Everything You Need To Know About Blockchain But Were Too Embarrassed To Ask

Authored by Nicky Woolf via Medium.com,

 

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I’m hearing a lot about “bitcoin” and “blockchain.” What’s going on?

Let’s start with the basics. Bitcoin is a cryptocurrency — a digital version of an asset, much like gold. In 2017, its value skyrocketed.

Blockchain is the tech that underpins it. It’s a powerful concept and has the potential to change the world pretty drastically.

But what is it?

Blockchain is known as “distributed ledger” technology.

Almost everything we do, whether it’s getting ill, buying a house, using a credit card, voting, traveling by car, or using public transport, involves the creation and movement of data.

Blockchain is a new way of storing and moving that data, where instead of being held all in one place, the information is atomized and spread over thousands of nodes across a network, all locked together with clever cryptography.

That structure allows a lot of cool new opportunities, which we’ll get to in a bit.

Hang on. Why does information need revolutionizing? What’s wrong with the way we store information now?

At the moment, the data that rules our lives is — for the most part — kept in big lumps in one place, whether on a private server, in the cloud, or on paper in libraries or archives. That’s fine for a lot of things, but it can also be vulnerable to attack.

It was recently revealed that hackers breached Uber last year and stole the personal information of 57 million users. You probably heard about the hack — and subsequent publication online — of data on up to 37 million users of the extramarital dating site Ashley Madison the same year. Or the more recent breach at the U.S. credit rating company Equifax, which saw the personal data of 143 million U.S. consumers, including Social Security numbers and, in some cases, driver’s license numbers and even credit card details, stolen.

 

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These breaches can have serious consequences, leaving millions of people vulnerable to identity theft and fraud. The personal nature of the Ashley Madison data compounded the problem, contributing to at least two suicides.

Blockchain would have stopped that?

Not necessarily. Blockchain can’t stop hackers getting into your computer system if your admin password is “password.” But other times, hackers use brute force — sheer computing power — to attack a system; blockchain makes that nearly impossible.

“The internet was created to move information,” says Jamie Smith, CEO of the Blockchain Business Council and head of communications for BitFury, a leading blockchain technology company. “That information needed to be stored somewhere, so everyone on earth has a zillion databases. Essentially, you can think of them like houses. It’s hard to break into a house, but not impossible, and cybersecurity is just a lot of really fancy ways to protect that house.”

Blockchain technology breaks the database into a million tiny pieces, which are then spread across thousands of computers. “Instead of breaking into a house,” Smith says, “you now have to break into an entire town.”

And that’s the “distributed” part of it?

Exactly. Each part of the structure — whether it’s a unit of currency like bitcoin, or the navigation system of a self-driving car, say, or your health or voting records — is spread across the network in a web of interwoven chains of data. The system gets exponentially more secure the more complex it gets.

That’s clever.

That’s just the start. It also self-checks and self-repairs. The computers participating in the blockchain help maintain its integrity by checking and verifying sets of transactions — blocks — which then form a chain with the history of each piece of data encoded on it. Because the blockchain is constantly checking itself, the data on it is immutable. Even if a hacker did somehow manage to break into a block, any changes they made would be immediately and permanently visible.

To get participants to volunteer processing power, different systems based on blockchain, including bitcoin, offer incentives in the form of tokens. That’s what bitcoin is: a value token given in exchange for computer power. That process is called “mining,” and the idea was laid out by Satoshi Nakamoto, bitcoin’s inventor, in this famous white paper.

Nakamoto saw that with the right incentives, a network “based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party” could grow organically, and the more participants on the network, the more power it has to maintain itself. Today, the computers mining bitcoin’s blockchain run almost 5 quintillion encryption procedures — called “hashes” — per second.

That sounds like a lot.

It really is. There has never been a supercomputer built on Earth that could do anything even close to 4 quintillion hash operations per second. It’s more powerful than the world’s top 500 supercomputers combined. This also uses an astonishing amount of electricity — bitcoin mining now uses more electricity than the nation of Ireland.

A direct comparison is difficult, mind you. Supercomputer power, measured in floating operations per second (FLOPS), is not directly comparable to hashes per second. It’s like the difference between torque and horsepower — a tractor may be more powerful than a Ferrari, but it won’t go as fast. Bitcoin isn’t beating Deep Blue at chess anytime soon; it’s just not geared for that. But there has certainly never been anything like it before.

