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”:

CD08C4C4316DF20D9C30450FE776DCDE4810029E641CDE526C5BBFFEC1F770A3

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

B7AD38507FD70B134D8ECAFF9DF540968E2E8A71C6895F474A51DC4B5546E82B

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)

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.

(Photo: source)

“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)