Blockchain is here to stay, and it is the obvious and likely inevitable way forward for businesses, institutions, and currencies. It is safer and significantly faster than traditional methodologies, and considering its efficiency and relatively low risk - cheaper.
But there is much more to blockchain than we can learn from its current popular usage. If you are here, you are probably already familiar with crypto, DAOs, and smart contracts to at least some extent. We thought it would be valuable to go through the entire history of the technology and look at exactly why decentralised systems are the future.
In this article, we will take a look at some of its most important aspects
what makes it a decentralised system
what a decentralised system even is)
how the technology began
how it works
what the difference between public and private blockchain is
and a lot more!
What is a Decentralised System?
You’ve probably known centralised systems your whole life.
A centralised government presides over a country’s people, and a central bank controls the money supply. A central board of directors makes decisions for a company, and a central administration makes decisions for a school or university.
In a centralised system, a central authority controls everything. This central authority could be a single person, an organisation, or a government. A centralised system is often more efficient because there is only one decision-maker, meaning that decisions can be made quickly, and there is less chance for confusion or disagreement.
In contrast, a decentralised system is one in which there is no central authority. Instead, each individual or organisation has some degree of control. In this way, decentralised systems are often more democratic because everyone has a say in how the system works. They can also be more resistant to corruption because no one person or organisation can control the entire system.
An example of a decentralised system is something you are using right now - the internet! For all its side effects on society and interpersonal relationships, I feel it is safe to say that it has revolutionised the world and offered immense benefits for people not only locally, but globally. Not only in the present moment but throughout time.
Those same benefits are immediately transplantable to other decentralised systems - a decentralised currency’s value can be democratically shaped by its users. A decentralised company can be fairer and more transparent. A decentralised electrical grid can be more dynamic, add additional value to its users, and be more reliable to boot.
So, how did we get here? And what will “here” look like ten years from now?
Early Examples: Mersenne Numbers, SETI, and Napster
1 + 2 + 3 = 6. This is not a particularly groundbreaking revelation, but it is what makes 6 a ‘perfect number’, as 6 is divisible by 1, 2, and 3, meaning that the number 6 is equal to the sum of its proper factors.
Being that mathematicians are investigators of patterns, a 17th-century polymath by the name of Marin Mersenne is responsible for the discovery of these perfect numbers using a simple formula - 2^n - 1, a formula he used to discover not only perfect numbers but also something we call Mersenne primes.
But the higher “n” becomes, the more difficult it is for both humans and computers to crunch these calculations.
So in 1996, George Woltman founded GIMPS, or the Great Internet Mersenne Prime Search, a great initiative with a somewhat unfortunate acronym.
But how does that relate to decentralised systems? Well, GIMPS relied on a computer program that anyone with access to a computer could download, which allowed for a part of their device’s processing power to be used to crunch Mersenne numbers, making it one of the first truly decentralised computing systems.
In case you are curious, the largest found Mersenne number is 2^82,589,933 - 1, coming up to a total of 24,862,048 digits. If that’s too big a number to conceptualise - and it is - this article has about 20,000 characters. To reach that number, we will need 1242 more!
If this all seems familiar, it might be because you’ve heard of SETI@home, which used the exact same technology to calculate cosmic signals in the search for extra-terrestrial life.
Both of these projects are still active today, and their userbase is only continuing to grow.
But these are relatively limited in scope. What about something that has mass appeal, say, downloading music?
In 1999, we got a taste of what the future would hold through Napster. If you are too young to remember, Napster was what was known as a peer-to-peer file-sharing program. The way it worked is that you would share a folder on your computer containing the mp3 files you wanted to share. Every user’s folder was indexed on a centralised system, giving you access to millions of audio files at the click of a button.
It was not the first program to do this, but it was the first that truly hit the mainstream. The music industry struck back against Napster, which ultimately led to its demise. But the genie was out of the bottle - Gnutella, eDonkey, Freenet, Kazaa, Limewire, and tons more took the underlying technology and further developed it to provide fully decentralised file-sharing platforms which allowed users to now share any file they wanted to.
And if that too seems familiar, it’s because this led to the creation of BitTorrent. And the rest is history.
