Blockchain, Bitcoin and where it will lead?

Thanks to the rise of crypto currencies such as Bitcoin, blockchain is getting much of the publicity it so deserves. Alibaba’s Ant Group, who made Ant Chain (a low-cost Blockchain service network) is the most valuable unicorn ever showing the potential in blockchain technology.  In this article Sam Mendis helps unpick the intricacies of blockchain technology, discussing some the  benefits and flaws along with looking to the future to discover how this could be revolutionary in many different sectors.

Basics of Bitcoin

Many people have heard of blockchain, might have even invested in Bitcoin, yet do not have a full grasp of the important principles that blockchain technology encapsulates. Blockchain is a very simple concept. It is a form of ledger, more accurately a Distributed Ledger Technology (DLT). A DLT is a form of ledger that is distributed to many people who can then verify each new addition to the ledger. This is the basic premise to how blockchain works.

To start someone (Rebecca) creates a block, the first input, for this example let’s use currency and say £500 has been added to an account. This is the initial block, which then a corresponding key is added to, in blockchain language a hash. This hash can be a n character alphanumeric code which is unique to the block. The next block is showing that £100 has been transferred out to George. This then shows that there is £400 left with Rebecca and £100 with George, with this piece of information, the previous hash (£500 was the initial value) is shown. Following this George transfers £50 to Luke, which is the newest block. With this block the previous hash is recorded (£100 was transferred to George). This creates a very simple mechanism to see exactly what has been going on. The final piece of the puzzle is that this ledger is then distributed across hundreds of computers worldwide, meaning when a new block is added the hash is verified by every one of these computers and if over 50% of the computers authenticate the block it will be added to the chain. An example is shown below:

Block Number	Information	Hash	Previous Hash
1	Rebecca has £500	Wx013Pudck5	–
2	£100 transferred from Rebecca to George	I09Xth24yN1	Wx013Pudck5
3	£50 transferred from George to Luke	Qty780Xn6Rn	I09Xth24yN1
4	£200 transferred from Rebecca to Luke	C1Wjgr57P2Q	Qty780Xn6Rn
5	Rebecca removes £200 out	0Wb89tSEnB8	C1Wjgr57P2Q

In this case there is a clear record of who has what money, along with how much is left in the system. If George was dishonest and tried to change the value transferred to him by Rebecca from £100 to £200, so that he could remove £150 rather than only £50, he would have to change all the corresponding Hashes after block number 2. This would be both time consuming and labour intensive, however, it could be possible if George had the requisite computing power needed for these hashes. If this ledger was distributed across 200 computers (in blockchain language Nodes) and George attempted to do this, he would have to gain access to at least 101 computers to change all the hashes for the new block (in this case block 6) to be accepted. Now if creating hashes takes a specific set amount of time for example (3 minutes) this task would be nigh on impossible. This is the premise of blockchain technology. Of-course this is a simplification, yet this does clearly show the difficulty with altering a ledger using Blockchains, making the system extremely appealing for financial transactions.

Bitcoin

Blockchains have been made famous by the world’s most famous cryptocurrency – Bitcoin. Bitcoin uses blockchain technology, but importantly Bitcoin is a completely separate entity. As seen from the table, blockchain technology can easily support financial transactions building up a ledger of financial records which can be extremely difficult to hack. During the 2010s there has been a massive boom in crypto currencies, especially Bitcoin, with many different features attributed to their success. Firstly, Bitcoin is not controlled by any government. It is wholly owned by those who invest in it, making it unsusceptible to governments manipulation, like normal day to day currency.

Another characteristic of Bitcoin is the anonymity of the system. As I have previously shown, blockchains are almost the opposite of private, everyone has access to the blocks. Similarly, if one specifies a bitcoin wallet, everybody can see how many bitcoins that wallet contains. The inherent anonymity of the system if you have a wallet number, there is no way of finding the owner unless they themselves give themselves up. This could be described as having a bank account but with no name. The bank (in this analogy everyone) can see how much money is in it, but nobody knows who it belongs to unless the owner shouts about it. This anonymity is appealing for many people, those who want to trade in illicit substances, those trying to launder money and those who just don’t trust their governmental financial and economic governance.

The other unique aspect of crypto currencies is the fact there is a specified amount. In normal money, governments can print cash which causes inflation. This does not occur with bitcoin. Because the reward for hashing new blocks is halved every 210,000 blocks (the process known as bitcoin mining), there is a limit of 21 million Bitcoins that can be generated through mining, which means that once they all have been mined no more will be found/created, meaning in traditional terms, no inflation will occur. Mining in any crypto currency expends large amounts of energy and computing power, making it expensive.  This again guarantees investors that the value of their bitcoins – in relation to other bitcoins – will not reduce. However, the problem with this is that Bitcoins are valued in normal currency and can fluctuate in value in relation to Dollars, Stirling or even gold.

