Understanding Blockchains: For Managers And Other Affected Parties

Courtesy: ForexNewsNow

So you too have heard all the hype. Blockchains will change the world, end poverty and hunger, save democracy, protect orangutans and put an end to global warming. Ok, things like that! Anyways, if you are like most people reading this page, you have heard these too. You might have then tried to understand what this is all about. If you search for it, there are two kinds of pages you can get to:

• Blockchain for dummies: These tell you that Blockchains will change the world, end poverty, etc which you already know!!
• Blockchain for nerds: Hashing algorithms, leading zeroes, SHA-256, mining pools, incentive systems, SegWit, hard forks, proof of stake…. Eeeeeeeeks!!!!

This is where I was stuck, for quite a while. So, here’s my attempt to share what I understood.

What does a blockchain do?

You already know that blockchains change the world, end poverty and hunger, etc. But what is the common thread that run through these obviously different outcomes? Here goes:

Blockchains help non-trusting peers to agree on a piece of information in a secure and decentralised manner without intermediaries

That will need to be broken into smaller pieces to chew, swallow and digest!

• Peers: are parties of same stature. For example, when you pay me Rs. 100 at the market when I sell you vegetables, it is a transaction between peers. One human being to another. This is different from when your company appoints you as an employee, or the government prepares the list of citizens in your state, or a customer makes a complaint to a company. The company and employee are not peers, nor are citizen and government, nor customer and company. This is not to mean, human beings are peers and organisations are not. US and China negotiate import duties as peers. Mother and children are not peers. When I order a book on Flipkart, it is a peer to peer transaction between two legal entities of similar stature before the law.
• Trust: We don’t often realise how much we need to trust other human beings when we go about our lives. When you step out on to a crowded street, you trust that one of those people is not going to jump on to you with a knife. Without that trust, we might all be walking around with a dagger, pistol or pepper spray in the coat pocket and what an ugly world that would be. When you accept the Rs. 100 note from a stranger buying vegetables from you, you are actually trusting your government. That the government is keeping a strict vigil to ensure that others are not printing these notes as they wish, and that the government itself is not doing it recklessly. When you make an online payment to buy something, you trust the bank to transfer only the required amount.
• Consensus (“agree on a piece of information”): It is the medieval times. A Byzantine army has laid seige to an Ottoman fort. Ten battalions, each led by a general, have stationed themselves around the fort waiting for the right moment to attack. Now, put yourselves in the position of one of the generals. You need to decide exactly when to attack. Not only that, you have to reach an agreement with all the other generals (your peers!) about the timing of attack. If you attack while the others don’t, you will die! If you don’t attack while the others do, you will be branded a traitor and again basically you die! In addition, there is a rumour that one or two of the other generals don’t really like you and you have to be extra careful (non-trusting peers!) about the messages you receive about when the attack should begin. Now remember that this is before the days of radio communication or encrypted satellite phones. You have to take decisions based on what the occassional messenger on horseback comes and tells you. The messengers themselves may have been bribed or threatened by the enemy. Also remember, you are not waiting to receive instructions from a superior commanding officer, you are an equal participant in the decision along with your peers. Add the drama of the dynamically evolving situations in a real battlefield, and I hope you begin to appreciate what mathematicians formally describe as “The Byzantine General Problem”, where non-trusting peers need to reach consensus about a piece of information. What are the kinds of information real people like us, outside medieval battlefields, need to agree on? It could be practically anything depending on the application. That I am selling you one kilogram of fine, brown, Palakkadan Matta rice for Rs. 50. That this apartment #4C, on the fourth floor, belongs to me and nobody else. That the truck from my factory, carrying steel bars, passed Kochi at 04:03 a.m. on 24/06/2018. That you lent me Rs. 2000, and I have agreed to repay you on or before 31/08/2018. You can even store instructions (small programs, called “smart contracts”) which get automatically executed. For example, to automatically transfer a refund to my account if my pizza is not delivered within the promised 10 minutes, or to transfer ownership of your home to your son when you die.
