Trust Is the Heart of the Blockchain

What was the original intention for the blockchain and Bitcoin?

What does Bitcoin founder Satoshi Nakomoto’s original white paper tell us about it?

The core idea that jumps out at you in Satoshi’s white paper is about trust. How do you create trust between people who want to send each other payments?

The solution, Satoshi writes, is “cryptographic proof” rather than trust. Cryptography is simply the art and science of creating a code, a code that can’t be hacked or changed by someone else.

Satoshi’s insight was that the way to create trust between two people who want to send/receive payments is you don’t rely on trust between them. Instead, rely on cryptography. That’s why some people say the blockchain is a “trustless” system, but what they really mean is it’s “trustful,” completely trustworthy.

Satoshi writes in the white paper:

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.

In the absence of something novel to create trust like cryptography, you need to rely on a “trusted third party.” Why is that an issue? Costs.

There is the obvious cost of fees charged by the third party, especially when they’re not being fair or trustworthy (looking at you Wells Fargo and your $35 fees). But it’s deeper than that. It’s what the fees incent and don’t incent in the system.

Fees and minimum transaction amounts hinder what Satoshi calls “small casual transactions” between people. Think of all the value that’s not creating markets and transactions because of this loss.

And not as obviously, it causes people to be somewhat suspicious of each other around the edges of the third party payment system because in that system (which isn’t using cryptography) some payments are reversed. Fraud takes place in today’s payment system and so people are naturally suspicious at some level of anyone they transact with.

What Satoshi proposed, then, is a system that automatically and every time creates an irreversible transaction. It eliminates the possibility of both blatant fraud and what he called the “double-spending problem,” which is fraudulently spending digital currency more than once.

His proposal, simply put, was a network that would essentially run itself (i.e., no third party) by generating cryptographic proof of every Bitcoin payment (using time stamps and digital signatures from individuals), then, with the help of an entity called “miners,” who are incented to extend and secure the blockchain, group these payments together in a “block,” followed by another block, then another, to create an irreversible, irrefutable “blockchain.”

What’s also striking is that even though you need so called miners to create blocks of transactions that all the other miners will agree is the next block in the chain (accomplished through a type of game they play), miners can fall in an out of the system at will. No particular miner is necessary for the system to function. Either, they believe the incentive to do their job is sufficient or they don’t. It’s brilliant.

“The network,” as Satoshi writes in the conclusion, “is robust in its unstructured simplicity.”

Read his white paper if you have a minute. It’s only eight pages and holds the basic blueprint for the next Internet and financial system that’s happening right now.

(Photo source)

A Miner Extends and Secures the Blockchain

A blockchain is a network. Like any network, it allows you to send things back and forth like messages or money.

But, it’s more advanced than the Internet networks we’ve been using up to this point because in addition to being distributed among many servers it uses cryptography to identify the sender and receiver and the digital asset that’s being used (e.g., Bitcoin).

So the core ingredients of the blockchain are that it’s a distributed system or network and it uses cryptography. But how does cryptography work exactly? Here, check it out:

Go to this simple website that generates a cryptographic hash. If you enter the word “elephant,” for example, you’ll get this “hash”:


And if you enter the phrase “Up, up and away” (or try your own phrase) you’ll get this hash:


Now whether you input one letter, two words, or a file with 450 sentences, you’ll get an output of a hash, just like you see above, with 256 characters that are a combination of letters and numbers.

So that’s pretty straightforward. The point is you can take the most infitesimal amount of data, or an enormous amount, and get a 256 character output every time. It’s a digital signature for that data (or data file), small or large, that you can be absolutely certain is trustworthy.

And here’s the point.

A hash, a digital signature, is important for individuals using the blockchain, like you and me, but it’s also critical for extending and securing the blockchain overall.

This global security role is played on Bitcoin’s blockchain by an entity called a “miner.” A miner maintains a server or node on Bitcoin’s blockchain and signs up for this role in order to get paid in Bitcoin.

What a miner does is bundle up the most recent transactions (e.g., today I sent you one Bitcoin) on the blockchain into a 256 character hash, thereby creating the next “block” in the blockchain. And, importantly, she links the hash of the current block to the hash of the previous block in the chain.