These early examples of decentralised systems were efficient, easy to implement, and in the case of Napster and its peers - incredibly disruptive. But they were an essential step in developing and popularising other applications of this technology, including blockchain.
Professor Chaum, Satoshi Nakamoto, and Vitalik Buterin
In 1979, a computer scientist and cryptographer at Berkeley by the name of David Chaum became convinced that in an increasingly digitally-connected world, privacy concerns could soon become a reality.
Chaum, who was very much ahead of his time, began the development of what he called a vault system in 1979, and described it in his 1982 paper 'Computer Systems Established, Maintained and Trusted by Mutually Suspicious Groups'. He realised that by using a chain of cryptographic signatures, it would be possible to create a database that could be shared and verified by everyone in a network. This would make for a more secure and transparent system than the centralised databases used at the time.
In his paper, he writes:
“Each of some mutually suspicious groups can supply part of a vault in such a way that each group need only trust its part in order to be able to trust the entire vault. Another approach to construction is based on public selection of a system’s component parts at random from a large store of equivalent parts.”
Sounds familiar, right?
Exactly how this system works is a bit complicated, bud David Chaum took these principles and created the world’s first digital currency, called Ecash, which unfortunately went bankrupt in 1998. While forward-thinking in many ways, Ecash just hit the market too early and was missing a few key ingredients that we take for granted nowadays.
One thing in particular that was missing from his early projects was a consensus mechanism, which ended up being the last piece of the puzzle towards blockchain.
In 2009, the now-infamous Satoshi Nakamoto released a whitepaper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’.
In it, he proposed a system for electronic transactions that did not require the involvement of third parties such as banks or financial institutions. To achieve this, Nakamoto proposed a system of digital signatures and a decentralised ledger, or “blockchain,” that would keep track of all transactions. Nakamoto also proposed a consensus mechanism, or “mining,” that would allow the system to operate without the need for a central authority.
From his whitepaper:
"We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power.
The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism."
The consensus mechanism works as follows: when a transaction is made, it is broadcast to the network of computers running the Bitcoin software. These computers, called “miners,” then compete to verify the transaction by solving a complex mathematical problem. The first miner to verify the transaction is rewarded with a certain number of bitcoins, and the transaction is then added to the blockchain. The consensus mechanism is essential to the functioning of the Bitcoin network, as it allows the system to operate without the need for a central authority. Without a central authority, there is no one to trust with the control of the Bitcoin network.
A further improvement happened again in 2013 at the hands of a Russian-Canadian programmer named Vitalik Buterin, who published a whitepaper proposing the creation of a new platform that would enable the development of decentralised applications. This platform would later become known as Ethereum.
From Vitalik’s whitepaper:
"The intent of Ethereum is to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications, with particular emphasis on situations where rapid development time, security for small and rarely used applications, and the ability of different applications to very efficiently interact, are important.
Ethereum does this by building what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions.
A bare-bones version of Namecoin can be written in two lines of code, and other protocols like currencies and reputation systems can be built in under twenty. Smart contracts, cryptographic "boxes" that contain value and only unlock it if certain conditions are met, can also be built on top of the platform, with vastly more power than that offered by Bitcoin scripting because of the added powers of Turing-completeness, value-awareness, blockchain-awareness and state."
One of Ethereum’s big innovations was to introduce the concept of smart contracts.
A smart contract is a program that runs on a blockchain and automatically executes the terms of an agreement between two or more parties.
This was a game-changing idea because it meant that all sorts of complex agreements could be encoded on the Ethereum blockchain, opening up a whole world of new possibilities for decentralised applications.
Since the launch of Ethereum, smart contracts have become one of the most talked-about features in the blockchain space. They are seen as a key driver of the blockchain revolution and are being used to create countless new, innovative applications.
Another significant improvement is the platform’s upcoming moving from proof-of-work to proof-of-stake, a decision that is positioned to make Ethereum both more secure and significantly more energy efficient (using up only 0,05% of the energy used previously).
Explaining Blockchain Through Cryptocurrency
A blockchain is a digital ledger of past and future transactions done on a decentralised network. It is constantly growing as new blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Bitcoin nodes use the blockchain to differentiate legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere.
New tokens are created through hash generation. In bitcoin’s case, miners are rewarded with Bitcoin for verifying and committing transactions to the blockchain.