This Satoshi sounds like a smart dude. Who is he?

We don’t know. Satoshi’s identity has always been a secret. People have claimed to be him over the years, but none of them really checked out, and it has been speculated that he may have in fact been a group of people. Those thought to be the most likely candidates have strenuously denied it, and there is now such a mythos around him (or her, or them) that it’s probably better not to know.

What we do know is that Satoshi emerged out of a movement known as the cypherpunks, a community of cryptographers, programmers, and sundry thinkers who, toward the end of the 20th century, began to wonder if there was a better way to approach privacy, information, and power. Among their number were Jacob Applebaum, who developed the anonymous web browser Tor; Wikileaks’ Julian Assange; and Bram Cohen, who developed the distributed file-sharing platform BitTorrent.

BitTorrent? The thing my cousin uses to download bootleg ‘Game of Thrones’ episodes?

That’s the one. Cohen’s insight was that rather than sharing whole files, if you broke them up into small chunks, then people could download them piecemeal from each other as well as from the source. In that sense, BitTorrent shares some spiritual DNA with blockchain.

These guys sound like anarchists.

Anarchists and libertarians, mostly. Blockchain isn’t seductive just because it’s secure; it has the potential to totally circumvent the entire way we operate as a society.

 

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To the cypherpunks, according to Steve Bellovin, professor of computer science at Columbia University in New York, this was “a perfect solution.” Cryptocurrencies had been around, in one form or another, since the ’80s, but they were centrally created or managed. Satoshi’s insight, elegant and simple, was to decentralize the whole thing.

“You didn’t have to trust governments or banks — it looked perfect for this kind of mindset,” Bellovin says. It spoke to “the cypherpunk dream of a frictionless, or near-frictionless, world economy, allowing money to flow around the globe without having to go through choke points run by governments or monopolistic companies.”

I bet the big banks don’t like that.

Some of them are worried. Jamie Dimon, CEO of J.P. Morgan, has been an outspoken critic of bitcoin in particular. Some say the price growth of bitcoin is a bubble that will inevitably burst sooner or later. But there is a lot of hype around blockchain right now, and banks are not immune to enthusiasm. Initial coin offerings (ICOs), in which new cryptocurrencies are launched, have proliferated madly.

 

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Not all of them are legit. In November, the SEC filed fraud charges against the organizers of one ICO, PlexCoin. Just two days later, members of a cryptocurrency mining marketplace called NiceHash found that hackers had breached the site and made off with more than $60 million in bitcoin. Blockchain, like any technology, is only as secure as its users.

But hang on, can’t they just check the ledger and find the hackers?

Yes, actually, in theory they can. While bitcoin in its early days had a reputation for being a tool for criminal activity like drugs or money laundering, that was based on a fundamental misunderstanding of what it does and doesn’t anonymize. If you have the resources — and the ability to subpoena cryptocurrency exchanges to find out what addresses pertain to which users — you can follow the path of a bitcoin much more accurately than you can a paper dollar.

To be clear: Do not use bitcoin for illegal activity; it is not anonymous.

I wasn’t going to.

Good.

Anyway, despite those hiccups, blockchain went mainstream in 2017, as the value of bitcoin and Ethereum rocketed up tenfold in the space of a year.

Ethereum? What’s that?

Ethereum is the second-largest blockchain. It’s much smaller than bitcoin — its cryptocurrency token, ether, has a market cap of $42 billion, compared to bitcoin’s quarter of a trillion dollars — but Ethereum can integrate smart contracts onto its blockchain. “So if I upload a program, let’s say a bet, I escrow some money into it, you escrow some money into it, and then a third party lets us know whether the Chicago Bulls beat the New York Knicks or vice versa, resolving our bet,” explains Joe Lubin, one of Ethereum’s founders.

Ethereum isn’t meant to be just a cryptocurrency like bitcoin, according to Lubin, but a full enterprise platform onto which programmers can build applications for any number of things. Despite that, one ether went from being worth $8 in January to being worth $434 in December as investors began to sense the enormous sums of money to be made.

So where are we going from here?

Blockchain is going to become more and more normalized as the gold standard—for security, at least. As a base for currency, it will face some challenges, but most large banks now have departments specializing in cryptocurrencies, and some are considering building their own private blockchains.

