October 26, 2017 at 09:51Blockchain: how it works and why this technology will change the world
- Transfer
The Spectrum portal, which covers news in the technology world, has published blockchain material. This article describes what pitfalls are in the operation of technology and why it cannot be used everywhere. We have prepared a Russian-language adaptation of this article.
Technology development
Bitcoin was coined as an act of disobedience. Cryptocurrency appeared shortly after the global economic crisis and was advertised as a remedy for the injustice and corruption of the traditional financial system. The creators were sure that when Bitcoin became more popular, it would compete with real money and eventually displace the institutions that led to the crisis.
The unofficial slogan of Bitcoin: “We believe in cryptography”, directly speaks about who is to blame for the problems of the economy: intermediaries, bankers, “trusted” third parties, which in fact cannot be trusted. These people simply create problems for others, reducing profits and complicating transactions.
Bitcoin sought to replace the services provided by these intermediaries using a special code and cryptography. When a person pays a mortgage, a series of operations take place between his bank and other financial organizations in the background, due to which money is withdrawn from the user's account. The bank can guarantee that everything is fine with the money, since it stores information about where and how each penny from the account was spent.
Bitcoin and other cryptocurrencies replace these background operations and transactions with software - a distributed and secure database called blockchain. At the same time, many computers control the process of changing the owners of the bitcoin token. The right to use cryptocurrency can be transferred to absolutely anyone, regardless of their nationality and place of residence.
8 years after the creation of the blockchain, they are trying to apply the technology to procedures and processes not related to the transfer of funds.
Can blockchain connect people who rent housing with travelers and offer the parties a transparent platform for payment? Can the blockchain act as a repository and platform for playing films, shows and other digital media, while maintaining royalties and passing them on to the creators of the content? Can the blockchain automatically check flights and pay compensation to travelers whose planes did not depart on time?
If so, then blockchain technology will help get rid of Uber, Netflix and, for example, insurance companies.
These are not assumptions, but just some of the things that are now being built on Ethereum - a blockchain platform that remotely hosts software on a distributed computer system calledEthereum Virtual Machine . The Ethereum blockchain, on which the cryptocurrency ether works, is currently the most open for experiments.
But this openness does not always play into the hands. New blockchain schemes are created every day, including by the largest technical corporations. Microsoft offers its customers cryptocurrency experimentation tools in its Azure cloud. IBM, Intel and others are partnering with the Hyperledger hub , an open platform for developing business-oriented blockchains. The largest banks - the very ones that the creators of the cryptocurrency wanted to supersede - came up with their version of the technology, trying to get ahead of the trends.
And even Bitcoin, which runs on the first and most successful blockchain, is being upgraded for applications that its creators have never dreamed of.
But not a single blockchain can boast of massive use. No concept or strategy has yet led to a revolution in any industry. Bitcoin is used by no more than 375,000 people in the world per day.
Which blockchain platforms will survive, and which ones will slowly sink to the bottom? To make any forecast, you need to understand what blockchain is and logically correlate it with bitcoin.
How does blockchain work?
In 2009, an anonymous hacker (or group of hackers), under the pseudonym Satoshi Nakamoto, created the first digital currency. In this system, money was only an accounting tool, a method of abstracting the value, assigning property and providing funds for transactions.
To perform these functions, money has historically been used. Possession of physical tokens - coins, allows people to personally conclude transactions among themselves. Cash is difficult to copy, so there is no need to fully account for who owns a certain part of the money supply.
However, if you create a table that indicates to whom and how much money belongs, coins and bills will become unnecessary. Banks and payment processors have already partially sublimated physical currency into digital records, tracking and processing transactions in their closed systems.
Bitcoin completed the conversion by creating a single universal digital register called blockchain. This technology got its name because it looks like a circuit - you can make changes to it only at the end of the blocks. Each new addition contains a set of new transactions. For example, if Sasha pays Julia for bitcoin, this transaction will appear at the end of the chain. And in the blocks before that it will be indicated that Sasha paid Misha, and Misha Olya.
The blockchain for bitcoin, in contrast to the accounting books that are maintained by traditional financial institutions, is located on computers around the world. This data is available to anyone with an internet connection. Miners, owners of computers on which blockchain information is stored, are responsible for detecting transaction requests from users, combining them, checking and adding to the blockchain in the form of new blocks.
The validation process establishes that the person actually owns the bitcoins after the transaction, and that he has not yet spent them elsewhere. Ownership in the blockchain is determined by two cryptographic keys. The first key is in the public domain on the blockchain. The second is available only to its owner. These keys are used to encrypt electronic messages. When someone sends an encrypted message, he uses the public key. The recipient, when opening the letter, uses the private key and decrypts the message.
In blockchain technology, transactions are signed using private keys corresponding to the public keys assigned to the coins they want to spend. And when the transaction is processed, a new public key is assigned to these coins.
When several people participate in the design of an operation, the issue of irreversibility becomes important. If the blockchain were managed by one bank with a set of well-known validators working within the same jurisdiction, then transaction execution would be a simple matter.