There are some drawbacks to Bitcoins, firstly the lack of oversight. If someone manages to hack your Bitcoin wallet, that’s it – you are not getting your bitcoins back. Furthermore, if you have been following closely, in the past 5 years Bitcoins value have become extremely volatile, rising to a peak of $20,000 for one bitcoin in mid 2018 and now at a value of roughly $9,000. This is a risk, the Winklevoss twins (known for suing Mark Zuckerberg) have benefited immensely from their investment in Bitcoin, yet there are countless others who I am sure have not been so fortunate. Other drawbacks include, the lack of security that you will be getting what you paid for, in real terms no guarantee of refunds, as well as the very real potential that Bitcoin could be replaced by a more superior crypto currency. These are all important factors to remember before taking the jump to invest in Bitcoin.

Smart Contracts

One of the drawbacks of Bitcoin, lack of refunds and guarantees, is gradually being addressed with the introduction of smart contracts. The best analogy for smart contracts is something like PayPal. PayPal was introduced as a method of guaranteeing an online payment (especially over eBay) had security. If the product was damaged, you could complain to PayPal and they would check and refund you your money. Smart contracts work in a very similar way. Propose Paula wanted Rosa to build her a website. They could agree on a smart contract which outlined the details of the transaction, how much Paula was going to pay, the wireframe of the website and lastly the proof that Rosa would give to show that the website had been created to the specification. This contract would be agreed by both Rosa and Paula and immediately the funds taken out of Paula’s account and kept in holding. The funds would only be released to Rosa once the proof of completion has been verified by the system allowing both parties to know that they haven’t been ripped off.

The following tables show a breakdown of the different technologies associated with blockchain and smart contracts.

Smart Contract

Component	Key attribute	Description
Contract	Relationship	Terms of agreement between participants in the contract

Blockchain

Component	Key attribute	Description
Ledger	Assets	Replicated, shared, and synchronised digital data geographically spread, tracking all assets since genesis block
Governance	Consensus Rule	Specific set of rules that all Bitcoin full nodes will unfailingly enforce when considering the validity of a block and its transactions
Network	Participating Nodes	Any computer that connects to the Bitcoin network is called a node. Nodes that fully verify all of the rules of Bitcoin are called full nodes

The main player in the smart contract game is Ethereum. Ethereum is the second largest crypto currency yet is the most commonly used platform for building smart contracts. This is because Ethereum is a more flexible blockchain than Bitcoin allowing it to run any type of smart contract. These contracts can range from a few lines of code, to large complicated contracts, however, the premise is the same. Once activated the contract will run to completion if all the requirements are filled, however, if any of the requirements are unfulfilled, everything will return to the original state pre contract minus a fee which is used for the computing power up till then.

Another important concept related to smart contracts is permission ledgers. These are similar to normal blockchain technology, however, rather than 50% of nodes having to approve the transaction, this can be programmed to a certain percent of specific nodes. For example, 80% of nodes located within Oxford. This can be useful as it only allows specific nodes to verify the transaction.

Quantum

Quantum computing has been floating around for years. Google’s announcement in late 2019 which claimed to reach the quantum supremacy showed that quantum computing is really at our doorstep. But what does this mean for blockchain technology? Will anything actually change?

A quantum computer is different from our classical devices. Currently computer bits can be in two states, 1 or 0. Quantum computers use qubits rather than bits, which means they can store data as a mixture of either 1 or 0. This sounds extremely strange, yet when delving into the world of quantum physics, surprisingly normal. This ability of the qubits to be in different states at the same time allows quantum processors to complete calculations in fractions of the time it would take classical computers. Google claimed that it has reached the milestone of quantum supremacy, which basically means the computer has performed a calculation that would take a classical supercomputer tens of thousands of years. This was first incident of a major corporation claiming to have achieved the supremacy, opening the floodgates to what could happen next.

If quantum computers were to expand rapidly and evolve to where they could be useful in day to day life, it could cause catastrophic implications for all types of cryptography. However, would blockchains be safe? A Deloitte report questions the safety of bitcoins and found that roughly 25% of Bitcoins are vulnerable to a quantum attack, however, this is due to the reuse of addresses, indicating that blockchain technology could be resilient to quantum attacks. Yanix Altshuler, an MIT researcher has been quoted via cointelegraph.com stating that “there is no evidence that quantum computing can compromise the blockchain”. According to bitcoin.com it would take 2,000-3,000 qubits to threaten the security of Bitcoin. This is slightly worrying, however, Google’s quantum computer that broke the quantum supremacy had only 54 qubits. This shows that the type of technology needed to threaten blockchains are years away, with experts believing that as quantum computers get more advanced, encryption methods will be created to mitigate the threat of quantum computers.   This shows that quantum computers will not be a threat in the near future which should encourage more and more businesses to try to understand the benefits of such technology.

In conclusion, it is clear to see that blockchain technology is definitely here to stay. It provides a different type of security, which is not private, yet can be anonymous. Hopefully with more interest and uptake blockchain technology can become even more widespread changing the face on internet security. With more and more emphasis on both anonymity and security, blockchain technology could hold the key to a more secure future.

Sources: forbes.com, computerworld.com, www2.deloitte.com, cointelegraph.com, technologyreview.com, unocoin.com, euromoney.com, theverge.com, knowtechie.com, google.com, blockchainhub.net, github.com, news.bitcoin.com, newscientist.com. Accessed [05/08/2020]