ARTICLES FROM THE BLOCKCHAIN ACADEMY®
DLT IS NOT BLOCKCHAIN, BLOCKCHAIN IS NOT DLT!
Recent headlines reported failure of Blockchain to meet its expected efficiency gains. Bloomberg.com’s headline said: “Blockchain Settlement Was Slow, Costly in Trial, Weidmann Says”. FT Alphaville reported: “Blockchain Officially Confirmed as Slower and More Expensive”.
It is true that Blockchain still has to prove its expected efficiency gains. In the meantime, the amalgamation of DLTs and Blockchains leads to inaccurate reporting. The attribution of conclusions on tests with DLTs to Blockchain and vice-versa leads to a misunderstanding of reality. The above articles referred to experiments with DLTs and not Blockchains.
Let’s create clarity.
The definition and classification of Blockchain and DLT is mainly influenced by a technological analysis, as prominently brought forward in the 2017 Global Blockchain Benchmark Study (1). The following paragraphs take a different functional -and predictive- stance: Blockchain will be the term that in the medium to long term sticks around to indicate the Internet of Value and DLT, as a term, will stick to indicate the private permissioned corporate interpretations of Blockchain. These private instances of Blockchain could be indicated as IntRAnets of Value. Within this functional differentiation DLTs are not Blockchains and Blockchains are not DLTs, like internet is not intranet and vice versa.
The implementation of DLTs and Blockchains have two completely different objectives. DLTs try to improve the processes for economic value creation within the existing siloed and adversarial business logic. Blockchains try to propose a whole new freely accessible economic and societal infrastructure for value exchange. With this open platform comes a global collaborative business logic with network effects, crowd wisdom, crowdsourcing and frictionless and borderless exchange and creation of economic value at its powerful core.
A Blockchain is a freely joinable global community of users that transfers value over the internet, directly from person to person, by writing transactions in one single database, which is created, shared and maintained by the users’ computers. A consensus protocol enables for all these computers to agree in a decentralised way on the authenticity and accounting integrity of new transactions and add them in a permanent and unchangeable way to the Blockchain database. The correct outcome of this process is the consequence of an economic-incentive-and-sanction-scheme that monetarily rewards / sanctions correct / incorrect participation in the consensus process. The avoidance of personal economic damage leads to a trustless consensus system. Blockchain is a global macro-economic and societal transaction system that operates without the need of trust between actors.
A DLT ledger is a shared database that is created and maintained by its community. In so far, it resembles a Blockchain. The big difference with Blockchain is twofold. First, the community that shares the database is not freely joinable and second the trust in the consensus process and the unchangeable character of the database is based on contractual agreements between the participants. DLTs are shared databases that are customised for existing business logic and integrated with existing infrastructure between siloed competitive actors. DLT is a micro-economic transaction system.
As both implementations have their own distinct value, it is important to be accurate in allocating test results to its corresponding substance.
(1) Dr Garrick Hileman & Michel Rauchs, “Global Blockchain Benchmark Study”, Cambridge Center for Alternative Finance, University of Cambridge, Judge Business School, 2017, p 23, online at: https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-09-27-ccaf-globalbchain.pdf (last accessed Oct 6th 2019)
SIMPLIFYING BITCOIN MINING!
Mining takes care of two aspects in the Bitcoin computer code. Firstly, Mining secures the content of the Bitcoin accounting journal -the Blockchain- in order for it to become unchangeable. Secondly, Mining is also the tool that is at the basis of the creation of consensus between network participating computers on new transactions to be added to the database.
This first part of a set of 2 articles concentrates on the first aspect: the way Mining secures the content of the Bitcoin accounting journal, also referred to as the Bitcoin Blockchain or the database.
Mining secures the accounting journal with the help of some mathematics which is complex in its details but rather accessible in its principles. In the rest of this article, we’ll explain these principles and how they allow for the accounting journal to become unchangeable and tamperproof. Let’s dive into it!
Do you remember those equations for which you have to compute the unknown X? Bitcoin mining -also called “POW” or “Proof of Work”- is exactly that: finding the solution for the unknown X in an equation! Be aware that the real formula in Bitcoin Mining is not a summation. We just use the summation formula in order to make the reasoning accessible!
A feature of an equation with an unknown X is that when X is found, then the KNOWN becomes “LOCKED” and unchangeable. If you put another number than 5 in the equation, then the solution found for X doesn’t hold anymore and must be recomputed in order for the equation to equate again.