But for Bitcoin, there is no central bank to enforce the rules. Miners work anonymously around the world, despite the diversity of cultures, the difference in legal systems and regulatory obligations. Therefore, there is no way to hold them accountable. The irreversibility of the operation is provided by the bitcoin code. He uses a scheme called proof of work.
How proof of work makes blockchain technology reliable
In order to create new blocks, miners need to own all the transaction information. They compete with each other, since the miner, who first created the block, receives payment for this service. The question is what prevents the miner from deleting previous transactions in the blockchain. Although he will not be able to steal coins in this way, he will be able to complete the same transaction several times. For example, pay for the goods, and then delete the transaction information.
To avoid this, all miners on the network should have the same copy of the blockchain.
When the miner adds a new block, he must provide cryptographic proof of the transaction. To get the proof, the miner passes the block through several rounds of the hash function - a calculation that takes a piece of data of arbitrary size and translates it into a meaningless alphanumeric string with a fixed length, called a hash. To make the process more reliable, the blockchain algorithm requires that the received hash starts with a certain number of zeros. It is impossible to predict in advance which hash a given data set will produce, so miners start the calculation again and again, each time inserting a random number into the data set. When this number changes, a new hash occurs. As a result, miners get the correct number of zeros.
A miner that finds the correct hash sends a block to other miners. They check it and add it to the full version of the blockchain contained on their computers.
This can be compared to closing the door. Suppose a person has a lock, and a set of keys, one of which can close it. He must try all the keys before finding the right one. And after that, leave it in the lock so that others can verify that the key is suitable.
Miners spend their money on supporting the network - they buy equipment and pay for electricity. To change a block in the blockchain and conduct the same transaction twice, they will have to spend twice as much of their money, so it becomes unprofitable to deceive.
In addition, with each new block, the cost of changing the previous ones increases. New blocks store the hash of the block in front of them. Any changes to old blocks will result in invalid hashes for all subsequent blocks. Therefore, it is impossible to insert dummy modifications into the previous block without repeating all the work that was done after this block. If we draw an analogy with locks, it turns out that the lock at the end of the chain is connected with all the previous ones. If you change the lock in the middle of the chain, you will have to look for new keys for each lock after it.
It turns out that the miners provide expensive evidence, and then receive money for their work. Thus Satoshi created the first viable peer-to-peer digital currency. But he also solved a more general problem that had been bothering scientists for decades. Bitcoin, which for 8 years has never been disconnected from the network for a long period, reliably encourages miners to work in good faith, providing a single network. The result is a secure, ever-growing data chain that anyone with an internet connection can check and supplement.
How to use blockchain in other areas
Blockchain technology can be useful not only for transactions. Almost immediately after the appearance of bitcoin, people began to think about how to apply this technology in other areas. When miners verify transactions, they run small programs that process and provide the data necessary for the transaction. But what if you run more complex programs, such as software for social networks? Or use blockchain to provide data for online forums?
These ideas appeared immediately after the creation of bitcoin, but only a few years later, a nineteen-year-old student from Toronto contributed to their development. In 2013, Vitalik Buterin developed a completely new technology called Ethereum. Thanks to her, the blockchain could be used not only for transactions.
Unlike Bitcoin, Ethereum uses mini-programs called smart contracts. They can be written with unlimited complexity. Users can interact with the programs by sending them transactions with instructions that the miners then process.
This means that anyone can embed the program in the transaction and be sure that it remains unchanged and accessible to the block chain. Theoretically, with Ethereum, you can replace Facebook, Twitter, Uber or any other digital service with new versions that are transparent, invulnerable to censors and do not require human intervention.
What is a distributed registry?
In parallel with Buterin’s attempts to use technology to create a computer that covers the whole world, the idea of a closed and controlled version of the blockchain developed. In September 2014, a group of financial institutions, including Barclays, Goldman Sachs, and JP Morgan formed a consortium called R3 to explore how locks can increase the efficiency of settlements between banks.
The open structure of blockchains such as Bitcoin and Ethereum contradicts the needs of these organizations. First of all, the anonymity of users whose data is represented by alphanumeric public addresses without indicating their real identity raises questions. Banking laws in the United States and other countries prohibit such anonymity. “We need to know who the participants and counterparties are on these platforms,” said Tim Swanson, director of market research at R3.
Financial institutions are also legally required to protect customer data and control their export across national or regional lines. Given that public blockchains contain all the information about transactions on many computers on the network, it is impossible to limit the storage chain when using them.
Thus, a distributed registry approach to blockchain technology appeared. In a distributed registry, the identification of people adding blocks is known, and data in the system is available only to selected parties. Since the right to create new blocks is assigned by people who run the code, and not by lottery, there is no need to check the work of miners.
Such a system is designed for situations where all participants in the blockchain already have a small degree of trust, but want to perform services for a neutral third party, as can be the case with banks in the settlement of international bank transfers.
