7 answers to understand the blockchain

Catalan Economy

30 Jul 2018

By Carles Gómara, innovation manager in Catalonia Trade & Investment and coordinator of the Mobile International Program

The blockchain appears all around us. Everybody is talking about it. However, the concept is as popular as it is misunderstood. In order to understand it and see if can be useful to business we answer 7 fundamental questions:

  1. What is the origin of the blockchain?

The blockchain was created by a Mr. Nakamoto in 2008. In fact, maybe it was a Mrs. Nakamoto, or even a group of people going under that name. The truth is that no one has unravelled the mystery of who is behind that name; but what we do know is that the goal was to develop a technology that would allow the creation of a cryptocurrency: the now famous bitcoin.

Bitcoin was then the first application used by the blockchain system, which allows you to create databases with a unique feature: they are made using open source code. Therefore, anyone can download the code from Internet and even improve it.

The best way to understand this is through visualizing its name: block chain. Each new piece of information that is added to the network generates a new block that adheres to the previous one and gives continuity to the chain. We now have a block chain.

Furthermore, one of its essential characteristics is that it is a distributed and replicated database, i.e., the information is copied identically in all of the nodes making up the network. Everyone has exactly the same copy of its content.

Of course, unlike traditional databases – which allow you to create, read, update and delete – the blockchain only allows the first two options: it is impossible to modify or remove any block once it has been created.

  1. How does it work?

All the information you want to save goes into a block that contains three essential pieces of information (as well as other supporting fields): a time stamp, the identifier (ID) of the previous block and the ID of the block itself (which will then also be incorporated into the next block). However, it must be borne in mind that the third block is obtained by the fusion of the first two and is not generated quickly, but through a complex calculation.

This factor explains one of the basic blockchain characteristics: its extremely high security. And it's not just good data encryption. If a hacker managed to crack this encryption to modify information, this modification would make the block’s ID change, which would then no longer coincide with the following block. And if there is no match, the chain is broken.

This makes it very easy to discover if someone has entered and changed data. What’s more, even if one could modify the entire chain fast enough so that no one would notice, this would have to be done in at least 51% of all replicas throughout the network.

The need for so much computing power and for the time to make the changes means it is impossible for other users to not see it and thus stop it in time. In fact, one of the characteristics of the blockchain is that it is slow. But in this case, slow means safe.

  1. How is each block ID created?

To create the block ID the hash function is used. This is a small computer program that receives an entry (a name, for example) and returns a number in binary code. It is a classic function in the indexing of databases that in the case of the blockchain uses a far more complex and secure version called Secure Hash Algorithm SHA-256.

Any tiny change in the entry causes the resulting number to be very different. Making this conversion is fast, but since blockchain wants to be slow to be more secure, it introduces different levels of difficulty: making the created ID start with a certain quantity of zeros. To do this, you need to add more information to the entry (which is called Nonce), which, in practice, is a number from 0 to just over 2,000 million (231). This procedure means that, on average, it takes 10 minutes to find the ID. This process is called 'Proof of Work'.

  1. Who creates the blocks?

The blocks are created by miners; a network of connected companies sharing a copy of the databases. In Bitcoin, for example, all the transaction information that you want to add to the chain is placed in a memory pool until the miners arrive and try to create an ID. The first to obtain it then informs the rest that it has been created and the block is generated.

The incentive for miners is the fact that whoever manages to create the block gets a reward of 12.5 bitcoins. To be the first, miners need to have ever more powerful equipment to be faster and faster. This competitive spiral is detrimental in terms of blockchain security, given that it cuts the time needed to create each block.

Therefore, approximately every two weeks (every 2,016 blocks created) the statistics are reviewed and if the average time required to obtain the ID generated by the new block is less than 10 minutes, the level of difficulty increases. Currently, 17 pre-zeros are needed in the hash result. In the event that the difficulty discourages miners and block creation time goes well over 10 minutes, it can be compensated by reducing the level of difficulty.

  1. Is it free?

Nothing is free in business. Each piece of new information you want to add to the chain is classified using the priority criteria miners use to choose which block they create first. If we want our information to be a priority for miners and be quickly added to the chain, a commission can be paid to increase its priority, so it moves up in the list.

  1. What barriers does the blockchain face?

One aspect that complicates the blockchain system is its high energy consumption, especially as regards the work of the miners. For example, the bitcoin network consumed in November 2017 the same amount energy as all of Ireland in the same period.

To reduce the cost of 'Proof of Work', new strategies are being discussed such as 'Proof of Stake' (where miners with the most bitcoins could create blocks); and 'Proof of Authority' (where only the most reputable and credible miners could create blocks).

Other blockchain barriers are the volume of information it generates, the fact that it is undergoing a process of adoption which generates uncertainties and its slowness.

  1. Is blockchain only useful within the financial world?

We are currently in the middle of a period of exploration and testing. Even though its initial use has been seen in a cryptocurrency context,  its potential is far greater.

For example, Walmart and IBM apply blockchain to follow the entire value chain of a product. IBM again together with MAERSK also track all their containers worldwide using this system.

At present we would be hard pushed to find a sector that is not launching blockchain projects to prove viability and suitability. We will have to wait and see what applications are the most successful and where it becomes consolidated, but it is unquestionable is that the blockchain is here to stay.



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