04.04.18

Understanding blockchain & the “value revolution” as a technologist

image representing blockchain

No self-respecting technology professional can have made it through 2017 without hearing the word ‘Blockchain’ multiple times. But just what is a Blockchain, and is it as much of a game-changer as some are saying?

Blockchain technology is all about storing and moving things of value. So, let’s start this conversation by looking the problems that exist with the most common value store that exists today: money.

Money, money, money…

The one thing we need above all else is food. Back when humans were cave dwellers few things had any value except food. In those days mankind either picked it, killed it or stole it. If you had one type of food but needed another you could trade what you had for what you needed. But what if you had too much food? Since food is perishable long-term storage isn’t an option. A method for storing the value of food (other commodities) was needed. Enter the era of ‘money’.

Conventional money is simply a socially agreed value system. Once its value is agreed by society money provides a way of storing value. But money brings problems of its own. Be it gold, silver, notes or coins money is pretty easy to steal and very difficult to trace (unless it’s moved in large quantities).

The birth of the internet brought about changes in the way we move money. Debit cards, contactless payments and online systems like Apple Pay mean we use actual notes and coins less and less. You could say we’ve entered the era of ‘digital money’. However, the internet is inherently insecure. As a result, banks had to create complex ways of protecting our money while also trying to add speed and flexibility to transactions.

Fundamentally there’s a big issue here. We’re relying on third parties (banks, governments and other large institutions) to store and move our money. If an institution fails (e.g. the collapse of Lehman Brothers in 2008[i]) or a government becomes corrupt our money can simply disappear overnight. In addition, there are restrictions as to how and when we can transfer money. When moving money across political borders, local government wants a cut of the action by way of taxation. The banks are going to charge you for the privilege too. Just to add insult to injury transfers can be seriously sluggish. Even now, in the days of instant communication, an international money transfer can take as long as four days and cost up to 20% to transact.

What about other things of value?

It’s not just in money that we store value. Your identity is a valuable if not essential commodity when applying for credit or proving you own a house or car. Again, we’ve chosen to trust third parties like government agencies to keep accurate records of our identity. But how accurate are the records? Could we dispute them?

Just one of the searches that our legal representatives make when we buy a house looks for claims against the house’s title (bad debts registered to the address etc.). That could mean the seller isn’t entitled to sell the house to you). Amazingly about one third of searches at sale time turn up previously undisclosed problems with a house’s title![ii]

So, the trust we place in these agencies is not always well placed…

What’s needed is a value system that is indisputable. One that is fast and cheap to use. One that has global reach and is globally distributed and where no single entity has control. It must, of course, be extremely difficult or impossible to corrupt. Finally, it should be ready to power the next generation of human value interactions where value (no matter what its form) can be transacted with complete security.

In short we need a digital, highly secure 21st century ledger.

What’s a ledger?

In the pre-digital world account transactions are written down in a manual ledger book. There is an opening balance (from the previous page if one exists) at the top, debits and credits down the page and a closing balance at the bottom. Although these are simple they are also difficult to corrupt. Changing an entry throws out the balance meaning following entries and balances needed to be manually amended too. Any amendments are made manually and are usually obvious to future readers of the ledger.

With the birth of computing this type of ledger was replaced with a digital file (e.g. a spreadsheet). Amendments became simple with any edits made causing the following entries to be automatically recalculated. While this saves huge amounts of time it also means anyone with access to the file can make amendments without leaving obvious evidence. One step forward, two steps back…

Enter the blockchain

A blockchain[iii] is a digital ledger. It has pages (except they’re called ‘blocks’) and each block holds multiple transactional entries. There’s an opening balance at the beginning of the block and a closing balance at the end. Each block sits as part of a historical ‘chain’ of blocks that together form the entire history of all transactions. Details of who owns what, who bought or sold what and when it all happened are right there in the blocks.

So how is this different from a traditional spreadsheet?

Well first, once a full block of transactions is agreed upon (more about which later…) it gets locked and can’t be changed. Ever. As one block passes it’s closing balance to the next it also passes a cryptographically encrypted version of all the transactions it contains. Therefore, if the first block is ever changed the following blocks will no longer tally and the system will know something’s wrong.

