A very brief history of blockchain
By Oleg Giberstein
Blockchain technology and some of the applications that it powers, such as digital ‘crypto’currency or smart contracts, have gone through increasing hype and attention cycles. But until today, many still find it difficult to define what Blockchain really is. ‘What backs this magic internet money’ is a question often asked of Blockchain advocates.
The answer to that question is surprisingly simple: cryptography and mathematics. We will need to take a look at the foundations of Blockchain to understand what this means in practice. First of all, Satoshi Nakamoto, the anonymous creator of Bitcoin, was not the inventor of Blockchain. The concept of a cryptographically secured chain of blocks that confirms the state of an overall system was introduced in 1991 by cryptographers Stuart Haber and W. Scott Stornetta. Blockchain provides a solution to a mathematical problem first proposed in the 1980s, the so-called Byzantine General’s Problem. Imagine a scenario whereby a number of Byzantine armies are besieging a city. To stage a successful attack, the generals must coordinate on a time of attack. The problem: some of the generals are traitors, there is no centralized communication channel or way to determine who can be trusted. Blockchains evolve around a consensus system designed to solve this coordination problem.
The true innovation that came along with Bitcoin’s creation in 2008 was the addition of game-theory based financial rewards through cryptocurrency to this ‘chain of blocks’. Satoshi’s answer to the Byzantine General’s Problem was to create a Blockchain-based protocol that requires all participants (think ‘computers’) to solve complex cryptographic problems and be rewarded in an in-built unit of value (think ‘Bitcoin’). This so-called ‘Proof-of-Work’ consensus system is designed to make the system expensive: reward good actors for fulfilling desired functions and punish bad actors by removing their contribution from the chain. To bring this back to the General’s analogy, you ensure the ‘coordination’ of the attack by introducing a high personal cost for each participating party and by making each party ‘work’ to prove that they can be trusted. Traitors get ‘punished’ by losing or forgoing economic reward.
While Satoshi was not interested in conquering cities, his system was designed to ensure that a digital cryptocurrency, Bitcoin, could be powered and secured by an ever-growing network of participants. These participants would have a ‘selfish’ economic motive to ensure the system’s safety against threats such as ‘double-spending’ i.e. hackers (think ‘bad actors’) breaking the chain by spending what should be a unique unit of value twice. Thus, Bitcoin was born as a cryptographically secure, digital currency that does not have to rely on a central authority to operate safely.
‘Mining’ as a ‘proof-of-work’ is the way how the Bitcoin Blockchain finds consensus on its state. While this has created a now over 10-year old digital currency, the growing expensiveness of ‘mining’ for Bitcoin through energy-consuming hardware has received much negative attention. However, the way the system is designed, expensiveness is a feature, not a bug. Making the system expensive is a way of securing the network and making it progressively more difficult for bad actors to break it. The result is a store-of-value that is designed to be censorship resistant (i.e. cannot be controlled or changed by any one party other than through the use of substantial economic resources) and trustless (i.e. it does not rely on a central party to coordinate it).
While this article is only a very short introduction to some of the fundamentals of Blockchain, we will leave it to another article to look at why the store-of-value use-case and censorship resistant digital currency matter, how Blockchains can power applications beyond currency through smart contracts (and more), what alternative systems to find consensus other than ‘proof-of’-work’ exist and what current blockages and opportunities for the Blockchain space as a whole are.
As a parting thought on why this really matters is the following: before the internet, communication was reliant on third-party central providers manually connecting two parties to each other, be it through phone-call operators or mail office employees sorting through letters. The internet created the ‘rails’ (think ‘protocols’ such as IMAP and POP3) on which communication could flow without the need for manual third-party intervention. Many enthusiasts believe that Blockchain technology could do the same for value transfer. Blockchain could power trustless protocols that allow financial services to flow across the web without the need for banking and financial intermediaries. To say it in the words of Marc Andreessen, Mosaic and Napster co-founder and today a major Blockchain investor, “huge, if true.”
Oleg Giberstein is a Blockchain enthusiast and Co-founder of Coinrule.io, a tool to create automated cryptocurrency trading strategies without any coding.