In a blockchain, random strings of data are used only once in order to prevent replay attacks, and so ensure that each transaction can only be processed once, what is known as a ‘nonce’ (short for “number used only once”).
This is important in order to prevent someone from trying to spend the same coins twice. In order to find a nonce that works, miners must try billions and billions of these nonces until they find one that "hashes" to a value that is lower than the target threshold.
To work with bitcoin, every user needs to have a file containing every previous transaction up to that point to be allowed to send or receive the currency. If a node finds a valid block that it has not seen before, it will add it to its blockchain and broadcast it to the network, where others will do the same.
But blockchain has other uses outside of that - the mechanism is the same, but its applications can be wildly different.
Early Cryptography & Asymmetric Cyphers
Any initial predictions that could have been made back when the Internet graduated from being a military and academic experiment in the early nineties would likely be seen as a severe understatement today.
As with every new piece of technology, however, there were kinks that needed to be ironed out. One of the challenges that became evident from the Internet’s early days was security.
Websites, e-mail clients, private servers - all these were easy targets for hackers or otherwise antagonistic third parties. And even companies that took great effort to secure their websites would sometimes have to either start from scratch or use third-party services, which were, in turn, also compromisable.
As hackers’ collective knowledge, skill, and tools grew, newer revisions and iterations of different fields of applied science would also need to be adapted for the Internet to work as intended.
Cryptographically speaking, blockchain falls under the category of asymmetric encryption. How encryption traditionally works is that a message would be turned into a garbled, illegible mess that could only be understood by converting it back into its original state using a key, and it is this exchange of keys and the way they are applied to the message where asymmetric cryptography truly shines.
Long ago, spies would meet in shady locations to exchange envelopes, and during World War II Alan Turing would infamously apply his pioneering skills to create machines that would crack intercepted German cyphers. In both these instances, however, the problem was essentially the same - the codes used were interceptable.
This same problem that applied to spies and WWII communications officers also applied to the early days of the Internet. In order to understand an encrypted message, a so-called public key would also have to be exchanged, meaning that, yes, that key would also be easily interceptable. And if you wanted to exchange encrypted data over a secure network, establishing that secure network would also require the exchange of public keys.
The way by which blockchain’s asymmetric encryption solves this problem is by creating two different keys. Information is encrypted using key A and decrypted using key B and vice versa. After generating a pair of these (known as a key pair), a user would pick one and designate it as their public key that they can freely share with whoever they wish (in case this sounds familiar, this is the principle by which cryptocurrency works as well). The second key, however, would be kept secret.
By using the two public keys, two different parties (users, websites, services, etc.) can establish an encrypted connection, where data can now be exchanged freely and securely. Essentially, this means that should this exchange be intercepted, one would only have two different halves that would not allow them to get access to the information being shared.
Using this method to validate the communication between servers and users is how the modern Internet keeps your communication secure, and it is the way in which blockchain transactions operate.
What is DLT, and How is it Different from Blockchain?
A ledger is a book of financial or other transactions and information, so it’s within reason that a decentralised ledger is one that is shared among many users.
Distributed ledger technology (DLT) is the general term for all database systems that are distributed across a network of computers. This includes both blockchains and other types of databases.
Other types of DLT include Hashgraph, which allows multiple transactions to be stored on the same timestamp, and ones like DAG and Holochain, which offer variations on existing blockchain technologies.
A key feature of blockchains is that they are immutable, meaning that once data has been written to a blockchain, it cannot be changed. This is because each block in the chain contains a cryptographic hash of the previous block, as well as a timestamp. The hash of a block is unique and can be used to verify the data within that block.
There are many different types of DLT, but they all have one thing in common: they allow multiple parties to share data and keep track of changes without the need for a central authority.
Public vs. Private Blockchain
Public blockchain is just like how bitcoin works - everyone has access to every transaction ever made, and there is great utility in that, particularly for a currency.
The benefits of public blockchain include increased security, transparency, and immutability. Transactions are transparent because they are recorded on the blockchain and can be viewed by anyone, and immutability means that once a transaction is recorded on the blockchain, it cannot be changed or deleted.
But what if blockchain is used to transmit data and not just money? Data that some people should have access to and visibility of, but not everyone.