Some countries are, too. Georgia has built a blockchain system for its land title registry; some U.S. states are reportedly considering a pilot scheme to move voting onto a blockchain. There’s talk of using it to secure the New York stock exchange. Walmart, Nestlé, and Unilever are looking into using a blockchain to underpin their supply chains.

There’s a long way to go yet. Tim Draper, a venture capitalist and bitcoin investor, reckons that eventually “bitcoin will be the main source of money. Blockchain will be used to capture identity and secure contracts. It will be so prevalent that people will not know it, but will use it everywhere.”

That could be a long way off. Bitcoin’s price could continue to rise — or it could crash tomorrow and send the market tumbling, forcing regulators to react. Blockchain is the future — but getting there may be a bumpy ride.

Comments

Son of Captain Nemo Tue, 01/02/2018 - 20:29 Permalink

If it's in Russian and builds a ledger around a piece of precious metal that provides the location with a serial # to a mining server that is not in CONUS, Canada, U.K., Israel or the EU...

TEACH ON!!!

Son of Captain Nemo Common_Law Tue, 01/02/2018 - 21:20 Permalink

C_L

If it was the "NSA" and this never happened (http://www.ae911truth.org/)... followed by 6 going on 180 occupations of "choice" around the globe that has killed probably better than 5 million human beings and displaced more than 20 million... costing the U.S. government and it's taxpayers more than $10 trillion... But after this one (https://www.youtube.com/watch?v=IVpSBUgbxBU) WHO REALLY KNOWS?...

I would have several cryptocurrency wallets of my own and be proud to place my paycheck into it knowing .gov's contributions in it's "making"... Instead of the reality which is nothing more than a "honey pot" to seize as much currency with the most important target(s) being in Russia, Iran and China who's sound money and energy resources we desperately need to control in order to continue living at everyone elses expense on the planet!

In reply to by Common_Law

ghengiskhan Common_Law Wed, 01/03/2018 - 08:47 Permalink

Only 100x more inefficient than any p2p torrent because their answer to security is mind boggling encryption which equates to massive data transfers constantly.  This thing is so nonsensical in terms of data usage I can't believe it's real.  If they actually pushed this into mainstream point of sale it would cripple our pitiful internet infrastructure with all our fake fiber that is 20 years behind.

In reply to by Common_Law

meterman Son of Captain Nemo Wed, 01/03/2018 - 18:57 Permalink

I've been reading the BS on BITCOIN for months and months. Here are the questions you request.

Never a word about:

1. Who(He She It) do you send your real US dollars to to buy Bitcoin?

2. Who are these people that get your real US dollars?

3. What do they do with these real dollars?

4. How do you get your real US dollars back when you sell(?) Bitcoin.

Have you ever seen an article that answers these questions? Post a link. 

In reply to by Son of Captain Nemo

10mm Tue, 01/02/2018 - 20:36 Permalink

Jim Rodgers big investor and supporter of Blockchain. Advisor on Board of Blockchain Technologies Inc. Symbol BLKCF. Simply look it up.

 

DC Beastie Boy Tue, 01/02/2018 - 20:40 Permalink

We already know Tyler’s 

You all stumbled on this less than a year ago and many of us have already moved on from blockchain to daps, proof of anything besides work, decentralized exchanges, static nodes, master nodes, smarter contracts and beyond 

rp2016 Tue, 01/02/2018 - 20:42 Permalink

I guess you are never too embarrassed... even when I have come to know who you are, ZH. You are a disgrace, and even that you flaunt with so much grace.

LetThemEatRand Tue, 01/02/2018 - 21:09 Permalink

"Bitcoin is a cryptocurrency — a digital version of an asset, much like gold."

I read the entire article and this makes no sense.  Bitcoin is a use of blockchain technology.  If blockchain technology is the asset, then Bitcoin is one way of using that asset, but it is not the asset itself.  It is digital gold, not gold.  So Bitcoin is like buying GLD, with no pretense that there is any physical gold underlying it.

Drop-Hammer Tue, 01/02/2018 - 21:27 Permalink

Or, I can pull out old-fashioned paper money and pay for something.  Or, if there is some weird catastrophic event, I could use my paper money or my silver as had been done for thousands of years.  In a real SHTF situation, I can use my lead and steel to take what I need.  So, why would I want JewCoin again? Oh, I forgot.  It has 'block-chain'.  Kind of like how Brawndo has electrolytes.  

