What is BlockChain?
- Paper ledger books keep records of account balances, ownership of property, marriages, births, deaths etc.
- Checks or charges made by the account owner were used to update the balance held in the account.
- A sale of property would also result in a ledger update.
A New Way of Doing the Same Thing
- Blockchain is just a ledger that groups together transactions in “blocks” and uses them to update the ledger state.
- Blockchains are transition-state machines
How does BlockChain Work?
1. Users submit transactions requests to anonymous nodes on a peer-to-peer network
2. Nodes forward the transaction requests they receive to all other nodes (peer-to-peer networks are sometimes called gossip networks)
3. Each node collects a group of transactions (about a 1000 to 2000 in the case of Bitcoin) in a block
4. Each node checks the current ledger state to see if these transactions are valid.
- Enough in the account to cover the transaction?
- No double spending?
- No forged signatures on the transactions?
5. The block of valid transactions is appended to the existing chain, the ledger state is updated, and then nodes start to work on a new block
What is new here?
1. Distributed: Thousands of nodes in the validation network keeping copies of
the blockchain and ledger state.
2.Immutable: Cryptographic magic makes it impossible (or at least difficult) to
change any transaction in a block or rewrite history.
- Hashing of the contents of each block
- Recursive hashing of blocks to link them together sequentially
- Proof of Work (PoW) to make it computationally impractical to rewrite history
3.Append Only: Blocks can only be added to the end of the chain sequentially
4.Time-Stamps: Time stamps in the blockchain prove when a transaction was
5.Uncensorable: There is no “Bitcoin Inc.” or other entity that is in charge of
blockchains. Blockchains live in the wild without a central point of control.
(Although this is not true for certain private permissioned blockchains.)
6.Anonymity: Owners of accounts are anonymous, Accounts are identified only
by numbers called public keys. Validating nodes are sometimes anonymous
Why use blockchain instead of an ordinary database?
- Since blockchains are ledgers, they don’t have tables, metadata, or relational
- structures that allow for complicated SQL queries.
- Validation through Proof of Work is expensive, complex, and sometimes not very
- Bitcoin writes a 1MB block every ten minutes. Ethereum has similar limits.
- Proof of Stake and Directed Acyclic Graph (DAG) solutions make other types of compromises.
Why use blockchain instead of an ordinary database?
- Creates provable audit trails
- Time stamps
- Can’t be censored
- Can’t be altered
- No need for a trusted authority or data intermediary
- Facilitates distributed business processes
- Can support a crypto-token
Problems With Current BlockChains
Blockchain is an immature technology. It suffers from the following major problems right now:
Cost: It costs about $.75 to make an Ethereum transaction and $3 to make a bitcoin transaction. These have been as high as $4 and $37, respectively. Transactions prices increase when demand for the finite space available in each block goes up.
Scalability: Bitcoin can execute as many as 7 transactions per second, and Ethereum can do as many as 15. The Visa/MC network can execute 56,000.
Security: The security models of existing Distributed Ledger Technologies (DLTs) are weak. (Ask us about Byzantine Fault Tolerance)
This means that:
- Bitcoin is not useful as a transactional currency
- Ethereum is not useful for micropayments
- It is not clear that Ethereum will be able to support all the ERC20-based startups currently under development once they start writing regular ledger updates into the Ethereum main-chain. Fees will certainly go way up in the next year.
- It would be neither wise nor practical to move the TSE or any other high value, hight transaction volume, entity onto any existing blockchain platform.
Blockchain is Awesome
The TSE will be on blockchain within five years, probably much sooner.
- Public records will be on blockchain,
- Payment systems like Visa/MC will have moved to blockchain or been disintermediated.
- Connected devices (the Internet of Things) will use blockchain to act as agents for the owners.
- Logistics chains and other distributed business processes like real estate will use blockchain.
- Two-sided markets and matching problems such as staffing will use blockchain.
Blockchain Really is Dot Com 2.0
- Bitcoin and blockchain are not the same.
- Not all crypto-tokens are cryptocurrencies.
- Not all blockchains need a crypto-token to provide utility
- Most blockchain startups are about as well conceived as pets.com.
- Most blockchain startups do not really need a token but have one anyway to raise money.
- Many blockchain startups do not really need blockchain. It’s just cooler that way.
- For every 99 pets.com or webvan.com, there was a google.com as well.
What To Do
If you want to invest, follow the same rules as always:
- What is the value proposition?
- What is the revenue model?
- Who is the team?
- Can they execute?
- Do they have a comparative advantage?