Let’s take the above and explain in accessible terms how it translates into the -for the sake of this article, simplified- equation used for Bitcoin mining.
The number “5” is the first KNOWN in the above equation. For the equation used for Bitcoin mining, the first KNOWN is the numerical representation of all the data in the Blockchain database. The second KNOWN in the above equation is “0”. In the equation used for Bitcoin mining, the second KNOWN is also ZERO (this is not completely accurate, but for the sake of simplicity, let’s suppose it’s zero), which is simply a requirement for the equation to be equal to a fixed point.
Now, what’s the sense of all this? Well, if someone changes the content of the Bitcoin Blockchain database, then its numerical representation changes and by consequence, the solution that was found for X for the equation to be equal to zero doesn’t hold any more! As the solution for X was published to all the participants in the network, everybody notices that X doesn’t solve the equation anymore and thus everybody is alerted that something changed in the content of the database. At that moment, everybody reverts to the version of the database that is unchanged.
The whole system is a simple way to create an unchangeable database!
So mining is nothing else than the computation of the UNKNOWN X that solves the equation to be equal to ZERO. Once the UNKNOWN is found and published for everyone in the peer to peer network, then the content of the database becomes “LOCKED” and unchangeable!
The real function used in Bitcoin mining is a cryptographic function called HASH in which the numerical representation of the whole Blockchain database enters as KNOWN and the UNKNOWN X is called the NONCE. Instead for the function to equate to zero, it has to be lesser than a certain threshold number called the difficulty or target.
The reasons for which the term “mining” is used to name this process of finding X, is that the complexity of the real equation allows only for a tedious trial and error process to arrive at a solution. And when a solution is found, then the miner that found the solution is rewarded with some newly minted Bitcoins. So the whole process of searching for X and being rewarded with Bitcoins resembles a gold-mining process.
This was a boiled down version of the far more complex real thing, with nevertheless the merit of explaining the essence. For those who would like to explore in more detail the real process, here is a very instructive reference: https://www.igvita.com/2014/05/05/minimum-viable-block-chain/
Wishing you happy discovery!
For other revealing articles from The Blockchain Academy®, visit https://www.the-blockchain-academy.com/#articles
BLOCKCHAIN APPLICATIONS: THINK FOR YOURSELF!
It can be challenging to understand how applications arise from “that thing called Blockchain, that thing that is nothing more than a distributed database of transactions with instant global consensus”.
Let’s give a shot at creating a framework from which Blockchain applications can be understood or even deducted/created/invented!
All Blockchain applications are the result of a combination of elements coming from three categories: assets, owners and Blockchain capabilities. You can make a venn-diagram with these three categories and the Blockchain applications will be situated on the central intersection part.
Let’s have a look at these three categories!
The assets can be anything on which you have a right. It could be a vote, a car, a share, a piece of land, an identification, a house, a title, a piece of art, a written piece, a patent, a trade good, a raw material, … and we can go on like that, listing any kind of asset available in the world.
The category holding the type of owners holds any kind of legal entity, more specifically and non-exhaustively, natural persons, corporations, governments, foundations, associations, supranationals and so on.
The Blockchain characteristics are fundamental to its design. A Blockchain is immutable, transparent, unchangeable, global, distributed, programmable. A Blockchain enables instantaneous transfer of assets between peers and creates general -almost instantaneous- consensus around these transfers. A blockchain is a single unique source of truth.
The revolutionary and disruptive character of Blockchain resides in the possibility to COMBINE any of these elements in an efficient and value creating application.
Take for example the ownership of official state documents by a government and combine that with the immutability & transparency of a Blockchain. The result is a transparent and immutable management of public works, with fraud reduction as a direct consequence.
The combination of a financial instrument like a put option owned by an individual with the Blockchain capabilities of programmability and immediacy yields an option that executes and settles automatically at the moment a certain price threshold has been reached.
Let’s have a third and last example: take the international trade process as an asset, import and export corporations as the owners of that process and the global consensus as the Blockchain capability, mix them together and you have an international trade process where everyone has only one absolute source of information, eliminating as such the need for reconciliation and the hassle of many litigations.
Well, we did it! We created a framework that allows to put applications in their context or even to imagine and innovate new applications ourselves.
Have a try! Take arbitrarily elements out of the three categories, mix them together and imagine what comes out of it as value creating application! Give it a shot in the comments below this article! 😉
Blockchain, Cryptocurrencies, Banknotes and Chopped-up Databases
In our previous article, A Freestyle Interpretation of Money, we argued that -from a value point of view- the form under which money exists is not that important, but that its scarcity is.
