To understand what the Blockchain is and how it works, it is necessary to go back to the source, that of Bitcoin.
For users, Bitcoin is a peer-to-peer (P2P) network that allows money to be transferred as easily as sending an email, without the need for a central entity, such as a bank.
Bitcoin is a shared ledger, or registry, on which transactions are recorded. “Shared” because everyone has a copy of the ledger. The consequence is that any alteration of this ledger, intentional or not, is immediately rejected by the network. Thus, Bitcoin users know that once their transaction is recorded in the ledger, no one can delete or modify it. They trust the network, without having to trust every member of the network. This notion of trust is crucial, as we shall see later.
Let us now dissect the registration of a transaction in this shared register and take a simple example of a transaction: “Alice transfers 3 bitcoins to Bob”.
To carry out this transaction, Alice does not go through her bank but directly addresses the entire network to indicate to everyone that she wishes to register this new transaction in the ledger. Since the ledger is shared, anyone can request a transaction to be written. But the Bitcoin protocol requires some sort of electronic signature on each transaction. This signature serves the same purpose as a handwritten signature: to prove that a transaction was created by the real owner of the account, so only Alice can spend her Bitcoins. The signatures are different for each transaction, so there is no need to copy an existing signature.
But if there is no central authority, who will validate the transactions and write them to the shared ledger? Surprisingly, anyone who wants to!
Bitcoin’s primary goal is to provide a decentralized system that no government or corporation can control. When Alice sends her transaction, it is transferred to all the nodes in the P2P network that maintain the ledger, the so-called “miners. Each miner keeps a personal copy of the registry and updates it each time he receives a new transaction with a valid signature.
Because the network is global, delays in the flow of information – and sometimes fraud – can lead to differences in the way information is written in different registries. How do you decide which version of the ledger to use? As in other democratic systems, there is a vote, but it is a bit different from a typical voting system. The miners “vote” by trying to solve a special puzzle based on their version of the ledger: to do this they collect the latest transactions in a “block” (hence the name Blockchain) and then find a value that will give that block a certain property. This is like solving a cryptographic puzzle and the first miner to solve the puzzle announces his solution. Then everyone updates their copy of the ledger with the block of transactions. This voting process repeats itself, approximately every ten minutes, with miners constantly agreeing on the state of the ledger. When a miner solves a puzzle and submits his block, he is compensated for it through the creation of new bitcoins. This is to encourage miners to update the registry and keep Bitcoin running.
Through these mechanisms, Bitcoin allows anyone to create monetary transactions, to transfer Bitcoins, without having to go through a central entity, such as a bank.
Bitcoin to transfer and certify
Each bitcoin is divisible into 100 million units called satoshi (1 bitcoin = 100,000,000 satoshis). Each satoshi can be individually identified and associated with a small amount of information*. Users can then use each unit to represent a share in a company, a voting right, a certificate of ownership or anything else.
From then on, it becomes natural to think about using the Blockchain to dematerialize certifications, ownership, and transfers.
In the cultural industries, we are thinking of registering works as proof of intellectual property, via their digital footprint, in the Bitcoin Blockchain. For example, a musician takes the digital fingerprint of the song he has just composed, registers it in the Bitcoin Blockchain and can then prove in the future that he is indeed the composer.
In public administration, an important part of whose role is to certify, the applications are countless. For example, the Ecole Supérieure d’Ingénieurs Léonard de Vinci is going to certify the delivery of its diplomas via the Bitcoin Blockchain.
Similarly, Honduras is using Blockchain technology to register property titles to fight corruption and fraud, and Ghana recently launched a similar initiative.
Another example is everledger.io, which is tackling the issue of diamond traceability using this technology.
Beyond Bitcoin, smart contracts and Ethereum
Bitcoin makes it possible to write small programs, called “smart contracts”, that allow intelligent control of transactions. On Bitcoin, these programs remain limited, and it takes creativity to apply them in real situations. Several initiatives aim to extend these possibilities, the most prominent of which is Ethereum.
In Ethereum, it’s no longer just about recording simple transactions like Bitcoin, but about running computer programs. Thus, all these actors will perform the same programs, the same instructions, store the same data, all in a synchronized manner. Ethereum can therefore be compared to a single, global computer.
This global computer has huge flaws (at least now). It is inevitably slow, to allow all its participants to synchronize, and it is expensive to use compared to an ordinary computer since every operation is performed in parallel all over the world, consuming hardware, and energy.
But these shortcomings are overshadowed by what it brings: trust. When a user operates, that operation is performed on all the computers participating in the Ethereum network and the results are stored everywhere. This operation is predictable and irrefutable. Predictable, because the program itself is in the blockchain and, like a Bitcoin transaction, unalterable; the execution of the program is therefore faithful to what the user has requested. Irrefutable, because anyone can prove that the action was performed.
Thus, the most relevant uses of Ethereum are to be found where data and programs are relatively simple, but where trust is paramount. A telling example is the ownership of your house. The data itself is relatively simple, but you need to trust that no one can come in and delete it or change it to their advantage. You want to be sure that you can find it and prove its authenticity, years later, to certify that your house is yours. The implementations we’ve already mentioned, in Honduras and Ghana, are implemented using Bitcoin derivatives. Ethereum would make it even easier to implement. Indeed, it is no longer a question of diverting the use of Bitcoin (dedicated to financial transactions), but of implementing a piece of code on a platform designed to support any type of program.
Still, in the real estate sector, notaries could compile files in a much more efficient way by automatically gathering supporting documents, which the experts would have stored and certified directly in the Blockchain.
Any context that needs trust can benefit from Blockchain technology. And some are already working on applications that take advantage of the technology: for example, ujomusic.com, a platform for selling music directly, without any intermediary other than the program itself. Publicvotes.org, an automated, transparent, and verifiable voting system. Slock. it, a system allowing smart locks to be operated directly via the Blockchain, which would eventually allow having equivalents of Airbnb or Drivy by allowing to open the doors of shared apartments or cars according to the rules (reservation, payments…) coded in the Blockchain.
However, behind all this excitement around blockchains, we must also see the youth of the ecosystem. Many challenges are on the horizon, such as user adoption or legislative issues.
One thing is for sure: we have a new way to create a trust (even if a program, managing the equivalent of nearly $150 million, was attacked on June 17, 2016).
Until now, we used to put this trust in central actors like banks, insurance companies, governments, or big web players. Today, we can build, via the Blockchain, applications in which we can trust directly via technology and not via central bodies, with inherently verifiable, non-alterable and auditable operations. Finally, while the promise may seem beautiful, the reality is not yet quite there. Indeed, the first “large-scale” smart contract, The DAO, which managed more than $160 million, fell victim to an attack on June 17, 2016, exploiting a weakness in its code.