What is the blockchain?

Blockchains are part of the evolving history of internet technology, so we must grasp their potential, writes William Mougayar

If you cannot understand it without an explanation, you cannot understand it with an explanation’ – Haruki Murakami

Understanding blockchains, the technology underlying cryptocurrencies, in the form of a shared digital ledger, is tricky. You need to understand their message before you can appreciate their potential. In addition to their technological capabilities, blockchains carry with them philosophical, cultural, and ideological underpinnings that must also be understood. 

In terms of defining blockchains, they are essentially digital ledgers, in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly, but unless you’re a software developer, blockchains will not be products you just turn on and use. Blockchains will enable other products that you use, though you may not know there is a blockchain behind them.

It is my belief that the knowledge transfer behind understanding the blockchain is easier than the knowledge about knowing where they will fit. It’s like learning how to drive a car. I could teach you how to drive one, but cannot predict where you will take it. Only you know your particular business or situation, and only you will be able to figure out where blockchains fit – after you have learned what they can do. Of course, we will first go together on road tests and racing tracks to give you some ideas.

Visiting Satoshi’s paper

When Tim Berners-Lee created the first World Wide Web page in 1990, he wrote: ‘When we link information in the web, we enable ourselves to discover facts, create ideas, buy and sell things, and forge new relationships at a speed and scale that was unimaginable in the analogue era.’

In that short statement, Berners-Lee predicted search, publishing, e-commerce, email, and social media – all at once, in a single stroke. The Bitcoin equivalent to that type of prescience by someone who just created something spectacular can be found in Satoshi Nakamato’s 2008 paper, Bitcoin: A Peer-to-Peer Electronic Cash System, arguably the root of modern blockchain-based cryptocurrency innovation.

The paper’s abstract depicts Bitcoin’s foundation and explains its first principles:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution

A trusted third party is not required to prevent double-spending.

We propose a solution to the double-spending problem using a peer-to-
peer network

The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.

The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of central processing unit (CPU) power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. 

The network itself requires minimal structure. Messages are broadcast on a best-effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone. 

If you are a non-technical reader, and you focus on the italicised parts, you will start to get the gist of it. Please re-read the above points, until you have got to grips with Nakamoto’s sequential logic. 

Seriously. You will need to believe and accept that validating peer-to-peer transactions is entirely possible just by letting the network perform a trust duty, without central interference or hand-holding. 

Paraphrasing Nakamoto’s paper, we should be left with these points:

peer-to-peer electronic transactions and interactions 

without financial institutions 

cryptographic proof instead of central trust 

put trust in the network instead of in a
central institution. 

As it turns out, the blockchain is that technology invention behind Bitcoin, and what makes this possible. With Satoshi’s abstract still in your mind, let us delve deeper with three different, but complementary, definitions of the blockchain: a technical, business, and legal one. 

Technically, the blockchain is a back-end database that maintains a distributed ledger that can be inspected openly.

Business-wise, the blockchain is an exchange network for moving transactions, value, assets between peers, without the assistance
of intermediaries.

Legally speaking, the blockchain validates transactions, replacing
previously trusted entities.

TECHNICAL: back-end database that maintains a distributed ledger, openly

BUSINESS: exchange network for moving value between peers

LEGAL: a transaction-validation mechanism, not requiring intermediary assistance.

Blockchain capabilities = technical + business + legal.

The web, all over again

The past is not an accurate compass to the future, but understanding where we came from helps us gain an enlightened perspective and a better context for where we are going. The blockchain is simply part of the continuation of the history of Internet technology, represented by the web, as it carries on its journey to infiltrate our world, businesses, society, and government, and across the several cycles and phases that often become visible only in the rear-view mirror. 

The internet was first rolled out in 1983, but was the World Wide Web that gave us its watershed evolutionary moment, because it made information and information-based services openly and instantly available to anyone on earth who had access to the web.

In the same way that billions of people around the world are currently connected to the web, millions (and then billions) of people will be connected to blockchains. We should not be surprised if the velocity of blockchain usage propagation surpasses the historical web users growth. 

By mid-2016, 47% of the world’s 7.4 billion population had an internet connection. In 1995, that number was less than 1%. It took until 2005 to reach 1 billion web users. By contrast, cellular phone usage galloped faster, passing the number of landlines in 2002, and surpassing the world’s population in 2013. As for websites, in 2016, their total number hovered at around one billion. Quite possibly, blockchains will evolve into several flavours, and will become as easily configurable as launching a website on WordPress or Squarespace. 

The blockchain’s usage growth has an advantage on the web’s trajectory, because its starting point is amplified along four segments: web users, cellular phone users, website owners, and any ‘thing’ that benefits from being connected, becoming a ‘smart thing’. This means that blockchain usage will ride on these four categories, instead of purely seeking new users – and the possibilities are endless. 

Once you start to imagine blockchains’ possibilities on your own, without continuously thinking about trying to understand them at the same time, you will be able to move forward in terms of how you can exploit them. 

Further reading

Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin .org/en/bitcoin-paper.

This is an edited extract from The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology by William Mougayar (Wiley, 2016). 

WILLIAM MOUGAYAR is general partner at Virtual Capital Ventures, an early stage tech fund. He is on the board of directors of OB1, the OpenBazaar open source protocol that is pioneering decentralised peer-to-peer commerce; a special advisor to the Ethereum Foundation; a member of OMERS Ventures board of advisors; an advisory board member to the Coin Center; and founder of Startup Management.

He has been described as the most sophisticated blockchain business thinker. He is a blockchain industry insider whose work has already shaped and influenced the understanding of blockchain for people around the world, via his generous blogging and rigorous research insights.

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