Now, talking about “form”, let’s have a look at the form of banknotes and the form of a random cryptocurrency.
Visually, the form of a banknote is … well … a banknote: a piece of paper on which is written a nominal value and a unique identifier number. Additionally, security measures are added in order to become uncopyable.
The form of a cryptocurrency, on the other hand, is kind of weird: it’s just a line of data in a database, indicating the sender and the receiver, a nominal value and a unique identifier number. Additionally, security measures are added in order to become uncopyable.
Hey! We just wrote twice almost the same thing in describing the form of a banknote and the form of a cryptocurrency. Let’s repeat: “… nominal value and a unique identifier number. Additionally, security measures are added in order to become uncopyable”.
And what are the differences? Well, there is 1) the support, i.e. paper for banknotes and a digital database for cryptos and 2) the absence of the indication of a sender and a receiver on the banknote.
Mmmm … interesting. Let’s try to reconcile them.
Let’s take all the banknotes of a nation, let’s take some adhesive tape and let’s stick them together to a long list of banknotes. Well, we kind of created a database in which each banknote represents a line in the database.
The other way around, let’s print the cryptocurrency database, let’s remove the sender and receiver references, let’s take a pair of scissors and let’s cut out the most recent transaction lines for each cryptocurrency unit. Well, we kind of created banknotes from a cryptocurrency-database.
Conclusion? In their essence, banknotes and lines in a cryptocurrency-database are very much the same!
A Freestyle Interpretation of Money
What is money?
Well, the question is one that needs much more than just a small reflection in order to be answered conveniently. But for the sake of easiness and simplicity, let’s try -humbly- to squeeze things down to under 300 words. Here we go!
When you consider the economy as a whole, its product has a certain value. How much? Well … the value that it has according to the preferences of the participants in that economy!
Ok … but … then we still don’t know how much that is! Let’s introduce a scale!
In order to be able to express the value of the economy, we actually only need to agree on a starting point in time with an initial number that we accept as representative for the value of the whole economy.
Now we know how much our economy is worth. Easy peasy!
Once this is done, consumer preferences and market forces will allocate fractions of that initial reference point to individual products and services. And we can also start measuring economic growth from year to year.
We just created money! Money is a standard that helps us to indicate value in our economy.
Now, the form under which this money exists doesn’t really matter. It could be shells, tulip-bulbs, tally-sticks, gold, paper money or even just a number in an electronic file … which corresponds with the digital money we have on our bank accounts today.
If the form is not that important, its scarcity IS EXTREMELY IMPORTANT! The form we choose for our money should be LIMITED in its supply in order to match the limited character of the value of the economy.
So money is nothing else than a standardized method that enables us to measure value over time and allocate value to individual elements in the economy.
Actually, in its essence, money is not that difficult to understand! 😉
Blockchain and Triple Entry Bookkeeping, How Exciting! How Frightening!
Hocus pocus! Boom! Blockchain gave birth to a powerful concept of triple-entry-bookkeeping and … it’s simple! Let’s have a look at its workings and some implications.
Here you are: make one initial entry on the Blockchain and -based on that entry- make two automated entries in the classical in-house double bookkeeping system. One plus two is three: triple entry bookkeeping!
A transaction entry on the Blockchain is subject to a network-wide consensus. An ingenious voting process -in which all network computers participate- ensures each transaction’s legitimacy. And once registered, the entry becomes immutable and unfalsifiable.
This Blockchain consensus for each individual transaction creates, in essence, the equivalence of what a bookkeeping audit produces at the end of the accounting year: credibility and trust.
So Blockchain is turning things kind of up its head: the auditing part from classical bookkeeping is moved up-front! And this is powerful!
The consequences of triple entry bookkeeping as described are simple and powerful at the same time: audit up-front, consensus up-front, no reconciliation with counterparties, reduction of litigations, reduction of manipulation, removal of conflict of interests in the audit process … and we even could ask ourselves if this will induce a reduction in risk premia on financial instruments.
As a conclusion, Blockchain is so fundamental in its constituent elements, that essential processes and tasks in business will be redefined completely!
Let’s get ourselves prepared and start by understanding the fundamental building blocks of Blockchain!
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Making sure that the corporate and government community can rely on a central point of knowledge for all things Blockchain. Passionate about the transformative potential of distributed ledger technology.
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Lawyer & Lecturer in Law (uni.lu)
Passionate about exploring the transformative potential of the Blockchain from a Law & Technology perspective.
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