The result is every other server node in the blockchain can now verify and trust all of the data in every block in the blockchain. They can trust it because all of the data in the new block, and in every previous block, will produce the exact same 256 character hash.

A particular miner as opposed to the thousands of other miners for the blockchain gets to create the hash for the most recent block, link it to the previous block, and get paid for it, based on a mathematical game. Unpacking their mathematical game, and why it’s necessary, is for a different post.

Charlie Noyes of Pantera Capital does a fantastic job of explaining how hashes and mining works in Patrick O’Shaughnessy’s “audio documentary” Hash Power, Episode 1 (he starts at the 31min 8sec mark). Highly recommended.

(Photo: source)

Using a Centralized Internet to Create a Decentralized One

How do we get to an Internet that is truly decentralized?

I’m assuming a decentralized, highly secure “Web 3” Internet running on the blockchain is better because it will create more wealth and options for more people.

But that kind of world will disrupt many of the businesses and families and governments who have consolidated information and power. And they’re not going to like it, right? So what’s the path?

Is it to build a decentralized Internet from scratch and get it to critical mass?

Maybe, but there’s another way we should work on in parallel, which is to intelligently combine decentralized and centralized aspects of the Internet.

For example, I was listening to Ryan Shea and Muneeb Ali talk to Laura Shin about how they’re building out their Blockstack platform, which they view as an alternative to the Ethereum platform.

Blockstack has a decentralized storage layer called Gaia, which also allows you to use centralized storage like Dropbox and Google Drive. That makes a lot of sense to me . Why not leverage more mature technologies to help launch decentralized ones?

Albert Wenger makes this same point in his post on “The Unknown Path to a Decentralized Future“:

. . . it may be possible to take a stepwise path where some centralized elements remain at first (for instance, ones that demand throughput right now that’s not yet achievable on blockchains) with a view to decentralizing those elements in the future.

The trick, of course, will be to have a clear enough vision to leverage centralized elements without letting them coopt the decentralized ones. I think it’s worth the risk as we also build a purely decentralized Internet.

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The Blockchain Has Two Main Ingredients

I’m watching many of the full interviews from Manuel Stagars’s short film “The Blockchain and Us“,

One that I was instantly drawn to was with Roger Wattenhofer, who’s a professor at the Swiss Federal Institute of Technology (ETH).

I wanted someone who knows what’s up to whiteboard, or blackboard in this case, how the blockchain works. Wish granted!

His two main ingredients are “asymmetric crypto” and “distributed systems.” If you understand these two things, then you can understand the technical details of the blockchain.

Bonus: He confidently explains that cryptography and distributed systems were created in the 1970s, which is somehow amusing and makes the whole thing much more approachable.

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“The Blockchain and Us” – A Short Film

Hats off to Manuel Stagars for his short film “The Blockchain and Us“.

There’s no better way to learn about a multidimensional topic like the blockchain then have knowledgeable people, from different perspectives, give their take on how it emerged, what it is, and what it means.

It’s just 30 minutes long, so dive in:

You hear, for example, from Elizabeth Stark of Lightning (at the 13min, 31sec mark). She says:

Of course success is in no way guaranteed. One day we may look back on this and say, it wasn’t that great. But, if you ask me, I think undoubtedly there’s a huge amount of progress that’s already been made, and there’s something here! I find it hard to believe I’m going to look back in 10 to 20 years and say, oh, none of this ended up happening. We’re really seeing a new way of transacting value on the Internet.

There’s so many good insights in this film. So if you’ve been wondering about the blockchain, here’s your chance.

(Photo: source)

Blockchains and Tokens In A Sentence 

It’s a little strange that the blockchain, and its tokens, aren’t actually that complex, and yet they can seem that way.

If you’re not careful you can veer off into an area like “mining” that leaves the person you’re talking to confused. It’s true blockchains have a lot of dimensions and depth.

But here’s why they’re simple: Think about the idea of a blockchain apart from any technology.

Imagine a big sheet of paper that magically records the details of two or more people exchanging money (e.g., Cameron sends Andre thirty cents).This magic paper knows the identity of each person.

