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Fundamentals of the Blockchain

We all heard about that magical fiat currency called bitcoin that exists without a central bank or a physical presence. Its digital existence is not particularly confusing as almost all of our banking has become electronic, especially in the Netherlands where having cash on hand is something that’s almost a rare occurrence. However, not having a central bank? That’s where things get a little bit confusing.


Bitcoin works by utilising a technology called the blockchain in a globally distributed environment. Understanding what the blockchain is will show you how you can have globally accessible money and trust without anybody ‘printing it,’ and how (almost) anything else can be decentralised away from corporations and governments.

How does the blockchain work?


The question of what exactly is a blockchain is one that is rather enigmatic to a lot of people because of its complex mathematical and algorithmic base. However, it can be very easy to understand what it actually is when you try and focus on the pieces that form the blockchain, instead of the blockchain itself. Most importantly, understanding its inner workings will help you understand its significance.


Very aptly named, the blockchain is a chain of ‘blocks’ that are chained to each other by the power of mathematics. Each block stores a chunk of arbitrary data, and in the case of bitcoins these chunks are the transactions between the users of the bitcoin network. In addition to these data, most importantly, these blocks contain a reference to the previous block in the chain. The power of mathematics comes into play with the reference part of a block.


In the field of cryptography, there is a certain group of functions called hash functions. These functions are ones that take data of any given size into data of fixed size. Strong hash functions are able to apply this process such that even the smallest change gives a different result.


Now, imagine that someone has put a block into this function and gotten a specific output; if you wanted to make any changes on the block, the hash of that block would make it clear that it was tampered with. The chain is formed through the use of these hashes, by referencing blocks to each other by immutable identities. If you want to change the content of these blocks, the references become invalid and effectively break the chain. This makes it such that someone can’t just swoop in and change what’s in the blocks—if they do, people will notice that the chain is broken immediately.


To really understand why this is important, compare it to a regular chain. Let’s say that we have a chain on the rings of which are engraved when that one ring was made. One says 1923, the other says 1932, the other says 1935… Someone can come in and turn that 3 into an 8, and it won’t be apparent if done properly and people will believe that the chain started in 1928 and not 1923.


If we had a virtual version of this exact same chain, you could try and make that change, but people would be able to tell immediately that the ring, or the block, was manipulated. That’s why the blockchain is important, you cannot rewrite the history, and you cannot lie. When there are thousands of people in a shared network, with each of them having a copy of the consensus-made blockchain, the chain enables them to share and store information—such as a ledger of transactions in the case of bitcoin. Bitcoin’s ledger cannot be manipulated or refuted, which means that you cannot launder your bitcoins or fake the balance of an account.


What can we use it for?


Aside from bitcoins, the blockchain has many uses and can be applied to a wide range of systems.


Ones like the IPFS are built to allow people to store data in a decentralised manner. As opposed to a centralised data storage like Google Drive or Microsoft’s OneDrive, the IPFS makes sure that your data cannot be erased and has multiple copies that are accessible worldwide. Such distributes enables musicians to distribute their music for free, people from developing countries to access information at low cost and latency, and archivists to archive data that cannot be destroyed. Google or Microsoft on the other hand are corporations that charge for storage and have the power over what you store on their services.


Others like OpenBazaar and Steem attempt to take pre-existing services and bring them to the control of people. OpenBazaar is basically a distributed version of Etsy that lets its users open stores and sell items in exchange for bitcoins. It notes that they have no fees whatsoever because “there’s no company or organization running OpenBazaar, there’s no one to charge you fees to list your products,” as opposed to Etsy, which takes 20 cents to list an item and 3.5% of your revenue when you sell one. Steem is a social network that operates in a manner similar to Medium (owned by Twitter), the difference is that they reward curators and content creators for their participation in the website. They use a currency mechanism similar to bitcoins as rewards, which can then be bought and sold at a cryptocurrency exchange.


In essence, the main benefit of OpenBazaar is that it gives its users complete control over their stores and complete share over their revenues. Steem, although connected to a company, is using a blockchain-based rewards feature to facilitate user participation. There are many other systems that use blockchains to take existing concepts and give the power to the people.


Sounds too optimistic?


With all the talks about vote manipulation in electronic voting stations of the US presidential voting, you would think that applying blockchains to voting systems would be the next step. In 2015, I had the opportunity to talk to J. Alex Halderman about electronic voting systems and the security of them. Mr. Halderman is a professor of computer science at the University of Michigan and he contributed to the security analysis of the Estonian e-voting system. Estonia was the first country in the world to use Internet voting nationally, and in 2015 a total of 30.5% of the Estonian voters used the e-voting system.


In their analysis, the team found severe security issues regarding the voting servers and voters’ computers—both of which were found to be open to tampering by foreign powers, by the means of changing votes and compromising the secret ballot. Although certain issues they discovered with the system, such as the ones regarding manipulation of vote counts, could be solved by the use of the blockchain, there are many other problems that make electronic voting as a whole unviable and even dangerous.

My questions to Mr. Halderman about the application of a blockchain to e-voting systems and voter identification had answers that were not particularly exciting. He noted that “a dishonest election official could combine [encrypted ballot data] with the [cryptographic signatures of the voters] to find out how everyone voted,” which is something that is highly concerning. The only application of the blockchain in this case is having a list of all submitted ballots, but then that compromises anonymity, and anonymity in votes is something that is very important for voters from both free and authoritarian countries alike.


In conclusion, he noted that the need for authentication further complicates the problem. To combine integrity, security and anonymity at an electronic voting system seems quite difficult whether you apply a blockchain to the ballot infrastructure or not, and those are all integral to a truly democratic voting system. It seems that although the blockchain is very useful for quite a lot of systems, certain ones have problems that cannot be solved by the use of blockchains. There is a strong hype surrounding blockchains, but seeing that it’s not the solution to all of our problems is one thing to note.


Looking for more?


In case you are interested in this topic and looking for more information, Room for Discussion of the University of Amsterdam is hosting a discussion about the impact of the blockchain technology with Louis de Bruin and Simone Vermeend. It will be held on May 19, 2017, from 13:00 until 14:00 at the Room for Discussion Podium in Roeterseiland Campus’ E-building.

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