Private blockchain shares a lot with its counterpart - the identity of participants is still anonymous, and different transactions are still time-stamped. But there are a few key differences.
Different types of DLT arrangements can be understood by asking two very simple but important questions - who can join the network and who can maintain the ledger’s main functions.
Depending on the answers we give, we have four types of network.
If anyone can join, then it is public, or open - anyone can create nodes and join the network. If the answer to the second question is, once again, that anyone can join, then we are talking about a public permissionless network like bitcoin and ethereum, where everyone has access to the same functionality.
If the answer to the second question is that there are restrictions, we are talking about a public permissioned network, where anyone can join, but different people have different roles and only have access to the functionalities that have been pre-approved for them.
These roles are assigned through smart contracts, and private blockchains - both permissioned and permissionless - work in the same way, only not everyone has access to a network, but the users are instead limited to a company, organisation, etc.
In this way, private blockchain takes the best part of blockchain’s revolutionary technology and workflow and applies it to a more custom-tailored environment by amplifying its approach to efficiency and safety.
R3 & Corda
Corda, the industry leader in private permissioned DLT platform development, offers some of the best functionalities and ease of use on the market.
The Corda network does not share a full copy of the ledger with each of the participants. Instead, each transaction is shared on a need to know basis, so only those participating in a transaction will have it written in their respective ledgers. The moment a third party enters this transaction, everyone else who has been involved will also be notified.
Because everything is automated and agreed on through smart contracts, systems built on Corda easily facilitate notaries to watch over these processes. It is all incredibly efficient and completely transparent - for the people who need to know.
Corda's smart contracts are based on the open-source programming languages Java and Kotlin, both of which are easy to pick up and start implementing. And multiple transactions can even be processed in parallel!
Corda has already been used to revolutionise not only capital markets, digital assets, digital identities, but also the insurance, real estate, supply chain, energy, govtech, healthcare, telecommunication, and trade finance markets. All this makes Corda not only infinitely scalable, but incredibly efficient, and the platform is already being adapted to an even wider range of different industries.
Further Use Cases: CBDC and eBL
Improving companies’ and institutions’ processes is a great way to streamline whatever, but there are two applications of distributed ledger technology that promise to truly revolutionise the world.
Central bank digital currencies (CBDCs) can work like any other digital currency but are backed by a central bank. This means that CBDCs could be more stable than other digital currencies, which are often subject to volatility.
CBDC has the potential to provide a more efficient and cost-effective way of conducting transactions and could help to reduce settlement risk, while also helping to improve financial inclusion by providing access to banking services to those who do not have a bank account. CBDC could also have a positive impact on monetary policy as it would allow central banks to directly monitor and target specific sectors of the economy.
Implementing this technology has numerous other benefits, including helping to reduce crime, as they would be more difficult to counterfeit than traditional currencies, and transactions can be traceable. CBDCs could also be used to facilitate international trade and help countries avoid currency fluctuations.
Similarly to CBDC, electronic Bills of Lading can help streamline the shipping process and make it orders of magnitude more efficient.
An electronic bill of lading (eBL) is a legal document that proves that goods have been shipped from one party to another. The pitch is simple - it is a digital version of the traditional paper bill of lading. The eBL is created electronically and stored in a secure database, meaning it can be accessed by the parties involved in the shipment, as well as by customs authorities and other government agencies.
By digitising the entire process, shippers can save time and money by avoiding the need to print and mail paper documents. Electronic bills of lading can also help reduce the risk of lost or damaged documents and can provide greater visibility into the shipping process, allowing shippers to track their shipments more easily with a single identifying number.
The economy can only move as fast as its transfers and shipments, so implementing DLT to take them into a new generation of efficiency can soon become the new standard.
INDUSTRIA is a global technology consulting, development, and ventures company with expertise in the field of enterprise blockchain, confidential computing, process automation, and digital experience. As one of the official partners of R3, we are implementing cutting-edge blockchain technologies and reshaping the fintech world.
At INDUSTRIA, we are focused on providing permissioned blockchain solutions, such as Central Bank Digital Currencies, Electronic Bill of Lading, and Smart Legal Contracts. Our solutions apply to a wide range of industries and use cases to empower and modernise society.
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