Blockchain: how it works, and why this technology will change the world
Spectrum, which covers news in the technology world, has published material on the blockchain. This article tells you what the pitfalls in the work of technology are and why it cannot be used everywhere. We have prepared a Russian-language adaptation of this article.
Technology development
Bitcoin was coined as an act of disobedience. Cryptocurrency appeared soon after the global economic crisis and was advertised as a means of injustice and corruption of the traditional financial system. The creators were confident that when Bitcoin becomes more popular, it will compete with real money and ultimately supplant those institutions that led to the crisis.
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Bitcoin’s unofficial slogan: “We believe in cryptography,” directly speaks about who is to blame for the problems of the economy: intermediaries, bankers, “trusted” third parties, who cannot really be trusted. These people simply create problems for others, reducing profits and complicating transactions.
Bitcoin sought to replace the services provided by these intermediaries with a special code and cryptography. When a person pays for a mortgage, a number of operations occur in the background between his bank and other financial organizations, due to which money is withdrawn from the user's account. The bank can guarantee that everything is fine with the money, as it stores information about where and how each penny was spent from the account.
Bitcoin and other cryptocurrencies replace these background transactions and transactions with the help of software - a distributed and protected database called blockchain. At the same time, the process of changing owners of a bitcoin token is controlled by many computers. The right to use cryptocurrency can be transferred absolutely to anyone, regardless of their nationality or place of residence.
Eight years after the creation of the blockchain, they are trying to apply the technology to non-cash transfer procedures and processes.
Can the blockchain connect people who rent housing to travelers and offer the parties a transparent payment platform? Can the blockchain act as a repository and platform for playing movies, shows and other digital media, while maintaining contributions and transferring them to the creators of the content? Can the blockchain automatically check flights and pay compensation to travelers whose planes did not fly on time?
If so, then the blockchain technology will help get rid of Uber, Netflix and, for example, insurance companies.
These are not assumptions, but only some of the things that are now built on Ethereum , a blockchain platform that distributes software remotely on a distributed computer system called the Ethereum Virtual Machine . The Ethereum blockchain, on which the ether cryptocurrency works, is currently most open to experimentation.
But this openness does not always play into the hands. New blockchain schemes are being created every day, including the largest technical corporations. Microsoft offers its customers tools for experimenting with cryptocurrency in its Azure cloud. IBM, Intel and others are collaborating with the Hyperledger hub, an open platform for developing business-oriented blockchains. The largest banks, the ones that the cryptocurrency creators wanted to supplant, invented their own version of the technology, trying to get ahead of the trends.
And even Bitcoin, which works on the first and most successful blockchain, is being upgraded for applications that its creators never dreamed of.
But no blockchain can boast of massive use. No concept or strategy has yet led to a revolution in any industry. Bitcoin is used by no more than 375,000 people in the world per day.
Which blockchain platforms will remain, and which ones will start to sink slowly to the bottom? To make any prediction, you need to understand what a blockchain is and logically correlate it with Bitcoin.
How blockchain works
In 2009, an anonymous hacker (or a group of hackers), under the pseudonym Satoshi Nakamoto, created the first digital currency. In this system, money was only an accounting tool, a method of abstracting value, assigning property and providing funds for transactions.
For these functions, money has historically been used. Possession of physical tokens - coins, allows people to personally conclude transactions between themselves. Cash is quite difficult to copy, so there is no need to take full account of who owns a certain part of the money supply.
However, if you create a table that indicates to whom and how much money belongs, coins and bills will become unnecessary. Banks and payment processors have already partially sublimated the physical currency into digital records, tracking and processing transactions in their closed systems.
Bitcoin completed the conversion by creating a single universal digital register called the blockchain. This technology has received such a name, because it’s like a chain — you can only make changes to it at the end of blocks. Each new addition contains a set of new transactions. For example, if Sasha pays Yule for Bitcoin, this transaction will appear at the end of the chain. And in the blocks before that, it will be indicated that Sasha was paid by Misha, and by Misha Olya.
Bitcoin blockchain, unlike accounting books that are kept by traditional financial institutions, is located on computers all over the world. This data is available to anyone who has an internet connection. The miners, the owners of the computers on which the blockchain information is stored, are responsible for detecting transaction requests from users, merging them, checking and adding to the blockchain as new blocks.
The validation process establishes that the person actually owns the bitcoins after the transaction, and that he has not yet spent them elsewhere. Property in the blockchain is determined by two cryptographic keys. The first key is in the blockchain in the public domain. The second is available only to its owner. These keys are used to encrypt email messages. When someone sends an encrypted message, it uses the public key. The recipient when opening the letter uses the private key and decrypts the message.
In blockchain technology, transactions are signed using private keys corresponding to the public keys assigned to the coins they want to spend. And when the transaction is processed, these coins are assigned a new public key.
When several persons are involved in the execution of an operation, the issue of irreversibility becomes important. If the blockchain were managed by one bank with a set of well-known validators operating within the same jurisdiction, then the execution of transactions would be a simple matter.
