We hear about the term Block chain way too often to ignore it any more. And more often that not, it is referred to with negative connotations sans basis.
And no I am not just talking about it in relation to Bitcoins or Cryptocurrency. I am referring to the technology driving Bitcoins – Blockchain.
Blockchain as a technology is so disruptive that it could potentially revolutionize the world economy says this McKinsey report. Before we get to the why, we will look at the what. Naval Ravikant is a lot of things I admire but most importantly, he is such a great thinker and this 36 tweet storm mostly summarizes how the world as we know of it could change.
This article is a quick primer on what one needs to know about Blockchain. How does it work? And lastly, what are the practical applications beyond Bitcoins?
I am going to haphazard a guess that with AR, AI, Blockchain, IoT et all, right now is a great time to be alive and is probably what the early 1990’s with the Internet Boom felt like (though I was way too young back then to recollect much).
The uses of blockchain as a technology are endless. Some expect that in less than 10 years it will be used to collect taxes. There are a bunch of early adopters and start-ups who are doing a fabulous job in paving the path.
[A] Practical applications of Block Chain technology beyond Cryptocurrency
Providing Financial avenues & Economic freedom for those who have none – Consider a third world nations in Africa where apart from a handful of cosmopolitan areas, the majority of them deal in cash. The continent of 1.2B inhabitants is mostly cut of from rest of the world economy. BitPesa aims at solving Africa’s liquidity and money transfer issues. The Blockchain based app allows users to transact and do business across Africa with built in foreign exchange and business to business payment features. Simply put, blockchain here acts like a bank-like institution for people who do not have bank accounts. As long as you have a smart phone on an Internet plan, you will be able to conveniently and securely make transactions.
Distributed Cloud Storage (CDN) – Blockchain data storage will be a massive disruptor by the turn of the decade. Current cloud storage is centralized and the users are bound to and must trust their storage provider who ‘control’ all the online assets in a central server. With Blockchain, this can turn decentralized. ‘Storyj‘ is a beta testing cloud storage that is powered by the Blockchain network to improve security and decrease dependency. Additionally, imagine a scenario where users such as you can rent out their excess storage capacity (think Airbnb), creating new market places. Anyone on the internet can store your data at a pre-agreed price. With greater security, uptime and faster delivery, this is shortly going to revolutionize the structures as we know it.
There are several other use cases where there is head ways are being made – from tackling refugee crises using crypto-currency based vouchers, preventing voter fraud using the public ledger system, creating digital identities so that you never have to worry about your online security ever again [Sho Card], Smart Contracts, decentralized notaries, blockchain music, healthcare etc. [Read more on the top Blockchain applications here and  here ]
Now that we have established that the technology is here to stay, let us try understanding what it is and how it works.
B. How does Block chain work?
Scenario 1 – Physical Transactions and Record keeping
Consider two folks – Alice and Bob to be sitting at a table. Alice has an apple that she wants to give to Bob. She places it in his hand and now Bob has the Apple. Alice now has 0 apples and Bob has 1. We saw what happened and it was a physical transaction. No one else might be aware of it. Someone gives something to someone else in a regular barter. No matter what happens there is only 1 apple.
If Alice wants to give Bob something that she wants to track then she would use a ‘trustable ledger’. Think of a ledger as a large collection of data where balances of dollars or apples in this case are recorded for both Alice and Bob.
If these transactions were managed and tracked by say a third party company [called say, LedgerManage] then Alice will be sure of the transactions even if it did not know Bob.
Scenario 2 – What if the dollar or apple was virtual?
Alice sends Bob a virtual apple. How did she send it? Say she sends it through say email then how does Bob know that she send the same apple and not just a copy? Bob cannot confirm that Alice has discarded the virtual copy of the apple so he isn’t sure if the one he has received is worth anything? Can Bob send it to someone else. Maybe Alice downloaded the virtual apple from the same place that hundreds of others have downloaded it from – then what value does the virtual apple even have?
A virtual transaction is clearly not like a physical transaction. The problem that Alice encountered is called the ‘Double spending problem‘. A bunch of smart folks have been trying to solve the double spending problem for a very long time.
Scenario 3 – How does one avoid the ‘Double Spending Problem’?
How can Alice and Bob both ensure that the virtual apple is not spent twice or many times. How can the data of the virtual apple be removed from Alice in such a way that Bob knows it is trust worthy? If Alice and Bob use some sort of digital ledger much like a physical one then does that solve the problem? Now Alice and Bob can transact the virtual apples as much as they like and whoever controls the ledger will have control over the transactions.
Scenario 4 – Who controls the ledger?
What if the controller of the ledger (or the company, LedgerManage in this case) made more apples or gave more apples to someone without proof of transaction? That doesn’t sound like someone that Alice or Bob may believe. What is the controller stops controlling it suddenly?
Scenario 5 – Making the Ledger Immutable
What if we gave this ledger to Alice and Bob and to everyone. What if everyone had a public ledger that has a copy of all transactions that has ever occurred? If it is public, Bob or Alice or anyone else wouldn’t be able to cheat the system since it won’t agree with everyone else on the network. And this ledger will be very difficult to destroy. Everyone within the ledger knows how these apples are transacted. If everyone in this agrees to the set of rules then everyone has trust of all virtual transactions and there is no single person who controls – thus the control is decentralized.