• Intermediaries and decentralisation: We now come to the most exciting part of understanding blockchains. We mentioned the Byzantine General Problem earlier, but not how to solve it. Well, it is a really tough problem to solve. In fact, mathematicians have proved simple forms of this problem to be unsolvable. Then how does this world exist? So far we have known two ways to solve this problem. One is to simply trust your peers. I hope we human beings realise that trusting each other remains the most beautiful, cheapest and easiest way for us to co-exist peacefully on earth! The second method is for the non-trusting peers to use a trusted intermediary (non-peer). See the earlier section on Trust for examples. These intermediaries need to be fairly large, centralised and powerful to earn the trust of a large number of people. Also, the trust of a large number of people and their dependence on that trust tend to make these intermediaries larger, more centralised and more powerful. Think of Governments, Banks, Google, etc. This leads to a lot of the problems we see in our world today. Like we discussed earlier, the problem of facilitating interactions between non-trusting peers without a trusted, centralised, intermediary is extremely difficult to solve, and even thought to be unsolvable. Blockchain is a technology which solves this problem in a practical manner and enables a lot of peer to peer interactions without using large centralised intermediaries. It can enable you to buy vegetables from the market without having to trust that piece of paper issued by your government. It lets you enter into contracts with another company, where the terms are automatically enforced without having to drag each other into court. Citizens can vote in an election without having to trust the current, potentially corrupt Government. Etc. Etc. Etc…
• Secure: Blockchains are being hyped because they are Byzantine Fault Tolerant. Note the term ‘tolerant’. It is theoretically possible to hack into or tamper with blockchains or the information stored in them, but that is extremely, extremely, extremely difficult. Immutability (cannot be changed once recorded) is the fundamental aspect of blockchain security. This is achieved by mathematically linking each new piece of information (a block) with the previous pieces, thus forming a chain. To change one block which was recorded earlier, you have to recreate all the subsequent links in the chain, which is very difficult. You also need to get ALL your peers to agree to the changes, as everyone can see what the other is doing and can vote your changes out, hence the need for consensus. Greater the number of participants (the more decentralised the system is), the more difficult it is to tamper with. In addition to immutability, there are other aspects of security depending on the intended application. In an election, you want to ensure that people don’t cast votes twice, but you don’t want others to know who you voted for. If you wrote a poem, you want the world to read it but also to tell the world that you wrote it. Or if you are the shy poet, you don’t want anyone to know you wrote it, but would not want somebody else to claim they wrote it. If you implement energy conservation methods in your factory and is claiming carbon credits, you might want to leave an audit trail which cannot be altered and can be verified by a third party. If you are afraid that the ruling party is changing history textbooks to promote their agenda, you can put up facts on the blockchain so that nobody can change it in the future. When you send one Bitcoin to your gangster friend overseas in exchange for a packet of snuff (In case you didn’t know, all technologies can be put to good and bad uses!), you would like to know if he actually had that one Bitcoin in his balance and has not already sent it to somebody else. But you also don’t want anybody else to know who is sending this money or who is receiving. Depending on your application, you can use blockchains with properties like immutability, irrefutability, proof of existence, anonymity, transparency, etc. using various combinations of cryptographic techniques called hashing, encryption, etc.

Putting it all back together again,

Blockchains help non-trusting peers to agree on a piece of information in a secure and decentralised manner without intermediaries

Word of caution

As of this writing, almost everything mentioned above are mere possibilities. Blockchains are still in very early days. There are so many aspects of the technology (actually, combination of various technologies) which still need to be ironed out, and this space is rapidly evolving with new ideas coming in every other day. Outside the large pool of gamblers, developers, power seekers and other characters in this modern-day equivalent of the Gold Rush, there has not yet evolved a single application for this technology that is proven and widely trusted.

And no chain is stronger than its weakest link. Blockchain itself might be (almost) unhackable, but you will read plenty of stories about people who lost their Bitcoins after storing their secret codes in their emails secured by their dog’s name for password, which can be got from their Facebook page!

I have tried to explain what blockchains do, without going into the technicalities of how that is achieved, except for a hint here and there.

Have you found this a useful introduction?

Are there parts of it which is not quite clear, or you feel should be elaborated or improved?

Do share your comments :)