Drop-Hammer Tue, 01/02/2018 - 21:28 Permalink

Or, I can pull out old-fashioned paper money and pay for something.  Or, if there is some weird catastrophic event, I could use my paper money or my silver as had been done for thousands of years.  In a real SHTF situation, I can use my lead and steel to take what I need.  So, why would I want JewCoin again? Oh, I forgot.  It has 'block-chain'.  Kind of like how Brawndo has electrolytes.  

Drop-Hammer Tue, 01/02/2018 - 21:28 Permalink

Or, I can pull out old-fashioned paper money and pay for something.  Or, if there is some weird catastrophic event, I could use my paper money or my silver as had been done for thousands of years.  In a real SHTF situation, I can use my lead and steel to take what I need.  So, why would I want JewCoin again? Oh, I forgot.  It has 'block-chain'.  Kind of like how Brawndo has electrolytes.  

Jambo Mambo Bill Tue, 01/02/2018 - 21:43 Permalink

I think cryptos will pass the 1T and beyond this new year, however you need to have balls of steel after a threshold with these insane gains... will all disappear in smoke tomorrow? Maybe...

Yellow_Snow Tue, 01/02/2018 - 21:55 Permalink

SAY GOOD-BYE TO JAMIE DIMON...

BASHING BITCOIN WAS A CAREER ENDING MISTAKE...

HE WILL RETIRE SOON...

THE WORLD NOW SEES THE FOOL THAT MISSED THE GREATEST TECHNOLOGY TRADE OF THE CENTURY

The_merovingian J Mahoney Wed, 01/03/2018 - 04:29 Permalink

If it could be outlawed, many countries would already have done it. All that tried failed miserably, China is the best example. If they try to enforce taxation, users would soon realize that they could easily use Bitcoin as intended in P2P exchanges (fuck Coinbase), making it almost impossible for the IRS to find out who owns what.

It is a test run all right, but we already know it is here to stay. On a macro level, it could resolve the reserve currency issue, stop the exploitation of the remittance market and make life much easier for many accountants working in international businesses. On a micro level, it could avoid all those personal data hacks. Does Uber really need to know everything about you if you could simply pay them pseudo-anonymously? It could give you your privacy back and I for one embrace that.

In reply to by J Mahoney

Greendawg Tue, 01/02/2018 - 22:07 Permalink

this site will soon degenerate to a bunch of basement dwelling bitkiddies all pretending they are rich while shitting on each other for not pumping the right shitcoin. 

adr Tue, 01/02/2018 - 23:14 Permalink

This article didn't answer the question of why the blockchain needs $1 million tokens to work.

It didn't answer any use question for the blockchain.

It says that massive amounts of processing power is needed, but 99.999% of the speculators are not adding any processing power to help compute blocks. So they serve no purpose.

The analogy of BitTorrent is good in that it explains distributed files, but it did not require buying tokens to use the network. BitTorrent was millions of people storing pieces of a whole. If pieces were missing or corrupted, other pieces could be downloaded to get a complete file. This is not the Blockchain. The Blockchain requires all miners to hold the entire file and cross check it against all other versions. If one version is different, it must either match the consensus or be discarded. You could be transacting on a version of the blockchain that could be discarded with your entire stash. Perhaps your trades haven't ever been entered on the Blockchain and your exchange is just keeping a record of your trade, rehypothecating Bitcoin they don't even hold.

You can make a bet using apps right now and get money, there are thousands of fantasy sport apps and they don't need Ethereum. What does Ethereum add? It wasn't the promise of smart contracts that attracted "investors", it was the percentage gains of the token. The same percentage gains that make it useless for its supposed purpose. A $700 token isn't cheap for making a trade.

I read the white paper of a token that went from fractions of a penny to $.58. The purpose of the token was to be used for transactions that would cost fractions of a penny. That fraction of a penny is now $.58, destroying the use case outlined in the white paper. Since the application for actually transferring money doesn't exist yet, still in development, the purpose for the app and the token is dead before it even started. Unless the purpose was just to pump the value of tokens for the founders to cash out big. Yep, there's the purpose.

Will we see actual implementation of blockchain tech in 2018, or will it be another year of fluff and bullshit supporting billion dollar valuations of worthless white paper failures.

snblitz Wed, 01/03/2018 - 00:04 Permalink

Another information free article pimping bitcoin.

Could someone publish an article that makes at least one solid claim that bitcoin does something concrete and useful that has not already been shown to be false?

