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I’ve recently started reading about blockchain. To consolidate my understanding, I’ve put together an executive summary about what this technology is all about.

The Problem

As always, we should start with the motivation for the technology. Do we trust banks as middlemen for our purchases? Even if we do, it comes back to that age old adage that we “shouldn’t place all our eggs in one basket”. what should happen if that central authority goes down? Now to rephrase the question more generally: can we have a trust-less service that allows us to exchange value? Initially, this seems like an obvious contradiction because the whole point of the service is to act as a trusted third-party in the transaction. With blockchain however, we answer the question in the affirmative.

Overview by example

Before diving into the technical under-workings of blockchain, it pays to get a general sense of what it is based on. Let’s say Alice and Bob are performing an exchange. Alice hands Bob $10 and now Alice is now $10 poorer and Bob is $10 richer. No trust is required because the money was physically handed over. This is not how we usually make transactions in the modern day though. Today we have banks that keep track of how much we own and perform the transaction by deducting or adding to our balance. So if Alice transfers Bob $10, Alice balance sheet gets reduced by $10 and Bob increases by $10, no physical money needs to exchange hands. That’s simple enough. The problem with this is that now we need to trust that the bank records this correctly and doesn’t make a blunder in updating the records (And all other worries we have about trusting central authorities). This type of transaction is akin to if Alice and Bob had a friend Charles that keeps track of who owes who. In this case Alice owes Bob $10. This is problematic if Charles mistakes the amount that was owed, worse still he may be biased to his good friend Alice.

Now enter the third option, Alice, Bob and Charles live in a small town of about 100 people. Instead of having only Charles keep track of the exchange, what if everyone in the town helped out by individually keeping track of the transaction. In such a case, we no longer have to have to rely on Charles as a fair and trustworthy third-party. We can spread our trust amongst the other 97 people in the town. If a dispute where to happen, we can rely on the majority to validate the transaction details. This is the premise of blockchain, a way to distribute the responsibility of book-keeping. Of course, whilst this is ideal, it has multiple problems.

  • How do we secure transactions?
  • How do we verify a transaction occurred?

  • How do we get people to take part?

  • How do we prevent people from requesting a transaction when they have insufficient funds?
  • How do we agree on an order of transactions since everyone is bound to receive them in different orders?

The first three are the meat of blockchain technology and can be described fairly generically. I will tackle those here. The last two will be addressed in later posts discussing specific types of blockchains.

Forward

What I initially confused when learning about blockchain was the process of securing a transaction and verifying that a transaction occurred. To give the general idea, securing a transaction is about knowing who currently owns the money. Verifying a transaction is then the process of adding it to the public transaction log to confirms the exchange of ownership of the money. To put it in less technical terms, securing a transaction would be as though Alice signs her name that she approves a transaction to Bob for $10. Verifying this transaction would be to actually upgrade this local agreement to the global ledger such that the transaction is visible to everyone.

How do we secure transactions?

In the physical world, it suffices to say that if the money is physically in my possession, it is mine (unless I’ve stolen it of course). However, when dealing with digital currency, ownership is not so straightforward. It turns out that the way to keep track of ownership is by keeping a log of the history of transactions. You could think of this as if we had to write down the name of the person we were giving the money to before we pass it to them. To make this chain secure so that only the people who own the money can spend it, the transaction log is a trail of cryptographically secure signatures of the people who previously owned it until it’s current owner. Cryptography in this sense, is used to make stealing or masquerading as someone else computationally infeasible.

The technical term for this is called Asymmetric cryptography (Or public key cryptography). At a high level, this works by each user have a pair of keys. A public one and a private one. The public one is available to other users whilst the private one is kept a secret only to the user. These pair of keys have a unique feature to them which is that they can be used to digitally sign a message and make it close to impossible to forge. Procedurally, signing and verifying looks like the following:

Sign(Message, private_key) => Signature

Verify(Message, Signature, public_key) => True/False

As mentioned, the important feature of this encryption process is that it is there is no known way to reverse-engineer it. Knowing how the algorithm works doesn’t allow one to discover the private key. Furthermore, a slight change in the message contents, causes wildly different signature so there’s no relationship/pattern we can use to generate a valid signature other than guessing and checking.

Hence we arrive at the term cryptocurrency. We can now see where and why cryptography is applied to the digital currency.

How do we verify transactions?

After a secure transaction is broadcasted, it ends up in a pool of “pending transactions”. At this time, we introduce other actors in the system known as “miners”. In our example, the minors are analogous to anyone in the town. The job of the miner is to pick up these transactions and then validate them so that they end up on the public ledger. For this process to occur, miners must first complete a computational “challenge/puzzle”. Upon completion, it awards them a prize and the ability to append a new block (some set of pending transactions) onto the chain. It should be noted that appending a block onto the chain doesn’t yet guarantee permanence or legitimacy of the action. Instead, nodes work on the policy of following the longest chain. This means that even if a bad actor were to successfully solve the challenge before other nodes, it would only be able to append a single block. To keep up with it’s scam, it would have to continuously outperform the rest of the miners to have it’s chain become validated. Unless the bad actor has the computational power of more than 50% of the system, it is proven that it is computationally infeasible for a bad actor to invalidate the system.

How do we get people to take part?

A vital part to a functioning blockchain is that there are a distributed set of machines called “nodes” that are working to validate transactions. Similar to how we have people in the town actively keeping track of transactions that happen. To reward the nodes, a node is given with a small amount of the cryptocurrencies. This keeps people/businesses incentivized to run their nodes participating in the exchange. On top of that, some transaction even offer transaction fees that goes to the nodes (known as miners) that successfully validate their transaction.

Conclusion

To come full circle, given my understanding of blockchain works, I don’t think it’s accurate to say that it’s trust-less. I think it is trust-less in so far as we think of it as having no central authority. It still remains the fact that we need to have trust in the majority of actors in the system. I suppose the answer is still fairly clear that it’s better to place our bets on the majority rather than a single entity, no matter how trustworthy.