Anyone who does not understand Blockchain will be left out of the new economy. Its economic impact will be enormous, and this is only the beginning. Banks are already implementing it. Land registries, notaries, healthcare, insurers, public administration and many others will follow, making its social impact greater still.
Understanding its structure will allow us to see the implications, among them decentralisation, speed, cost savings and security. Multiple applications, such as cryptocurrencies (Bitcoin), smart contracts, banking transactions (Fintech) and even censuses and voting, are already here.
The fundamental part of Blockchain is the blocks, and it is important to become familiar with them.
Container vs Content
What is it, and what is it not? Blockchain technology is the containing infrastructure and is not the content. Think of the standard shipping container. Its design, size and handling changed the system of maritime transport for ever, regardless of the specific goods it carries. Allowing for the differences, Blockchain is a system of containers that hold whatever service it may be worth providing.
What changes? What does this technology bring?
Among other things, we could highlight:
- Decentralised Certification: It replaces a central body (Notary, Bank, Registry, Administration, etc.) with a decentralised validation system (Nodes) which are themselves part of the system
- Speed of execution: Days or weeks become minutes or hours. An international transfer, for instance, can take minutes instead of days
- Instant accessibility: There is no need, for example, to go to a government office to request a piece of data and be issued a certificate. Everyone who belongs to the system (Nodes) has continuous, instant access to all the information
- Security: Because asymmetric cryptography is used, the protection and integrity of the contents enjoy the highest level of security known
The blocks: what are they?
Blocks are the containers of the system’s information. The content is the service offered. Each service offered will give rise to a different system. In the specific case of Bitcoin, the system is a cryptocurrency, the service offered is the transactions carried out with it, and the content of its blocks records those transactions. In other systems, the information might be, for example, the set of contracts concluded, the transfers made or the personal information stored (medical history, qualifications, property, etc.).
The blocks: how are they created?
- Origin. Every system begins with the creation of a first block. It is called block zero or the “Genesis” block. Like shipping containers, these blocks have a defined structure that includes the basic management and security systems common to all blocks. The definition of the specific “content” service in that block system completes its structure.
- Participants. Imagine we take it into our heads to create a system that might interest people. With sufficient “means”, we launch a large publicity campaign to generate interest. Those who are interested are given access to block zero, or “Genesis”, making them participants. The tool (usually a computer) through which each of these participants accesses block zero (and those that follow) is called a Node.
- Block creators. We now have a block (Genesis) and a number of interested people (Nodes). However, the system will only start to make sense if more blocks are created containing plenty of service. We have defined Blockchain as a decentralised system, so some of those Nodes must be persuaded to create blocks independently. The Nodes that create blocks are called “Miners”, and the act of creating and validating those blocks is called “Mining”.
Do you want to be a miner? What will your reward be?
“Mining” is rather expensive, both in computing power (the hash rate) and in time. So either it is rewarded, or those concerned will not pick up their “pick and shovel” and get to work. This is a key element of every Blockchain system, and its design must be approached with great care. Let us look at an example in the Bitcoin system.
Bitcoin is a cryptocurrency. In this system, what the blocks contain is the transactions carried out with those Bitcoins between participants. Here, the miners responsible for creating blocks receive a “prize” for successfully creating and validating a block. That prize is a number of “new” Bitcoins. In the classic language of investment banking, it is the equivalent of an issue in the primary market. The total number of Bitcoins that can ever exist in this system will therefore equal the sum of all the rewards the miners can receive. Hence the great importance of defining that reward.
When the system was launched, a “miner” who created and validated a block received 50 Bitcoins. Is that a little or a lot? Today it would be worth some $220,000.
When the Bitcoin system was designed, it was established that the total number of coins would be fixed in advance. How? Through the reward, which is halved every time a given number of blocks has been created: every 210,000 blocks, to be exact. Today the reward stands at 12.5 Bitcoins. When the reward for creating a new block reaches zero, that will be that. When will that happen? Readers with some mathematical knowledge will have noticed that this form of reward is equivalent to a geometric series:
which is equal to:
In the case of Bitcoin, this gives:
In practical terms, what matters is that only 21 million Bitcoins can ever be created. Not one more. When will that limit be reached? The fact that the current reward is 12.5 Bitcoins per block created tells us that we are in the third iteration. By the end of it, 630,000 blocks will have been created and up to a maximum of 18,375,000 Bitcoins “mined”.
Mining vs Reward. Author’s own chart @canosfm
The 64th iteration will be the last, and it is estimated that it will take place around the year 2140 (assuming the global computing power (Hash Rate) currently devoted to “Mining” is maintained).
Validation
I have insisted on the phrase create and validate, not merely create. If a block is not validated, it is neither added to the system nor, of course, rewarded.
- How is a new block validated? In the Bitcoin example, a problem is set based on the set of transactions entered in that block. The problem is based on the encryption (Hash) applied to them. Whoever solves it carries the day. The solution is published in the block header and broadcast to all the nodes in the system. Everyone can see it. You can always visit Blockchain.info for further details.
- Who validates it? The system is decentralised, so it must be validated by the other Miners in the system. All of them must validate it, checking that the problem (Hash) has been solved correctly. In the language of Shakespeare, that solution is known as “the Nonce”.
- Created and validated: what now? At that very moment, once the newly created first block has been validated, it is joined to the Genesis node. If a second block were created, it would be joined to the first, and so on, illustrating graphically why the system is called Blockchain (a chain of blocks).
Should you become a miner? I am not so sure. Let me give you an example. I myself spent 33 hours straight “Mining” with my MacBook Pro and extracted… 0.00000001 Bitcoins. Not much to show for it, frankly. If you wanted to be a Pro Miner, you would need equipment designed specifically for the purpose (e.g. the “AntMiner S9”). This little gadget costs several thousand dollars, which you should not expect to recoup until it has been running continuously for at least a year or so.
All this leaves me with an open question about Bitcoin. The reward for creating blocks keeps shrinking. Is this one of the reasons behind Bitcoin’s spectacular rise in value? How will we go on “motivating” miners? Will the fees for maintaining the system rise? I am not convinced this has been resolved in the Bitcoin system. In new systems, this aspect ought to be better thought through.
Francisco Canos
Article published on 3 September 2017 in:
