Introduction
The new technologies of the called 4th Industrial Revolution include Big Data, Cloud Computing, Social Web, Internet of Things (IOT), Drones & Robotics, Mobility (Apps in mobile Phones) and Blockchain.
Blockchain is one of the new technologies that will bring some of the most important changes in the world, actually it’s story is very similar to Internet.
Distributed Networks were born for strategic war reasons, if you have a communication base centralized connecting all the points in the country as a Network, if any external action impacts the central they would hit the heart of national communications and you would be helpless. The Defense Department decided that telecommunications had to be in a distributed Network to have different nodes of connection and avoid the risk of losing connection from one point to the other.
Distributed Networks are safer and stronger than centralized Networks and even economically less expensive as you do not have to build a structure to support so many connections simultaneously in the same place.
Servers in any node in a distributed network do not have to be so robust as they will manage only a fraction of the total communications.
Internet as we know it is Internet of Information, through Internet we are connected and we can receive a video, a song, a document or other types of information, we really are receiving a copy of the original being.
When we are speaking of valuable assets as stock shares of a company, Bonds, or money we need to send the original, as you a valuable being is not suppose to have more than one copy, as it would be losing its core value if anybody can duplicate it.
WHAT IS BLOCKCHAIN
Blockchain technology is about building a network of valuables, it is an Internet of valuable assets. Blockchain aims to do the same as Internet has done with information but transferring valuable assets from one point to another instead of only information.
From Internet of Information to Internet of value
Internet offers a way to send pictures, documents, PDFs, emails, PPT, see Webpages, search for information, etc.
When we are speaking of value assets as Intellectual Property, energy, carbon bonds, money, legal agreements and official documents, personal identity documents, or any financial assets (bonds, credits, stock shares, futures, swaps, etc.) then you need a different type of network.
What is a Value Asset?
A value Asset is something that has an accepted and recognized price or value that belongs to someone and that lives in registers, data bases or what is called ledgers.
A bank is a trust worthy institution that is regulated that holds these ledgers and these entities that have the trust of the system have the registers of all people that holds property of the assets that are in their ledgers. That is how the economic monetary system works globally.
So, when we want to make a transfer of funds from one bank to another, we need the participation of third parties as the payment processors, a clearing house and a Central Bank authority, that validate the transaction between the two banks. Each one of these entities have its own ledgers and accounting registers, and they must conciliate positions as the trust of the system rely on these double-checking processes.
Every transaction is a balance and when a sum is transferred from one bank to the other, then the amount decreasing in one bank is added in the new account in the other bank. But currently, the money does not travel through Internet, only information is being managed by the network and the money is resting in the trusted entities that are the banks and the transferring system used that is validated by third parties that are authorities in these processes.
Internet is only a communication mechanism between the participants.
This current system works well, it is secure, but it is costly, it is slow, requires several participants for validation, needs reconciliation of accounts between the banks.
For example, if you have done International transfers it may takes one or more days, there are mistakes and the money sometimes does not reach the other side and you have to check with the bank of origin and track the transaction to find out where it finally went. So, the system is not infallible.
Think of what will happen if all banks and all trustworthy entities were connected to one only shared source of information, where everyone has the exact same register and value of things, sharing the same ledgers.
If this hypothetical situation is met, if all the participants let’s say banks, are seeing the same ledger and affecting in an agreed process the values to be transferred, then we do not need to rely on trusting one another, we will not need to conciliate every transaction in the books of every different participant, we could operate faster and safer, and any changes or transfers of value from one point to the other and it would be done instantaneously, in real time. This finally will be a cheaper, faster, interoperable, safer, and immutable process that will benefit everyone.
Blockchain is a safe Database with a shared and distributed network that is able of registering any valuable asset (not only financial), that offers a new way of operating valuables in a lower cost, safe, immutable (can not be changed by participants or hacked by third parties), and in real time system.
Blockchain technology is easy to check out by regulators as it is done in layers, it approves every transaction before it is registered by all participants in the ledger and then it becomes immutable, it cannot be changed again, even if there was a mistake in the operation. Let’s suppose that the amount we operated was higher than it should be, the only option to correct it, is by realizing a new operation returning the excess amount from the last entity to the original.
