases of intellectual property claims, for example, the ability to modify the “date created” and “last modified” values of a digital item spelled trouble. So, they set out to create a system where any modification to a digital file would be easily identifiable. In doing so, they established the second technological paradigm that would prove foundational to blockchain.
The essential insight these researchers came upon was this: if you intend to paint a verifiable history of a document, you must causally connect each iteration of the document to the next. The digital identity of each time stamp would be predicated on those that came before. It was the perfect paper trail. If anyone were to change the information in the chain, all information that followed it would also change. Blockchains are built on this very idea. When interactions occur on a blockchain network–say, a transfer of Bitcoin from one person to another–the data is entered into “blocks”. Blocks are just data containers, and in addition to transaction data, each one contains its own sort of digital fingerprint, identifying it and locating it along the chain.
The data contained within any given block is combined with complex mathematical functions to determine that block’s “hash” value–a value which codes its actual data, behind a mask of seemingly random letters and numbers. Each block contains both its own hash, and the hash of the block which preceded it. Most crucially, because the cryptographic equations take the data from the block as variables, changing the data changes the hash. Because all blocks are linked to their previous block, changing one hash changes the next all the way down the chain.
By chaining blocks, we already have a mechanism for creating a ledger of transactions, protected against fraud, all without requiring a single oversight body. This is the blockchain.
Hashing isn’t foolproof because modern computers are very powerful. One can imagine a supercomputer able to solve cryptographic hashes at such a fast rate that it can forge an entire blockchain.
Luckily, the same year the timestamping research paper was published, two other researchers published an entirely unrelated technical paper in the field of computer security. Their invention was the third, and final, technological paradigm upon which blockchain was formulated. It’s called “proof of work”.
Proof of Work
In the early ‘90s, everybody with a computer had the same problem: too much junk e-mail. These were the days before our junk folders became technically adept, so you could expect your inbox to be unduly flooded with the work of cheap salesmen, “princes” in foreign countries, and hackers. We needed a way of filtering out the bad from the good.
Cynthia Dwork and Moni Naor came to a simple insight: it was too easy to send hundreds, even thousands of emails to anyone in the world. Their solution was simple: make sending lots and lots of emails cost-ineffective, to disincentivize scammers. Email doesn’t come with a price, but Dwork and Naor proposed another form of “cost”: computing power. If even a relatively modest amount of computing power were required to send one email, regular email users wouldn’t be noticeably affected. On the other hand, a scammer trying to send out thousands of emails at once would incur great cost to their operating system. Blockchain leverages this so-called proof of work solution, and blows it up into an extreme sport.
If you want to send one Bitcoin to a friend, it won’t feel much different than transferring money from Paypal, or your online bank account. That’s because there’s third-party software which makes the process of cryptocurrency trading relatively straightforward. However, in doing so, you’re engaging a worldwide network of “miners” in a massive computational soiree.
Bitcoin miners are individuals around the world in possession of powerful computers, who take it upon themselves to validate and process network transactions. All miners compete to process your transaction, because there’s a prize involved. Every time a Bitcoin transaction is processed, new Bitcoin is created out of thin air and awarded to the miner who achieved the feat.
How that competition actually plays out is highly technical. To get a broad picture, consider: when’s the last time somebody asked you to “guess what”? It’s a frustrating question–so open-ended that there are millions of possible answers, and you can only guess randomly. It could take forever to get the right answer, but no time at all to confirm it once you do.
The computers used to mine Bitcoin participate in a process that resembles one big game of “guess what”, each performing thousands upon thousands of mathematical guesses per second. More powerful computers can make more guesses more quickly, but it’s a matter of chance. Similar to “guess what”, the game might take a while to finish, but when the correct answer is reached, it is instantaneously confirmed.
Without proof of work, miners would have little reason to avoid processing every transaction as quickly as possible. That would make it easy for fraudsters to push invalid transactions, thereby throwing the entire network out of whack. Instead, just as computational work disincentivizes malicious activity over email, so too does it provide inherent security in the blockchain.
Because so much computing cost is required to participate in Bitcoin mining, miners have to be extra careful that they do not spend it on transactions which may otherwise be flagged as invalid by the rest of the network. Any blockchain miner would do the work of making sure a transaction is valid before committing themselves to processing it. And because so many miners compete over the same transactions, you can expect that even if one miner is malicious in their intent, the rest will overpower them.
What’s to Come
Bitcoin was both a remarkably successful, and flawed technology. It brought blockchain–a new paradigm of computer technology–to the world. In the second part of this three-article series, we will discover how the design structure that allowed Bitcoin to see so much success also proved to be inherently limiting.