Scenario 6 – Anonymity and Transparency
Alice and Bob have ids in the ledger and everyone has access to it but no one knows the address belongs to Alice or Bob apart from themselves. This provides a layer of anonymity. But the transactions and its history are still identifiable and legitimate.
Scenario 7 – Public Consensus Network
These transactions are thus maintained by a network and it is in the best interest for folks on the network to confirm these transactions so that the network can grow while still being as ‘trustable’. As a side note, a bitcoin works on the same technology by ‘rewarding’ those who confirm the transactions [also, termed as mining]
The public ledger is the technology powering Blockchain.
In simple terms, blockchain is a distributed database that maintains records. Refer to the ‘common public ledger’ we spoke about earlier. Each record is called a block. Each block contains history of every block that came before it. In that sense it chains the blocks together, thus the term ‘block chain’.
[C] How is block chain secure?
The entire operation is encrypted end to end. Every transaction is linked to a unique cryptographic signature that is easy to verify and nearly impossible to falsify because block chain is maintained by a scalable set of computers called ‘nodes’ worldwide. What makes this the most interesting is that ‘all these computers around the world are coordinating with one another to make updates to the file in a lock-step fashion’. One of the best analogies is to think of it as a fossil record – as the examination of the fossil allows us to understand the order and time the layers were added, any individual can go back to the ‘layers’ in the file and it will be identical to everyone else’s file.
Anything that happens on the network only happens with consensus from the entire network. This is another reason why people trust blockchain- it gives proof. Think about a transaction where Alice is sending Bob 25 USD. What do we need to trust the transaction. Alice needs to verify that she is sending the money to Bob and Bob needs to verify that he is receiving it and the Bank has to update that Alice is 25 USD poorer and Bob is 25 USD richer.
Blockchain does this without a centralized unit such as a bank using ‘Distributed Trustless Consensus‘ . No trust is required since Alice and Bob can see the transactions in the immutable ledger.
[D] Why is Blockchain relevant right now?
Modern technology allows us to communicate directly through audio and video between A to B, allowing us to trust the communication irrespective of whether it happens across continents. When it comes to money though, people have to trust a third party to be able to complete a transaction. Say a bank.
Blockchain technology challenges this status quo in a radical way. By using math and cryptography, blockchain provides an open de-centralized database of any transaction involving value – money, goods, property, work or even votes. It helps create a record whose authenticity can be verified by the entire community.
The future global economy will move towards one of distributed property and trust where anyone with access to the internet can get involved in block chain based transactions and third party trust organizations may no longer be necessary.
This technology has immense potential- It offers Transparency, Auditability, Traceability and Immutability of all transactions.
“Blockchain is immutable; it cannot be changed, so records are permanently stored“
Leanne Kemp, the founder of EverLedger
Everledger is a startup that calls itself as the ‘digital vault’ of the future. The London based startup has placed more than 1.6M diamonds on a blockchain. Entries on the digital record include dozens of attributes for each diamond, including the color, carat, and certificate number, which can be inscribed by laser on the crown or girdle of the stone. It is helping reduce fraud in the diamond industry and guarantee diamond purity.
[E] Re-thinking the future
Wrapping our heads around what this could mean is a tad difficult. This World Economic Forum video on the topic talks more about about how a decentralized internet could potentially occur sooner than expected across all the apps that we use. All essential services could be open source frameworks. Imagine an Uber that is decentralized and brings in a high level of competition. All of this is seemingly just the tip of the iceberg.
Unimaginable new networks will evolve to meet society’s needs more cheaply and potentially more securely. Will governments, financial and legal institutions embrace block chain. What happens to the ones who don’t?
[F] Conclusion
I strongly believe we are the cusp of something huge. Reading the book Sapiens and about how we have evolved as a society makes me wonder if we have come back a full circle and finally put the power right where it belongs – in the hands of people. [As a side note, for some strange reason this entire thing around networks brings back vivid memories of reading God’s Delusion by Richard Dawkins]
And since I have such a huge nerd-crush on Naval Ravikant, I will conclude with an extract from his thoughts on networks.
“Humans are the networked species. The first species to network across genetic boundaries and thus seize the world.
Money is a network. Religion is a network. A corporation is a network. Roads are a network. Electricity is a network…Some are run by kings and priests who choose what is money and law, sacred and profane. Rule is closed to outsiders and based on power.
The 20th century created a new kind of network – market networks. Open AND meritocratic.
Blockchains are a new invention that allows meritorious participants in an open network to govern without a ruler and without money.
To a blockchain, merit can mean security, computation, prediction, attention, bandwidth, power, storage, distribution, content.
Blockchains give us new ways to govern networks. For banking. For voting. For search. For social media. For phone and energy grids.
Blockchain-based market networks will replace existing networks. Slowly, then suddenly. In one thing, then in many things.
Ultimately, the nation-state is just a network (of networks)”
Naval Ravikant
[Content Credit and References here]