- WHAT ARE THE BENEFITS OF BLOCKCHAIN TECHNOLOGY?
• Highly robust and resistant to external attack. It guarantees Integrity of the transactions thanks to cryptography.
• Eliminates conciliations and disputes. It is fully traceable and easy to audit.
• Simplifies processes including geographically distant participants with different interest, avoiding alternative or redundant channels.
• Guarantee privacy of the information on the transactions.
• It is interoperable and scalable. Easy to add new nodes or participants.
• Easy and fast to implement.
• Flexible and open to innovations (compared with the rigidity of current system).
• Opens opportunities to do new business that are difficult to do without this
technology.
The first application that uses Blockchain technology is Bitcoin. It is an electronic version of cash that allows to send on-line payments directly to other participant, without the need to pass through an intermediary or financial institution. Bitcoin started operations in 2009 right in the financial crisis.
Bitcoin has all the attributes described in the Blockchain technology, it is a shared Database through a safe and distributed network, where there is only one transaction registered every time in the ledger, it is immutable and holds the complete history of transactions done. The protocol of communication are nodes that have a consensus over the database, what is transferred is a digital coin or token with an anti-spam mechanism.
The anti-spam mechanism consist in the charge of a small fee for every transaction, if someone wants to send multiple transactions to block the network it would be too costly for the intruder, this makes it impossible for an external entity to knock down the system, the expense in fees would be larger than what they can get from the network.
WHY BITCOIN USING BLOCKCHAIN ESTABLISHES TRUST WITHOUT INTERMEDIARIES.
Using three strengths of the system:
1. GUARANTEES SAFTY – Through cryptography the digital assets are protected by digital signatures and Hashes.
It offers full integrity of the Database, authenticates all transactions and identity of participants.
2. NO NEED OF A VALIDATOR – Through a collaborative network of interconnected nodes that share the same Database. Only those transactions that had been certified by most of the nodes will be included in the Database, in agreement with all participants.
3. IMPOSSIBLE TO BE HACKED OR MANIPULATED – The transactions are done through a distributed network in a hyper-replicated process. Algorithm is replicated in every node of the system and assures correct translation of the transactions.
Database only permits to aggregate new transactions and holds the historic ledger of the previous, in an immutable manner. Mistaken transactions can be detected very easily.
There is only one source for all, and it is validated by the participants.
One of the key topics guaranteeing the safety of the information and transactions is cryptography.
WHY USE CRYPTOGRAPHY
Cryptography guarantees extreme safety for how it works. Cryptography was developed in the decade of the 70’s, as asymmetric Cryptography or public key cryptography, used in Bitcoin. It is based in the use of two different keys, the first one is a public key to encrypt and there is another one that is private to decrypt the message. It is necessary to know both keys to decode the information.
Both keys are similar, they are public if they are shared and private if they are secret keys for specific use of one of the participants.
If you are the issuer you can sign the information with your private key and the receiver that has the public key can verify it is yours and decode it. This is a method of authentication of the message.
The keys used are indecipherable, today it is impossible to decipher any of these keys of around 50 characters.
A transaction is done from an issuer A to a receiver B and the issuer describes the operation including receptor, amount, fee and sends it through the network after it is encrypted with the private Key, the network nodes authenticate the transaction with the public key and the receptor is able to decrypt the transaction.
The issuer uses his private key to encrypt the message, but he does not shares his private key, to decrypt the message you need the other public key after authentication is done, this is a validation process.The process is managed by algorithms that generate the private or public keys.
COLLABORATIVE NETWORK
Second strength of the Blockchain technology is the collaboration in a shared network between all participants. The Network is built by participant nodes(sometimes called “miners”) interconnected, that share the same list of transactions done up to the last moment. Only validated transactions by most of the miners are registered, and each one is registered it forms a new layer that is not possible to change, it is immutable.
This makes the system independent of any participant, it goes on as long as most of the participants are honest and keep validating transactions presented.
Why it is called Blockchain?
