The Brainstorm long-read: Blockchain has quickly become an important technology, but there's confusion as to what it is and its limitations. Here's an overview of blockchain and some thoughts on its likely future
What exactly is a blockchain?
A blockchain is a distributed database that maintains an ever-growing list of data records secured from tampering or revision. It is not centralised, which is important as there is no single point of failure. No one organisation can claim ownership so the group work together to confirm legitimate new transactions.
It is composed of data structure blocks, where each block holds batches of individual transactions and the results of any blockchain executables. All of these blocks contain a timestamp and a link to a previous block. The blockchain therefore serves as a public ledger of transactions which cannot be reversed without great difficulty or near-system failure.
In other words?
In layman terms, what you have is a group of computers all agreeing to validate new records being added to a database. The database is not stored in one single place and resides on many, if not all, the computers.
Whenever a new insertion is to be made – say, a sale of a car from person A to person B – then a new transaction record is created by person A. He or she adds the details of the ownership transfer and uploads it to the blockchain of nodes for them to add the new transaction to the blockchain. Should it be deemed a valid transaction by the majority of nodes (which often is validated mathematically), the new record is added to the end of the blockchain and remains there forever. What is neat about this solution is the fact that no centralised authority is needed to approve the transaction but rather a majority consensus.
The blockchain at work
Aside from the implementation of cryptocurrencies, blockchain technology can also transform key aspects of society. Examples include smart contracts to make micropayments more cost effective.
In the music industry, it can enable data sharing among the value chain from artist to consumer to realise and release more value. We can track who owns the song and who contributed to the work to enforce an unambiguous ownership trail. It can even be used to create online lotteries.
A blockchain can also be used to store files in a decentralised manner, as opposed to a system like Dropbox. For instance, StorJ is one such proposal for blockchain-based file storage and retrieval.
Blockchain and online payments
The need for online payments ushered in such mechanisms as PayPal. These systems are adequate for many scenarios, but there is a fee to be paid to such online payment providers. They also have limitations regarding the minimum payments they can be used for.
What if you wished to charge 1/100000 of a cent for bandwidth used in a 10 minute period? Well, cryptocurrencies such as Bitcoin allow these minuscule payments to take place. They can also be conducted with no transaction fees (or very minor fees).
Virtual currencies have been around since 1996 when E-Gold let users open an account with a value denominated in grams of precious metals. Several copycats emerged including WebMoney, which has over 25 million users.
The rise of Bitcoin
The one most likely to dominate in the future is Bitcoin, which is a decentralised, peer-to-peer payment network powered by its users with no central authority or middlemen. It is built on the blockchain technology and was designed specifically to provide transactional anonymity. The value of Bitcoins fluctuates a lot, ranging from US$0.30 in 2011 to over US$5,400 as of late October 2017.
There are countless perfectly legitimate transactions conducted with Bitcoin. Its integration into mainstream society is increasing each day with newer traders accepting Bitcoin and Bitcoin ATMs popping up.
The key benefit of a blockchain-built cryptocurrency like Bitcoin and its public ledger is that it prevents the double spend which has afflicted many previous attempts at creating a usable virtual currency. This is where I send payment A to Seller A for a digital widget and I also send payment A to myself in another wallet I own without Seller A knowing. Seller A sends me the goods which he thinks I have paid for, but he is unable to collect payment as the amount resides in a digital wallet owned by me.
Bitcoin does not provide 100 percent protection against this, but it does make it sufficiently difficult as not to be a stumbling block anymore. The fees are not to be underestimated so therefore merchants have an incentive to accept Bitcoin because its fees are lower than the two to three percent typically imposed by credit card processors.
Along with the use of the correct "mixing" techniques, Bitcoin can also provide almost perfect anonymity, which is important for many people. Existing non-blockchain currency or payment technologies cannot offer such a solution. Bitcoin is a digital asset and a payment which is peer-to-peer with transactions taking place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain, which uses Bitcoin as its unit of account.
Blockchain technology can transform key aspects of society
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into the public ledger. This activity is called mining and miners are rewarded with transaction fees and newly created bitcoins. Besides mining, bitcoins can be exchanged for other currencies, products and services. When sending bitcoins, users can pay an optional transaction fee to the miners.
Since the system works without a central repository or single administrator, the U.S. Treasury categorises Bitcoin as a decentralised virtual currency. Bitcoin is the largest of its kind in terms of total market value and the number of merchants accepting Bitcoin for products and services has passed 200,000. Despite the fourfold increase in the number of merchants accepting Bitcoin since 2014, proponents of the cryptocurrency argue that it did not have much momentum in retail transactions.
The reason for Bitcoin’s popularity is due in no small part to the ingenuity of its underlying framework. It keeps a publicly accessible ledger of all transactions, where all transactions are confirmed and added to this ledger through the Bitcoin mining process.
Bitcoin's integration into mainstream society is increasing each day with newer traders accepting the currency and Bitcoin ATMs popping up
What is clever is that it can be difficult to associate an address with any other address in the Bitcoin network so people can remain anonymous provided they use adequate steps in using different Bitcoin addresses and 'mixing' technology. This separation of virtual currency accounts from real-world identities, along with the ability for an individual to create an arbitrary number of accounts, enables the development of novel, complex layering transaction patterns and any Bitcoin user can create any number of addresses that they wish to.
Online, no-one knows you’re a bandit
While a key feature of Bitcoin is the anonymity on offer, there are techniques which can unmask this feature, though other cryptographic anonymity solutions have arrived such as Zerocoin and Zerocash. Both incorporate protocol-level mixing, while the anonymity properties come with cryptographic guarantees. These guarantees are probably better than existing mixing technologies in Bitcoin. The underlying cryptographic tool used to achieve this is a zero-knowledge proof, which is a method which proves a mathematical statement without revealing any other information that leads to that statement being true, thus leading to true anonymity.
