The ascension of Blockchain

Author: John Boyce III

Satoshi Nakamoto introduced Bitcoin to the world through a publication entitled, “A Peer-to-Peer Electronic Cash System”. While discussing the inner workings of Bitcoin, Satoshi discussed the formation of blocks containing transaction data that could be time-stamped and chained together to form a linear historical record of all transactions ever made. By tethering blocks into a chain to record transaction history, Satoshi created the first ever, secure, decentralized, digital ledger of its kind. Bitcoin is widely known for being the primary example of cryptocurrency’s investment potential in a global market, but Bitcoin’s greatest contribution lies within its framework: the blockchain. In this article, the reader will embark on a journey to better understand how Bitcoin works, current blockchain innovations and the how blockchain innovations will continue to revolutionize industries.

Developing a secure decentralized network that can process and record a vast amount of transactions on a global platform requires universal cooperation. To do this, Bitcoin uses a massive network of nodes: a node can be any computer with internet and storage capability. In order for the network to remain secure, the nodes must be honest since their role in the blockchain is to continuously time-stamp and record individual blocks into the chain. The chain of blocks is the ledger.1 There are currently 10,608 nodes worldwide working synergistically to maintain Bitcoin’s transaction history all while continuously backing up the data to assure continuity and security in accordance to Satoshi’s vision of decentralization.2 Networks involved in maintaining Bitcoin’s ledger must be able to produce enough computational power to stop an attack and verify transactions.

Bitcoin uses a proof-of-work protocol to configure transactions into blocks that the network of nodes chain together. Proof-of-work was first conceptualized in 1993 by Cynthia Dwork and Moni Naor.3 In an effort to deter spam mail, a cryptographer by the name of Adam Back created Hashcash in 1997. Hashcash was a system that made sending mass emails difficult by forcing the sender’s computer to solve a mathematical puzzle for each email sent.

This is how it works: the computational power required to send one email is minuscule but a ‘spammer’s’ computer will become overburdened solving puzzles for thousands of emails being sent at once, costing the spammer time and electricity. An email received from a non-spammer is verified with a header acknowledging the work put into proving the sender’s authenticity: substituting trust with proof of work.4 Bitcoin uses a proof-of-work protocol similar to Hashcash.

Hash is a term used frequently throughout Satoshi’s description of Bitcoin and refers to the hash algorithm SHA-256. To oversimplify, hashing information/data applies mathematical code to make the original set of information completely unrecognizable: one input digit altered changes the output completely. All of the information to cryptographically trace the order of transactions are encoded within or attached to a hash function: from digital signatures to a timestamp. In short, the cryptography involved is very complex and to verify transactions in their correct order requires a large amount of computational power to solve this mathematical puzzle.

If the network of nodes are the jeweler then the raw material (transactions) are unearthed by miners. Miners use their computational power to solve this mathematical puzzle which serves to verify transactions: a more complicated version of Hashcash authentication. Once the transactions are ordered correctly and a node in the network accepts the proof-of-work, that block of transactions are then added to the chain. The largest chain throughout the network is recognized as the most up-to-date. To change a previous block, the work must be redone to that block and all subsequent blocks, making the ledger nearly impenetrable.1 For contributing the resources to keep this system moving, miners are rewarded Bitcoin and transaction fees until the Bitcoin reaches its limited supply of 21 million. After peak circulation miners will only receive transaction fees.

On average it takes roughly ten minutes to one hour for a Bitcoin transaction between two locations (wallets) around the globe to be verified. By comparison an international wire transfer of money may take up to 5 days and requires a third party establishment. For this reason the functionality of Bitcoin as a decentralized currency became the focus of blockchain’s earliest innovators.

Charlie Lee saw an opportunity to create a cryptocurrency similar to Bitcoin but with less bulk. He reduced block verification time to two minutes and thirty seconds by changing the hash algorithm from SHA-256 to Script. Doing this made mining more accessible. In an effort to remain competitive with Bitcoin’s circulation, Charlie Lee increased his coin’s circulation amount by 4x that of Bitcoin to 84 million. In October of 2011, Lee’s adaptation of the Bitcoin, the Litecoin, was introduced.5 Since the birth of Bitcoin the rat race to create new cryptocurrencies pioneered a new trade industry and a fairly amusing joke (Dogecoin). However, it wasn’t until 2015 that blockchain’s potential ascended above its use as a cryptocurrency.

Ethereum, the brain child of Vitalik Buterin, officially went live on the 30th of July, 2015. Buterin improved on block verification time to 15 seconds substantially surpassing that of Litecoin. Ethereum functions as a cryptocurrency, but has a Virtual Machine that allows state & logic programs to exist on the blockchain. By incorporating a virtual machine into the Ethereum blockchain, individual accounts can program specific rules to a transaction between multiple parties.6 In 1996, Nick Szabo put forth a computer protocol that would allow all of the necessary components of a contract to be handled digitally, cutting out the need for a third party, he described this a the smart contract.7 The introduction of a virtual machine tethered to Ethereum’s blockchain that can facilitate smart contracts has created a massive global outlet for innovation.

Today anyone can open an account on Ethereum’s blockchain and create a smart contract between one or more entities as long as all parties have an Ethereum wallet. Once the rules are programmed into the contract and digitally agreed upon via a digital signature, Ethereum nodes can execute the contract’s terms once they are met. With an escrow contract Ethereum coins can be stored in a wallet until some condition is fulfilled at which point Ethereum tokens will be distributed appropriately. This system allows contracts to be completely independent of a third party — decentralized.

Image displays the inter-connectivity of individuals on a global scale.

As if decentralized contractual agreements aren’t revolutionary enough, Ethereum’s blockchain also can host back end support for programs. What this does is allow a company to build an application that can use Ethereum’s blockchain for decentralized support instead of a centralized server. Couple this with a smart contract and a company can create a decentralized application or DApp. By creating a DApp, entrepreneurs can market their idea to the world for the purpose of raising funds to start their company.

Ethereum network or DApps has created new fundraising opportunities for prospective companies to accept Ethereum from investors and distribute company tokens to their investors following crowdsale. This form of funding is known as the Initial Coin Offering (ICO).8 In the United States, crowdfunding has been encouraged through the passing of the JOBS Act and amendments to the U.S. Securities and Exchange Commision (SEC) specific regulations.9 These regulatory changes are coming to the blockchain industry and will better protect investors while paving a new avenue for future blockchain innovators to use token based crowdfunding to jumpstart their ideas.

Blockchain technology will continue its ascension into our everyday lives by revolutionizing industries. For every industry, there is or will be a blockchain innovator working effortlessly to disrupt the status quo. Asking an industry to invest in an idea that may fundamentally change their business model is not enough. Proving to an industry that blockchain will create positive change is necessary. Blockchain’s ascension has and will continue to be sustained by the enthusiasts; who see a project’s potential and refuse to let it perish.

“Anything you can conceive as a supply chain, blockchain can vastly improve its efficiency- it doesn’t matter if its people, numbers, data, money”
 — Ginni Rometty, CEO IBM

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