It is Called that way because the approved transactions are grouped in blocks. Any new transactions that are received by the validating network (“miners”) are confirmed by them, discarding the wrong transactions, and
every 10 minutes approximately a new block is generated. Every new block has the reference of the previous one, building a “chain of blocks”. You cannot change a past block, because you would lose traceability breaking the history of all blocks in the ledger that are connected by referral keys one to the next.
Validators in Blockchain isresponsible for verifying transactions within a Blockchain. In Bitcoin Blockchain, any participant can be a blockchain validator by running a full node.
Validators are participants in the shared network, they play a crucial part in any system of cryptocurrencies, as they are responsible for validating and grouping the transactions in blocks, retransmitting them and for their register in the ledger.
Nodes that validate utilize a high computational power needed to resolve the cryptographic puzzle required to validate any block. The first node validator to resolve the puzzle receives a reward of 12.5 BTC, but it decreases every four years. In addition, these validating nodesreceive fees from the users for each transaction executed.
Today most of these miners or validating nodes are corporations and they are called mining farms. They are in places where energy is cheap, Internet connection is fast, and where it is easy to maintain a cool temperature for the computers. Most of them in North America, North and East Europe and China.
HASH FUNCTIONs
Hashes are an essential part of the technology of Blockchain, they are the result of a mathematical function, they are cryptographic operations that generate unique and unrepeatable identification keys from some data received.
Hash is the function that translates information through a mathematical algorithm and if you change a minor part of the message, the function transfers it to a code that is totally different from the previous one. These codes are made of combinations of letters low or high, and numbers, always with a length of 64 elements.
There is one hash for every document, file, or message, and it is impossible to modify it without modifying the hash, it is undecipherable without the key.
Hash are used for identification of the transactions received. It is used as well as a referral for the blocks, each new block has the previous hash.
They allow the identification of any changes in the Database; you cannot change a previous block as it would be immediately detected by the other nodes in the shared network.
The cryptographic puzzle to be resolved by the validation nodes, has to search that the hash they are decoding or validating from the block has to have a certain number of zeros at the beginning, and they calculate the variable that accomplishes this goal.
There are consensual algorithms used for validating transactions, some are PoW – Proof of work used for several cryptocurrencies where the nodes with high computing power resolve the cryptographic puzzle, the first node to resolve it retransmit it and is rewarded. This is costly for the high energy consumption and low number of transactions validated. PoS – Proof of Stake where validators bet there tokens in the transactions, the validator to complete the block is selected by the amount of tokens in comparison with the total network value, how much time the tokens had been blocked and other measure, assuring the validator is committed on a long term with the Network, this system is used by a few cryptocurrencies (Peercoin, Decred, Ethereum).
Another one is BFT – Bizantine Fault Tolerant – That allows validators to manage the chain status, comparing messages between themselves to get to the right ledgering of transactions and assure integrity of information. This one is used by some currencies as Ripple, Stellar, Hyperledger, Dispatch.
How does Bitcoin work with Blockchain technology?
In summary this is the process:
1. User creates a transaction and signs with his private key
2. Transaction is sent to a few participants (nodes) for it’s validation, if valid retransmitted if not it is discarded.
3. Validators compete to validate the transaction. It is included with other transactions in blocks and nodes work to resolve the cryptographic puzzle to gain the right to register the block.
4. Winning node retransmit the block and solution of the crypto-puzzle to the rest, who validate the transaction.
5. If it is incorrect it is discarded, if right, everyone will add it to the ledger as e new block in the Blockchain.
6. Amount is recognized as owned to the new beneficiary.
BLOCKCHAIN TECHNOLOGY OPENS OTHER OPTIONS
Smart Contracts is another use for the technology, as an example Ethereum.
Database can be used to hold programs or data with other purposes than currencies, representing any valuable asset, interacting between themselves and they could include cryptocurrencies that are commonly used to pay the nodes for their computational power and energy used.
You can fix rules for the system that program payments when some conditions are met, as a date, legal confirmation of something, compliance with certain commitments.
Carlos Albarrán, Mexico City, Julio 28, 2022