But for Bitcoin there is no central bank enforcing the rules. Miners work anonymously around the world, despite the diversity of cultures, differences in legal systems and regulatory obligations. Therefore, there is no way to bring them to justice. The irreversibility of the operation provides the bitcoin code. He uses a scheme called proof of work.
As proof of work, blockchain technology is reliable.
In order to create new blocks, miners need to have all the information about transactions. They compete with each other, as the miner who first created the unit receives payment for this service. The question is what prevents Miner from deleting previous transactions in the blockchain. Although he will not be able to steal coins in this way, he will be able to complete the same transaction several times. For example, pay for the goods, and then delete the transaction information.
To avoid this, all miners in the network must have the same copy of the blockchain.
When a miner adds a new block, he must provide cryptographic proof of the transaction. To get proof, the miner spends the block through several rounds of a hash function — a calculation that takes a piece of data of arbitrary size and translates it into a meaningless alphanumeric string with a fixed length, called a hash. To make the process more reliable, the blockchain algorithm requires that the resulting hash begin with a certain number of zeros. It is impossible to predict in advance which hash will produce a given data set, so miners run the calculations over and over again, inserting a random number into the data set each time. When this number changes, a new hash appears. As a result, miners get the right amount of zeros.
The miner, which finds the correct hash, sends the block to other miners. They check it and add to the full version of the blockchain contained on their computers.
This can be compared to closing the door. Suppose a person has a lock, and a set of keys, one of which can close it. He must try all the keys before finding the right one. And then leave it in the lock so that others can verify that the key fits.
Miners spend their money on network support - they buy equipment and pay for electricity. To change the block in the blockchain and to conduct the same transaction twice, they will have to spend twice as much of their money, so it becomes unprofitable to cheat.
In addition, with each new unit, the cost of changing previous ones increases. New blocks store the hash of the block in front of them. Any changes to the old blocks will result in invalid hashes for all subsequent blocks. Therefore, it is not possible to insert dummy modifications in the previous block without repeating all the work that was done after this block. If we draw an analogy with locks, it turns out that the lock at the end of the chain is connected with all the previous ones. If you change the lock in the middle of the chain, you will have to look for new keys for each lock after it.
It turns out that miners provide costly evidence, and then receive money for their work. Thus, Satoshi created the first viable peer-to-peer digital currency. But he also solved a more general problem that had worried scientists for decades. Bitcoin, which for 8 years has never been disconnected from the network for a long period, reliably encourages miners to perform work in good faith, providing a single network. The result is a secure, ever-growing chain of data that anyone who has an internet connection can check and supplement.
How to use blockchain in other areas
The blockchain technology can be useful not only for making transactions. Almost immediately after the appearance of Bitcoin, people began to think about how to apply this technology in other areas. When miners check transactions, they run small programs that process and provide the necessary data for the transaction. But what if you run more complex programs, for example, software for social networks? Or use the blockchain to provide data for online forums?
These ideas appeared immediately after the creation of Bitcoin, but only a few years later, a nineteen-year-old student from Toronto contributed to their development. In 2013, Vitalik Buterin developed a completely new technology called Ethereum. Thanks to her, the blockchain could be used not only to complete transactions.
Unlike bitcoin, Ethereum uses mini-programs called smart contracts. They can be written with unlimited degree of complexity. Users can interact with programs by sending them transactions with instructions that the miners then process.
This means that anyone can embed a program in a transaction and be sure that it will remain unchanged and accessible to the block chain. Theoretically, with Ethereum, you can replace Facebook, Twitter, Uber, or any other digital service with new versions that are transparent, invulnerable to censors and do not require human intervention.
What is a distributed registry
In parallel with Buterin’s attempts to use technology to create a computer covering the whole world, the idea of ​​a closed and controlled version of the blockchain developed. In September 2014, a group of financial institutions, including Barclays, Goldman Sachs and JP Morgan, formed a consortium called R3 to study how locks can increase the efficiency of settlements between banks.
The open structure of blockchains, such as Bitcoin and Ethereum, contradicts the needs of these organizations. The first question is the anonymity of users, whose data is represented by alphanumeric public addresses, without indicating their real identity. Banking law in the United States and other countries prohibits such anonymity. “We need to know who the participants and counterparties are on these platforms,” says Tim Swanson, director of market research at R3.
Financial institutions are also legally obligated to protect customer data and control their export along national or regional lines. Considering that public blockchains contain all information about transactions on many computers in a network, it is impossible to limit the storage chain when using them.
Thus, a distributed registry approach to blockchain technology has emerged. In a distributed registry, the identification of people adding blocks is known, and the data in the system is accessible only to selected parties. Since the right to create new blocks is assigned by people who run the code, and not the lottery, there is no need to check the work of miners.
This system is designed for situations where all participants in the block chain already have a small degree of trust, but want to perform services for a neutral third party, as may be the case with banks when settling international bank transfers.
Last year, the R3 project, which recently raised $ 107 million from more than 40 institutions, released its first distributed registry of Corda. And he already has a competitor: JP Morgan, who left the R3 consortium last spring, released his own registry, called Quorum.