This sheet of paper is also magically owned, and kept, by lots and lots of people and therefore no one can own it. And it allows anyone to see details about the money that’s been exchanged.

So this big piece of paper magically records the exchange of money between people it can identify, the full record is freely distributed to many, many people, and it’s transparent to all. And because the blockchain system is built this way, it’s highly secure.

A token (or cryptocurrency) is special money used for the blockchain, which is exchanged in this secure and open way. In fact, any type of asset, truly anything of value, can be exchanged on the blockchain using a token.

So in a sentence:

The blockchain is an ownerless, transparent, and highly secure way to exchange and record value.

Laura Shin’s recent podcast on “How To Explain Cryptocurrencies and Blockchains” with Jamie Smith and Amanda Gutterman is a great way to explore why blockchains and cryptocurrencies are inherently simple. Highly recommended.

(Photo: source)

Defining Ethereum

How’s this for a simple definition of Ethereum in today’s New York Times:

“Ethereum is a global computing network operating according to rules defined by Ethereum software.”

Maybe that’s a little too simple.

But the article follows that up with a description giving you a better feel for it, which is “a global smartphone that can be programmed to operate according to the apps built on top of it.”

If you want to jump into the deep end of the genesis of Ethereum, I highly recommend this Wired piece titled “The Uncanny Mind that Built Ethereum,” profiling its founder Vitalk Buterin.

It has a really straightforward description of the blockchain and Bitcoin, which was to remove third parties from both the creation and transfer of currency. This was accomplished by recording payments (Bitcoin) on a new type of open ledger (blockchain).

The success of the Bitcoin blockchain made it obvious to Vitalik Buterin, and others, that you could use the blockchain to facilitate transactions and complex agreegments for anything (e.g., deeds to houses).

He realized the right type of blockchain network “could deliver every imaginable digital service, right out of the box,” and this idea eventually became Ethereum.

Vitalik recently spoke at Disrupt SF 2017 and this is how he described Ethereum:

Where Ethereum comes from is basically you take the idea of crypto economics and the kinds of economic incentives that keeps things like bitcoin going to create decentralized networks with memory for a whole bunch of applications.

In other words, Ethereum uses incentives in a decentralized network with shared memory to run diverse applications. Pretty simple.

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Is There a Blockchain App With 10 Million Users?

The blockchain is out there waiting to be used.

But how can you use it to, as the Ecomonist said in 2015, as “a way of making and preserving truths“? I like that definition.

The blockchain potentially offers something radically new because of its inherent ability to make and preserve truth between us at scale.

How do we use it, though? What’s stopping millions of people from using it right now?

Fred Ehrsam gave one very good reason why in April this year, which is the blockchain needs the right elements, or stack, to support the development of the applications that people can use.

His list of elements in this developer stack are computation, file storage, external data, monetization, and payments. He scored these elements in that post and concluded the stack was 20% ready in 2014 and 70% ready in April 2017.

Fred followed-up that post with a more detailed one on June 2017. His feeling is that the blockchain, specifically Ethereum, which is furthest along, is still “orders of magnitude  off from being able to support applications with millions of users”.

Yet, there is significant progress on scaling Ethereum, in his view, and we might see an app with up to 10 million users by the end of 2018.

One thing that will surely help this happen is the token aspect of the blockchain. Tokens mean incentives for eveyone.

Fred and Chris Dixon talk about why crypto tokens matter on a a16z podcast.

(Photo source.)

Accounting Tools for Tokens on Ethereum

At the moment, I’m really interested in how you can use Ethereum.

Ethereum is a “blockchain app platform” often called the “world computer” because you can build any app on it that you can think up.

So I’m looking for ways I can actually use Ethereum to do something useful.

Balanc3, for example, is creating accounting tools for tokens. It hasn’t launched yet, but I love what they’re working on.

They realized that tokens and cryptocurrency aren’t currently tied to accounting and compliance systems. So “product owners and CFOs face difficulties in accounting for internal operations and ensuring tax compliance.”

Balanc3 has spent over a year building the token data streams, accounting system, and interfaces to ground crypto in real-world accounting. You can read their announcement about this accounting service. I’ll be watching for their launch to test it out.

(Photo: source)