Bitcoin itself is also working on an extension to improve the mixing and CoinJoins which prevent transactions graph analysis and side channel attacks. There are several "altcoins" such as Ethereum, Namecoin, Peercoin, Dogecoin and Litecoin. Ethereum, for example, is an ambitious altcoin that aims to provide a Turing‐complete programming language for writing scripts or "contracts" and it has a growing user base.
The UK National Crime Agency (NCA) Cyber Crime Assessment 2016 reportstates that cybercrime accounted for 53 per cent of all crimes in 2015. This percentage is rising steadily year on year and we can expect to see cybercrime continue to develop into a highly lucrative and well organised enterprise. Cyber criminals, whether state sponsored or not, are beginning to devote funds to research and development. Organised crime gangs are increasingly moving online because that is where the money is.
We are also seeing terrorist groups beginning to exploit cybercrime to fund their evil aims. One of the latest attack vectors for hackers is ransomware, the nasty malware that holds people’s data files hostage until a payment is made in bitcoins, and cryptocurrencies like Bitcoin have enabled its rise. The security vendor Malwarebytes used a honeypot to attract attackers and they discovered an increase from 17 percent in 2015 to 259 percent in 2016.
Imagine the future when our smart home devices are held hostage and owners must pay a fee to have access to their lights and Internet of Things (IoT) appliances. We will also see ransomware appearing on our smart cars, trucks, trains and planes. It is only a matter of time before we see people left helpless on the side of the road, unable to operate their vehicles until they pay a ransom.
And that’s not the only problem…
A major problem of blockchain currencies is the storage and safekeeping of the 'coins'. Unlike traditional banking mechanisms, blockchain currencies can be stolen and moved to a thief’s account with no means of recovery. This is a real and ever-present danger with using cryptocurrencies and there have been ever-increasing incidents of coins been stolen.
A long-term pitfall is the verification of the blockchain. In Bitcoin, for instance, the incentive to validate the blockchain lies in the mining process, where miners compete to mine new coins. However, the total number of Bitcoins that can be created will never surpass 21 million so it is hoped that the incentives will then lie in the transaction fees, but incentivising other blockchains may be a larger problem.
Another problem is the governance of Bitcoin and other decentralised blockchains. They usually have a governance group of lead developers to implement the agreed changes. However, there is nothing to stop a core of the blockchain from forking off to a competing blockchain.
Cybercrime accounted for 53 per cent of all crimes in 2015
For a blockchain to be secure, an adversary must not be able to overwhelm the consensus process. This in turn means that an adversary cannot create a lot of mining nodes and take over 50 percent or more of the new block creation. While there have been mining pools which have reached this size, the community responded and these have shrunk, but it can be difficult to tell who owns much of the blockchain at this moment. This "51-prercent attack" remains a shadow on blockchain currencies.
A potential limitation that people are worried about in the longer term is where the choices of cryptographic algorithms might be broken. There has been steady progress in cryptanalysis techniques and, as we say in the security community, "attacks never get worse".
The Bitcoin blockchain can also not process more than ten transactions a second, a miniscule amount compared to the tens of thousands per second that payment systems like Visa can handle. This arose due to the maximum size of the "blocks" that are added to the digital ledger of Bitcoin transactions. This needs to be addressed before we see supermarkets all over the world accepting Bitcoin. Even PayPal, which is newer than Visa, can handle 100 transactions per second at peak times which is far more than Bitcoin.
A major problem of blockchain currencies is the storage and safekeeping of the 'coins'
The European Banking Authority and others have warned that Bitcoin users are not protected by refund rights or chargebacks. The use of Bitcoin by criminals has attracted the attention of financial regulators, legislative bodies, law enforcement and media. Criminal activities are primarily centered around black markets and theft, though officials in countries such as the United States also recognize that Bitcoin can provide legitimate financial services.
What happens next?
We have a reached a pivotal moment in global society where financial transactions can take place without being traceable. We are starting to see virtual currencies forming the modus operandi of trading in illicit goods, such as weapons, drugs and child abuse material, as well as for the payment of services that may be regulated or criminalised in certain countries, like online gambling. The existence of these currencies is ideal for criminals wishing to hide their tracks and we have to examine the implications for society when such a powerful anonymous virtual currency exits.
However, virtual currencies are here to stay so law enforcement and regulatory forces are facing a crisis in their investigations into these transactions. The skills required to "follow the money" have changed overnight. We are likely to dramatically need more Computer Security Incident Response Teams, real-time collection of traffic data and seizure and expedited preservation of stored computer transactions.
At this time, blockchain based cryptocurrencies like Bitcoin are not quite ready for the mass market. Buying, selling and storing of bitcoins is still beyond what we can reasonably expect the public to understand. That should change in time with new layered solutions which make it easier to buy and use Bitcoin. Most technologies become more user friendly over time so that is to be expected of a new mode of currency such as Bitcoin.
For now, public confidence is the main stumbling block
There are worries too that most of the coins at this moment are owned by Chinese and other anonymous Eastern individuals. This is an obstacle preventing some Western financial corporations from throwing their weight behind Bitcoin. Banks need to know the identities of the parties invovled in the transation so the anonymity makes this impossible for now. However, if there is money to be made in the future, watch the banks and financial institutions suddenly change this modus operandi.
For now, public confidence is the main stumbling block. What affects confidence the most is the theft of Bitcoins, failure of Bitcoin exchanges and the huge variations in Bitcoin valuations. Once those are addressed or become less worrying, real traction will take place. And underneath all of this is the blockchain, verifying transactions in a decentralised manner like we have never seen before.