The distributed registry approach also extends to other industries that store sensitive customer data. Many of these projects are built using tools provided by Hyperledger. He creates products for companies that want to work with smart contracts, but do not dare to use open blockchains, such as Ethereum and Bitcoin.
“People need to understand the actual problems and regulatory requirements that organizations such as banks, insurance companies and the health care industry must adhere to. They cannot afford the risk and uncertainty that are being introduced by some open systems, ”says Jonathan Levy, creator of the access control system for the blockchain Hacera.
How smart contracts will work
Regardless of which blockchain option wins, smart contracts will require a variety of supporting technologies. These additional technologies are currently being developed. And they will be very important for expanding the blockchain technology.
“As soon as we have smart contracts, there will be a number of problems,” says Ari Jewels, co-director of Cornell University IC3. These problems fall into several categories.
First, blockchains will not be able to store a lot of data. This will be a problem for many projects that, for example, offer to store and stream video. They simply do not have enough storage space.
The blockchain technology records the inputs and outputs of each coin into the network, as well as the contents of an additional field that allows you to spend up to 40 bytes of metadata for each transaction. It's all.
Another problem with the blockchain is that the technology itself does not know what is happening in the real world. This is important if the smart contract is an airline ticket insurance system. Blockchain needs to know when the plane takes off or lands, and for this you need to request data from websites.
Ideally, developers will create blockchains for storing and accessing data, taking into account weaknesses - vulnerability to censorship and the possibility of lifting locks. For this you need to carefully consider which "trusted parties" can actually be trusted.
The problem of data storage can be solved with the help of distributed file-sharing services, such as the decentralized cloud storage system, the Labs Interplanetary Database protocols or the Storj Labs. These are systems that allow people all over the world to get extra space on their hard drives. Such schemes will work for the blockchain-based smart contract system, since the data will be stored on several computers throughout the world and will always be available.
Import data in real time will be using the "oracles". These are services that receive payment for reliable data request in real time and submitting them to smart blockchain contracts.
In IC3, Gelus developed a secure data feed system for Town Crier smart contracts. It protects data entered into the blockchain from falsification. The work process is based on the use of trusted software on Intel processors.
Financing
To transfer all modern services to blockchain technology, we need a lot of money for equipment and research.
The question is how to get funding for a project that will destroy many large corporations. Ideally, you need to create open blockchains, like Ethereum, and entrust the storage of data to the people who created it. In such an environment, a company cannot survive a business model that collects and sells browser behavior, purchase history, or location data. Also, blockchain companies cannot rely on limited ownership of their intellectual property, since the programs are publicly available.
Nevertheless, a potential funding mechanism for blockchains - Initial coin offering or ICO has already appeared. It turned out to be extremely profitable, although legally doubtful.
For example, a person decided to use an application. But he cannot pay with ordinary currency, he needs to buy special coins for this application that have been released to the market beforehand and pay with them.
In the real world, it would work like this: someone opened the laundry and issued tickets to pay for laundry. The owner sells all tickets to people in advance, and they then, if necessary, resell them to others.
To date, more than half a billion dollars invested in the sale of tokens, and in recent months, these numbers are only growing. For example, Tezos blockchain set a record in July, collecting more than $ 200 million through ICO.
Because of such a huge investment, there were complaints from users about the hypocrisy of the creators of bitcoins. “The creators of blockchains who promote these schemes actually demonstrate all the avarice and greed that they assign to standard financial services and government-supported currencies,” said Preston Byrne, co-founder of Monax Industries, an open platform for blockchain developers, when money begins to flow into their direction, they become just as careless about the public they once were. ”
Others argue that ICO, as a new class of investment instrument, is as destructive as funded applications.
“Money is not the root of evil. Equality is the root of evil, ”says Joel Monegro, creator of Placeholder, a new foundation dedicated to blockchain technology.
He believes that providing company founders and employees with capital encourages them to accumulate wealth rather than use it to improve their products.
On the other hand, ICO is not only a financial instrument, but also a means of accessing the blockchain technology. From this it follows that the more people use the service, the greater will be the demand for the token required for access.
“My incentive is not to extract more profit, but to have more people use the application, because the cost of the token depends on the cost of using the service. You completely turn over incentives, ”says Monegro.
In the United States, the use of ICOs is probably coming to an end. At the end of July, the US Securities and Exchange Commission warned that many ICOs fall into the category of securities and therefore must work according to certain rules.
“Times have changed very quickly. Some of the early followers of Bitcoin experienced difficulties with finances three and four years ago, but held on to their beliefs and their coins and are doing very well now, ”says Jonathan Levy, creator of Hacera,“ we still need Bitcoin and Ethereum to work on a larger scale, so enterprises need to decentralize data and ensure their confidentiality. Now we are faced with a new challenge: given the huge amounts of money invested, it remains to be seen how many old-timers and newcomers will remain loyal to the cause and will continue to work to change the world with the help of technologies that have already changed them. ”
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Source: https://habr.com/ru/post/340992/
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