Irreversible public ledger? Nope.

ElTerco Wed, 01/03/2018 - 00:09 Permalink

The author neglected to mention that Blockchain doesn't scale. When there are a few thousand transactions, it works fine, but when there are billions of transactions, it breaks down completely.

J Mahoney Wed, 01/03/2018 - 00:15 Permalink

Any on you old enough to remember watching TV and say "I'll never pay for TV" -- and now have cable. How about "I'll never buy water" ? How about "I will always carry cash in my pocket" My point is that the big financial institutions and government want to change our way of life to where they have complete control and can turn you off at any time and track your every purchase. Even 13 years ago when I was in China, payroll was not direct deposited in a "pure bank", it was deposited to the "employees card" (like a debit card) and they had that much money to spend. Would MC/VS just love that or hate it if they were not a part of this new system--for sure they would like us to spend our money and not theirs (buying on a credit card uses their money UNTIL we pay them). Imagine this being mandatory and the government took a "flat tax" off every deposit? The imagination of possibilities are endless.

DaveA Wed, 01/03/2018 - 00:40 Permalink

Moving money around electronically is nothing new. Banks started doing it in the 1960s with a tiny fraction of the computing power now contained in a single $10 burner phone.

Blockchain currencies all suffer a fatal flaw, a fundamental conflict of interest between users and miners. Users want more transactions to keep fees reasonable, while miners prefer fewer transactions and higher fees, and miners have absolute power. It finally took a hard fork to raise Bitcoin's blocksize from 1MB to 8MB. The new currency, called "Bitcoin Cash" promises further increases "as needed", but again, only miners have the power to effect such a change.

Speculators are willing to pay $15,000 for one BTC (which still has the 1MB block size) because they figure the price will go up, but transaction fees are a dead-weight loss. Few are willing to pay a $30 fee on a $100 purchase, and fees will only rise as more people try to actually use Bitcoin.

It's like a 1000-unit apartment complex served by a single 2-inch water main. As long as most of the apartments are vacant, flipping from owner to owner at ever higher prices, no one notices anything wrong.

Harry Lightning Wed, 01/03/2018 - 01:57 Permalink

The danger of blockchain is now poorly understood, but here's a simple example : 

In today's world, to access and steal data the hacker needs to penetrate one location where the data resides and around which all security to protect the data has been deployed.

In the blockchain world, there are countless databases within one network, each of which share the total sum of data that is collectively used by the network. The hacker has numerous entry points at his or her disposal to attack to gain entry to the distributed database, gaining entry solely at any one of these may points allows the hacker to assume the identity and privileges of the network participant. In the blockchain world, each of those databases must be protected with the same rigor as only one point of entry must be defended today.

Think of it in terms of a bank vaults. Today you may have several banks in a specific square mile each with their own vault. To steal all of the money in all of the vaults, you have to break into each vault. In a blockchain world, all of those vaults are connected together by underground passage, so if I break into just one vault I have access to all. Its is a safecrackers' paradise, the way that blockchain will be the hackers' paradise !

To me this one aspect of blockchain will be very costly to defend against. Add on the vulnerabilities presented by standard human error and inability to find adequate personnel to defend the network due to the immense precautions required to defend what amounts to multitudes of data bases each sharing each others' data and information, and the incredible costs will end up torpedoing the technology as a usable business method for any exercise in which privacy and security are absolutely imperative. 

How often we have seen the promise of reducing human costs by employing technology fail to materialize because the costs to maintain the technology became greater than the prior human cost of labor. That is what is likely with blockchain technology, the maintenance costs of all these zillions of networks that collaborators will seek to develop will consume far greater expense than the prior art the new technology is replacing. 

Accordingly I am not in the least bit sanguine about the potential for blockchain technology to provide solutions to today's data storage, transfer, and protection challenges. It very well may be the laetrile of its time.

 

rphb Wed, 01/03/2018 - 03:05 Permalink

" Blockchain is the future  "

Again this article starts with a joke. No Blockchain i no more the future then a five winged airplane is capable of flight, but it is an important step in order to reach a plane that actually can. We just have to keep innovating and not stubbornly insist to keep using the same vehicle after it have proven itself to be inefficient.

Bitcoin uses an army of supercomputers and more energy than the entire state of Denmark, just to slow down the blockchain, so it don’t splinter in a thousand directions. Even a five year old could see that this model is untenable.