Bitcoin, Blockchain and Distributed Ledger Technology
Bitcoin is the first digital or crypto currency, which has been able to reach global scale in terms of implementation and adoption. Unlike traditional coins, bitcoins are entirely virtual. There are no physical coins or digital coins associated to them. Coins implicitly exist in a sequence of transaction logs that transfer value (coins) from a sender to a receiver over the Bitcoin network. Users of the system can transfer bitcoins over the network to do almost anything that can be done with conventional currencies, from buying and selling products, acquiring services, sending money to other users, making donations or exchanging Bitcoins into fiat money (USD, EUR, GBP, etc) through specialized marketplaces and exchanges.
Prior to Bitcoin there were other attempts at creating digital money mainly through the work and effort from a group of liberty and privacy activists called Cypherpunks. Some of these attempts were Bitgold (Nick Szabo), Digicash (David Chaum), Hash Cash (Adam Back) or B-Money (Wei Dai). However, despite some scientific developments introduced by these attempts, some of them even used in the construction of Bitcoin, none of them could effectively solve the trust problems associated to currency issuance and value transfers without a central entity being necessary to intermediate and validate the transfers.
Although the network was only launched in 2009, the concept behind Bitcoin was released in 2008 by one person or a group of people under the pseudonym of Satoshi Nakamoto through the publication of an article entitled "Bitcoin: A Peer-to-Peer Electronic Cash System "[1]. This article proposes an electronic money ecosystem that allows value transfer (payments) to be sent directly from one party to another through a peer-to-peer (P2P) network, without the need for the participation of a central authority that controls the issuance of the based currency or a financial institution that validates the transactions between users. The solution presented by Nakamoto for these trust problems was to decentralize the System by making the system management to be done collectively and cooperatively by a dispersed community of users rather than by a central authority, thus eliminating some failures in terms of security, credibility, collusion and corruption typical of centralized systems.
The means used for this decentralization consisted mainly in the use of a Shared Database System (Blockchain) distributed over the nodes of a P2P (peer-to-peer) network and the application of a set of consensus mechanisms and rules for the management and operation of the System.
A Blockchain is a sequential list of transaction logs grouped into blocks of information that are “chained together” using encryption, hence the name "Blockchain." Each block contains a unique cryptographic (digital signature) hash related to the previous block and so on up to the initial block (genesis block). This feature makes the information recorded in a blockchain theoretically immutable because it is not possible to change the information in a block without compromising the information of all previous blocks. The information registered in a blockchain is public, but maintains the privacy of users through a mechanism or private/public keys.
The information contained in a Blockchain is distributed and stored by multiples nodes of the network, this guarantees a high level of security and robustness to the system because there are multiple copies of the original ledger on diverse nodes of the P2P network. In addition to storing the entire Blockchain, some nodes can also act as validators of transactions through a process called mining for which they are monetarily rewarded [2]. In case a node tries to tamper the Blockchain by creating a block with invalid information, it not only loses the reward in Bitcoin but also waste the time and money invested in the machines and the electricity necessary for the mining process. [3] The purpose of this incentive vs. punishment conjugation is to apply the Nash equilibrium principle so that participants in the network have low motivation to attempt to corrupt the system.
The consensus mechanisms consist of a set of rules and processes, executed algorithmically without any human intervention, that define the conditions both in terms of the monetary policy of the System and in terms of validation of the transactions. Some of these rules define, for example, that the total number of Bitcoins to be issued will be 21 million, that the currency issue is made by the network nodes whenever a new block is added to the blockchain, that a new block must be added every 10 minutes and that a transfer is not valid if the issuer does not have sufficient balance in his wallet.
From a purely technical perspective, a Blockchain by itself is no more than a linked list that grows endlessly and therefore as a Database it is extremely inefficient when compared to other traditional Database technologies. It is only when Blockchain is coupled with the application of consensus mechanisms that the advantages associated with the issues of decentralization, trust, immutability, audibility and transparency of information become real. It was this Blockchain conjugation plus the consensus mechanisms that led to a new Technology segment called Distributed Ledger Technology (DLT). This type of technology integrates knowledge, processes, techniques and algorithms of various scientific areas such as P2P communication networks, cryptography, Information Theory, Mathematics and Game Theory (Economics). There are other types, or subtypes, of DLT’s beyond Blockchain such as DAG’s (Directed Acyclic Graphs).
In a DLT, multiple copies of a public common ledger that are geographically distributed and continuously synchronized, providing security, redundancy, transparency and (at least in theory) immutability. The data in each block is encrypted, but the existence of the block is visible to all participants. A DLT can be a truly trusted source in an untrusted environment. For these reasons DLTs are considered the foundation of the "internet of value" and allow the recording of peer-to-peer "value" interactions and transfer without the need for a central coordinating entity. "Value" means any record of ownership of assets such as money, securities, title deeds or also ownership of specific types of information such as identity, health and other personal data. In this context, DLTs offer a new way of doing business and transactions without the need for intermediaries using the so-called Smart Contracts as an alternative.
To date, the Fintech sector is the one where the application of this type of technology has been more successful especially in the context of the “Crypto Economy”, where the crypto-coins are highlighted as a form of digital money and the Initial Coin Offering (ICO) as a way to raise financing. [4] However, this is an area of constant innovation and has attracted more and more investors and the interest in the development of pilot projects applied to different sectors such as Energy, Health and Education. However, in the immediate future, companies wishing to embark on the Blockchain/DLT train must first make the following analysis: "For the project in question, is Blockchain the best choice compared to a traditional, secure and well-structured Database? ".
It is undeniable that given their disruptive characteristics, DLTs will play a major role in building the Societies and Organizations of the future, both at political and economic levels, especially when truly integrated with other Technologies like the Internet of Things (IoT) and Artificial Intelligence (AI). In the short / medium term we will see, for example, electric vehicles that automatically pay for the energy they consume through the execution of smart contracts. In the long run, we will see IA Systems, which will inevitably replace most human labor in the coming decades, to contribute financially to the Economic Sustainability of Societies where the redistribution of wealth will be based on the Unconditional Basic Income models supported by the Crypto Economy.
References:
[1] https://bitcoin.org/bitcoin.pdf
[2] At this moment the reward is 12,5 bitcoins. This value is reduced to half every 4 years in process known has halving in order to guarantee the digital scarcity of bitcoins.
[3] Depending on the crypto coin (hash algorithm) at matter the mining can be done using simple CPU’s or GPU’s or by specialized hardware like ASIC’s or FPGA’s.
[4] Funding method that works as a mixture of IPO + crowdfunding.