Over the next few weeks, Grzegorz Bytniewski and I (Simone Accornero) will be posting blog posts regarding blockchain, following its evolution from its birth in 2008, through the rise of Ethereum until what is expected to come in the upcoming years. We will discuss Ethereum and Fabric, smart contracts, blockchain's Gartner Cycle, public vs. private vs. hybrid blockchains, the evolution of the consensus protocols (proof-of-work, proof-of-stake, proof-of-authority), the so-called Internet of Blockchains and much more. Stay tuned!
The history of Blockchain begins when the mysterious creator of Bitcoin, Satoshi Nakamoto published in 2008 his/hers/theirs paper titled: “Bitcoin: A Peer-to-Peer Electronic Cash System”. According to the author(s), the paper was made for the purpose of providing the “solution to the double spending problem using peer-to-peer network”.
The double spending problem exists in a situation in which we would like to transfer to someone else some goods, for example digital money (like in classic online banking) or concert tickets. If we would have done it directly (peer-to-peer), we could issue the money or the tickets more than once by simply copying them and spending them more than once. This is why we need trusted third party like banks that prevents this kind of practice, but this comes with obvious costs and various limitations. (In the concert tickets case, the double spending is still a problem).
Classical solutions for double spending problem (source: Magister Advisors - Blockchain & Bitcoin in 2016 - A Survey Of Global Leaders)
A few months after the publication, in 2009, the first decentralized money (cryptocurrency) was created – Bitcoin was born. From that time on, it is becoming widely accepted in more and more places like e-commerce platforms, universities, airlines, charities, ordinary merchants and so on.
"Bitcoin Accepted Here" map (source: coinmap.org access:29/11/2016)
That day in 2009, not only the first cryptocurrency was born, but also the first ever genesis block (the first block of a blockchain) was created. In fact, many experts argue that the most important part of the Bitcoin experiment was the underlying blockchain technology as a tool of distributed consensus.
It is relatively hard to accurately and at the same time plainly define what blockchain is. As a starting point, we will present to the reader one of the generic explanations given by Swan in her book “Blockchain: Blueprint for a new technology”. She defines blockchain as a distributed, digital transaction technology that allows for securely storing data and executing smart contracts in peer-to-peer networks. This gives a general idea of the purpose of this new technology, however it does not say much about how exactly it works.
Exploring more thorough and detailed definitions, Don and Alex Tapscott describe blockchain in their book "BLOCKCHAIN REVOLUTION: How the Technology Behind Bitcoin is Changing Money, Business, and the World" as a distributed database that contains a continuously growing list of data records, the so-called blocks. These blocks are time-stamped, shared, unalterable, and connected to preceding blocks; they contain data and programs, batches of individual transactions and executables. In the case of Bitcoin, blocks contain mainly transaction data.
Definition of the block (source: EY, BitCoin Basics: Doing Ordinary Things in Amazing Ways Paul Brody, Americas Technology Strategy Leader @pbrody Linkedin.com/in/pbrody December 2015).
Definition of the block chain (source: EY, BitCoin Basics: Doing Ordinary Things in Amazing Ways Paul Brody, Americas Technology Strategy Leader @pbrody Linkedin.com/in/pbrody December 2015)
Transactions are verified in short intervals by computers run by the network’s users (the so-called nodes). Nodes are distributed, public, and encrypted. If a hacker wants to modify some data, the whole Blockchain would have to be reconfigured at every node, a computationally and organizationally extremely difficult task.
This distributed database, also referred often as distributed ledger, is stored at every node. Nodes which maintain and verify the network are called miners. They are incentivized to do so by mathematically enforced economic incentives coded into the protocol.
Centralized vs. Distributed (source: FT research, adopted by Andrew Chesler)
The network enables the change from the traditional client-server architecture of the web into the peer-to-peer architecture of the new decentralized web in which every node is both client and server. This diffuses information silos and removes single points of control, vulnerability and failure.
Blockchain networks can be sustained thanks to the globally increasing computation power and storage capacity on mobile devices and personal computers that already exceeds by a few orders of magnitude the capabilities of commercial servers and services. Gartner, Inc. forecasts that 8.4 billion connected things will be in use worldwide at the end of 2017, up 31 percent from 2016, and will reach 20.4 billion by 2020.
Computation power and storage capacity chart (source: statista.com, adopted by EY)
Blockchain technology is potentially disruptive, as trusted intermediaries could become obsolete. Banks and, more generally, the financial sector were the first ones to become aware of the technology via the cryptocurrency Bitcoin (which, as we explained above, operates on the basis of Blockchain). Bitcoin implemented the use case of decentralized money, however researchers’ and programmer’s attention (in particular Vitalik Buterin's as he writes in Ethereum White Paper) started rapidly to shift towards the implications of blockchain which they believed could have been far more profound.
They started investigating the possibility of adding [i] complex programs and executables and [ii] complex non-financial records to the blockchain distributed database. The first would create a whole new business logic behind Blockchain, enabling the so-called “smart contracts”, while the second would enable businesses to apply this technology to other digital applications beyond Fintech in areas such as governance, health (records), energy, science, literacy, culture and art.
This is how Blockchain 2.0 was born and this is where the true potential lies. Stay tuned for the next blog post about Blockchain 2.0!!!