Blockchain: Embracing the Revolution - Part One

SATOSHI NAKAMOTO AND THE BIRTH OF BLOCKCHAIN

On 31 October 2008, the elusively pseudonymous Satoshi Nakamoto released their white paper, outlining Bitcoin, to metzdowd.com, a Cypherpunk mailing list. The system was specifically designed to overcome the problem of double-spending, without the need for mediation from a financial institution. This was followed, on 3 January 2009, by the mining of the Genesis Block, a.k.a. ‘the Block’, a.k.a. ‘Block 0’, an act that marked the birth of blockchain, the technology underpinning Nakamoto’s algorithmic creation.

Bitcoin’s origins lie in the cyber-libertarian and crypto-anarchic philosophies running through the Cypherpunk movement. These are fuelled by a deep suspicion of governments, private corporations, and the central banks - at the heart of which stands the fiat currency system. Particularly pertinent is Eric Hughes’ ‘A Cypherpunk’s Manifesto’, with its insistence on the protection of privacy and anonymity. Satoshi’s white paper is concerned with these same concepts, with anonymity being preserved through cryptography.

Nakamoto’s Cypherpunk credentials have been disputed in recent times. Paul Sztorc pointing out that the code was written in Microsoft Windows rather than Linux, the movement’s weapon of choice, and that Nakamoto was apparently unfamiliar with such notable Cypherpunk’s as Wei Dai. A stance countered by Adam Back, who theorised that Satoshi may have used Windows as a smokescreen to protect their identity.

Whatever the reality of the situation, Bitcoin undeniably follows in the footsteps of earlier Cypherpunk initiatives such as MojoNation, Hashcash, B-money, BitGold and, godfather of the movement and founding father of cryptocurrency, David Chaum’s eCash algorithm, published in 1982. Indeed, Adam Back’s Hashcash, a proof-of-work system, is the basis of the cryptocurrency mining algorithm, as acknowledged by Nakamoto.

 

FROM DARK WEB NOTORIETY TO SURFACE WEB ACCEPTANCE

As a result of its cryptographic anonymity, cryptocurrency gained pre-eminence on the dark web, with Bitcoin rapidly becoming its de facto medium of exchange. As Patrick Tiquet, Director of Security & Architecture at the tech company Keeper Security, stated: ‘Bitcoin has been a major factor in the growth of the dark web, and the dark web has been a big factor in the growth of bitcoin.’

This unindexed sub-sect of the deep web is accessed through onion routing, which wraps the connection within layers of encryption to preserve anonymity. Although used legally for privacy purposes and to escape government censorship, media attention has inevitably focused on the dark web’s criminality, especially darknet markets such as Dread Pirate Roberts’ Silk Road.

Guilt by association briefly threatened to undermine the technology’s integrity, but the blockchain protocol has emerged from this miasma of suspicion to rapidly reposition itself at the forefront of technology. The entrepreneur William Mougayar has compared its importance to the World Wide Web, declaring blockchain to be ‘part of the continuation of the history of Internet technology, represented by the Web … In the same way that billions of people around the world are currently connected to the Web, millions and then billions of people will be connected to blockchains … Blockchain is not just any new technology … it is technology that changes other technology.’1

 

THE TRUST MACHINE

Blockchain is a distributed ledger that stores immutable blocks of executable code or transactional information across a peer-to-peer network, all of whom have a separate, but identical, copy of the entire ledger. Each block contains a cryptographic hash linking it to the previous block, a notarizing Unix timestamp, and the encoded instructions or transaction data itself.

Because it is distributed across a network, rather than being stored on a central entity, with all computers, known as nodes, communicating directly with each other, it has a high Byzantine Fault Tolerance. This provides protection from up to one-third of the nodes having a malicious intent, which is what gives blockchain its renowned resilience to attack from hackers. The lack of centralised points of vulnerability to exploit, and the sheer computational power required to bypass the Byzantine Fault Tolerance, makes hacking economically unviable.

Any change to the information held in a particular block changes that block’s hash value, breaking its connection with the other blocks, and alerting the network to the change. To prevent this, the hash value of all the blocks that follow on from the originally amended block would also have to be amended to reconnect the chain. Whilst this is possible, it would require a minimum 51% consensus of the network and, again, considerable financial resources to calculate and render those changes. Because of this, legitimate amendments to any aspect of the information or coding held on a blockchain are usually made to a new block, provided the requisite consensus is acquired from the network.

The Economist famously dubbed blockchain ‘the trust machine’ because assets can be exchanged without the need for a third-party intermediary. Trust is implicit within the public-key cryptography and the consensus mechanism algorithm, rather than the trustworthiness of the protagonists involved in the transaction.

The second-generation of blockchain applications, like Ethereum, subsequently incorporated smart contracts into the mix. These are self-executing transaction protocols, which initiate pre-programmed actions upon realisation of the terms of an agreement. Initially proposed by Nick Szabo in 1994, smart contracts, like blockchain, allow transactions to be executed without the need for a central authority, or third-party intermediaries.

 

A TRANSFORMATIVE POWERHOUSE

Ironically, given the Cypherpunk credo that nurtured it, financial institutions and governments were amongst the earliest adopters of the technology, recognising its transformative potential. Indeed, the Harvard Business Review stated that blockchain will transform the financial system in the same way that the internet transformed the media. Blockchain is already redefining the dynamics of the energy industry, education, supply chain management, shipping, software development, pharmaceuticals, food supply, insurance, real estate, healthcare, the airline industry, anti-counterfeiting, and the internet of things.

PwC’s ‘Time for trust’ report estimated that, in order to unlock value, the majority of businesses would be using the technology in some form by 2025, and declared that ‘blockchain has the potential to add $1.76trn to the global economy by 2030.’ They also believe that the ‘technology could enhance 40 million jobs globally’. Their economists expect Northern and Western Europe to benefit the most in percentage terms, due to the existing technology infrastructure and well-equipped workforces it enjoys, with the UK estimated to receive a 2.3% boost to its GDP. Whilst the ongoing pandemic may affect this timeframe, there is nothing to suggest that the potential the report highlighted has been invalidated by the crisis.

 

NOTES

  1. Mougayar, William. 2016 The Business Blockchain: Promise, Practice and Application of the Next Internet Technology. Wiley: Hoboken