Thursday, May 3, 2018

Blockchain Revealed

Many of you must be frustrated following so many links about blockchain without finding out what it is, how it works, or what it is good for.  While it was invented a quarter of a century ago by Haber and Stornetta, it has recently been popularized by its most famous application, Bitcoin.

One might well ask why anyone might choose to write on something where so much has already been written.  The answer is that finding the answer to my three questions has proved to be difficult.  In this blog, I will attempt to answer those three questions but to the extent that I fail, I hope that readers will follow up with questions.

A blockchain is a collection of digital objects related in such a way that changing any one of the objects will be obvious and changing all of them in a non-obvious way is computationally infeasible.   Thus, it is a data integrity mechanism.  It is an example of a zero knowledge proof, i.e., making a demonstration without prior knowledge or pre-arrangement.

The objects are “chained” in such a way that object N includes a hash of object N-1 and its hash is included in object N+1.   The hash of the last, or latest, object in the chain depends upon, is an arithmetic function of, the content of every object in the chain.  Therefore, one can demonstrate that the chain is complete and that no objects have been altered.   We also know that object N-1 existed before N and N before N+1.

This works for any set of similar digital data objects.  The objects determine the application.  For a simple example, the objects might be the entries in a journal, or entries in a database.  More complex examples might include a digital record for all the transactions of a digital currency, bills of lading, warehouse receipts, or public records.

Blockchains enable anyone to demonstrate, by recomputing the hash of the last object, the integrity of the data. Therefore many applications may not require or rely upon a trusted party or access control of the data.  On the other hand, demonstrating the integrity of the chain is computationally intensive so blockchains work best for applications where the number and size of objects is low.  Said another way, blockchains may not scale well.

Note that trusted third parties, such as banks, often assume risk and collect fees for their role; disintermediating them can reduce cost.  For example, one might be able to transfer large sums internationally more cheaply using digital currency than by using orders on central or correspondent banks.