The entire chain is instantly duplicated onto millions of computers (or ‘nodes’) across the globe. These nodes are referred to as the ‘network’. The nodes on the network work together to mathematically ‘agree’ new blocks as correct records. If there is a difference between the records of one node vs. the rest of the network then a ‘majority rule’ system is in place such that the version of the block with the most copies in the network is considered correct and any incorrect records are corrected to match the known good copy. Anyone trying to maliciously change records needs to change at least 51% of all the nodes on the network all at the same time. Mathematically this means illicit intrusion is essentially impossible.

Blockchains can have public records that anyone can read and private records that you’ll need an encryption key to access. Pretty much any data can be stored on a blockchain from financial transactions to ownership records.

Hash?

Encryption within blockchains typically use ‘hashing’ algorithms. Hashing is different from other encryptions in that it’s a one-way process. A good usage example is a password system for logging into a website.

When you first create an account on a given website you give the system your chosen password. This is immediately ‘hashed’ along with a system-wide ‘salt’ string into a fixed length binary number. Only the hash is ever stored. As hashing is a one way process you cannot ‘unhash’ it to reveal the password. However, when you enter your password later to gain access again the system will hash the password you enter and compare it to the hash it has stored. If they are the same you get logged in. Using this system not even the system administrators know your password.

So what about crypto currencies?

Each blockchain comes with its own ‘crypto’ (cryptographic) currency to represent the value a user has within the network. There are thousands of crypto currencies out there and each belongs within a different blockchain. Recently crypto currencies have been exploited by investors who see the power of blockchains and are hoping for a big financial return. Lots of money has been made but also lost thanks to the current price volatility of crypto currency.

Probably the most notorious crypto currency is Bitcoin. Bitcoin has a somewhat tarnished reputation thanks to early adopters who used it to anonymously buy illegal goods and services on the dark web using websites such as The Silk Road[iv]. However, Bitcoin is now increasingly seen as a legitimate system for moving and storing monetary value. The number of business accepting Bitcoin (including some AV installers) is increasing all the time and you can even buy and sell Bitcoin using a network of Bitcoin ATMs in some cities.

There are of course alternatives to Bitcoin. Like many early implementations of new technology, Bitcoin has limitations. Competitors like Etherium[v] and Ripple[vi] offer an arguably more useful feature set and are gaining traction. Etherium in particular offers ‘Smart Contacts[vii]’ where money transactions can be programmed based on logical conditions.

Governments are just starting to catch up with Blockchain and crypto currencies. The authorities in South Korea, China and Japan are all seeking to regulate this new financial market as are many western governments. Banks are investing in the new technology too. Currently volatilities in crypto currency value are huge compared to traditional markets but many predict this will change in the long term.

Blockchain implications for IoT

Beyond simple currency there are almost limitless uses for blockchain technology within the IoT world. User licenses, reoccurring payments, cross-platform communication and media ownership are just a few.

What is your TV or internet service wasn’t billed monthly but by minutes or kB of usage? Current transactional speeds and costs prohibit this but usage and billing could easily be handled this way with a blockchain. Maybe this will persuade content providers to concentrate on quality as users turn off poor quality programs and stop paying for it?

We currently only ‘rent’ content when we make a download purchase. When we pass away we currently can’t bequeath our download. But using blockchains we could properly own the downloads and pass them on to family or friends when we die. The possibilities really are endless.

Whatever your involvement with technology you can expect blockchain technology to turn it upside down in the next few years.

Welcome to the new era of ‘programmable money’.

 

A thirty-year veteran of the AV business, Geoff owns and runs Presto AV, an online marketing agency that specialises in the Smart Home market. Presto was born in 2009 and has grown into an award-winning web design company with an array of web and social media clients. He is lead instructor for CEDIA EMEA, a global CEDIA awards judge and holds CEDIA ESC-T/D/N certifications. He’s also a member of the CEDIA Professional Development Advisory Council (PDAC) and teaches for CEDIA across the globe. Geoff lives in Cambridgeshire, UK with his wife, children and a slowly growing guitar collection.

http://www.prestoav.com