Last year, the R3 project, which recently raised $ 107 millionof over 40 institutions, released its first Corda distributed registry. And he already had a competitor: JP Morgan, who left the R3 consortium last spring, released his own registry, called Quorum.
The distributed ledger approach also extends to other industries that store sensitive customer data. Many of these projects are built using the tools provided by Hyperledger. He creates products for companies that want to work with smart contracts, but hesitate to use open blockchains such as Ethereum and Bitcoin.
“People need to understand the actual problems and regulatory requirements that organizations such as banks, insurance companies, and the healthcare industry must adhere to. They cannot afford the risk and uncertainty that some open systems are introducing, ”says Jonathan Levy, creator of the Hacera blockchain access control system.
How smart contracts will work
No matter which blockchain option wins, smart contracts will require a number of supporting technologies. These additional technologies are currently under development. And they will be very important for expanding blockchain technology.
“As soon as we get smart contracts, there are a number of problems,” says Ari Jewels, co-director of IC3, Cornell University. These problems fall into several categories.
Firstly, blockchains will not be able to store a lot of data. This will be a problem for many projects that, for example, offer to store and transmit streaming video. They simply do not have enough storage space.
Blockchain technology records the inputs and outputs of each coin into the network, as well as the contents of an additional field that allows up to 40 bytes of metadata for each transaction. It's all.
Another blockchain problem is that the technology itself does not know what is happening in the real world. This is important if a smart contract is an airline insurance system. The blockchain must know when the plane takes off or lands, and for this you need to request website data.
Ideally, developers will create blockchains for storing and accessing data, taking into account weaknesses - vulnerabilities to censorship and the possibility of canceling locks. To do this, you need to carefully consider which "trusted parties" you can actually trust.
The storage problem can be solved using distributed file sharing services such as a decentralized cloud storage system, Labs Interplanetary Database protocols or Storj Labs. These are systems that allow people around the world to get extra space on their hard drives. Such schemes will work for the blockchain-based smart contract system, since the data will be stored on several computers around the world and will always be available.
Real-time data can be imported using oracles. These are services that receive payment for a reliable request for real-time data and their submission to blockchain smart contracts.
In IC3, Gelus has developed a secure data feed for Town Crier smart contracts.. It protects data entered into the blockchain from falsification. The work process is based on the use of trusted software on Intel processors.
Financing
To transfer all modern services to blockchain technology, you need a lot of money for technology and research. The
question is how to get financing for a project that will destroy many large corporations. Ideally, you need to create open blockchains like Ethereum and entrust the storage of data to the people who created it. In such circumstances, a company cannot survive from a business model that collects and sells browser behavior, purchase history, or location data. Blockchain companies also cannot rely on limited ownership of their intellectual property, since the programs are in the public domain.
Nevertheless, a potential financing mechanism for blockchains has already appeared - Initial coin offering or ICO. It turned out to be extremely profitable, although legally dubious.
For example, a person decided to use the application. But he can’t pay with regular currency, he needs to buy special coins for this application, which were released to the market in advance, and pay with them.
In the real world, it would work like this: someone opened a laundry room and issued tickets that can be used to pay for laundry. The owner sells all tickets to people in advance, and then, if necessary, they resell them to others.
To date, more than half a billion dollars has been invested in the sale of tokens, and in recent months these numbers have only grown. For example, the Tezos blockchain set a record in July, raising more than $ 200 million through an ICO.
Due to such huge investments, user complaints about the hypocrisy of the creators of bitcoins appeared. “The creators of the blockchains that promote these schemes are actually demonstrating the stinginess and greed they attribute to standard financial services and government-supported currencies,” says Preston Byrne, co-founder of Monax Industries, an open platform for blockchain developers, when money begins to flow into their direction, they become just as careless with the public that they once were. ”
Others argue that ICOs, as a new class of investment instruments, are as destructive as funded applications.
“Money is not the root of evil. Equality is the root of evil, ”says Joel Monegro, creator of Placeholder, the new blockchain technology fund.
He believes that providing capital to the founders and employees of the company encourages them to accumulate wealth rather than use it to improve their products.
On the other hand, ICO is not only a financial instrument, but also a means of access to blockchain technology. It follows that the more people use the service, the greater will be the demand for the token necessary for access.
“My incentive is not to make more profit, but to make more people use the application, because the cost of the token depends on the cost of using the service. You completely reverse the incentives, ”says Monegro.
In the United States, the use of ICO is probably coming to an end. At the end of July, the US Securities and Exchange Commission warned that many ICOs fall into the category of securities and therefore must work according to certain rules.
“Times have changed and very quickly. Some of the early followers of Bitcoin experienced financial difficulties three and four years ago, but held on to their beliefs and their coins and are feeling very good now, ”says Jonathan Levy, creator of Hacera,“ we still need Bitcoin and Ethereum to work on a larger scale, so enterprises need to decentralize data and ensure their confidentiality. Now we are faced with a new task: given the huge amount of money invested, it remains to be seen how many old-timers and newcomers will remain faithful to the cause and continue to work to change the world with the help of technologies that have already changed them. ”
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