Networked integrity

This blog post is part of a series of articles exploring potential links between blockchain technologies and international relations. Since many students asked me to explain this new technology, I’ve decided to dive into the Blockchain with the intention to come up with a clear and didactical presentation.

This peer-to-peer distributed network is a ledger of past transactions where all participants are geographically distributed and connected via different kinds of networks. As Don and Alex Tapscott’s mentioned in their latest book, seven principles will guide the development of new applications based on Blockchain platforms: network integrity, distributed power, value as incentive, security, privacy, rights preserved, and inclusion. [1] This article will discuss the first of these seven principles: networked integrity.

On Blockchain, integrity is encoded and distributed. It is never entrusted in a single user (individual or institution), which means that participants in a Blockchain can exchange value directly, knowing that the other party will respect what was agreed. In other words, Blockchain encodes trust values such as consideration, accountability and transparency.

Blockchain platforms can be classified into two main categories – closed (permissioned) and open-ended (permissionless). Open-ended systems such as Bitcoin and Ethereum are publicly available for use. Closed platforms such as Hyperledger Fabric and Multichain are aimed at consortiums where participation is close-ended.[2] Several security mechanisms entitled consensus mechanism exist and ensure the integrity of these platforms. Each Blockchain platform will adopt a specific consensus mechanism based on its level of openness.

First presented in a paper in 2008 by Satoshi Nakamoto, Blockchain was first designed to support the creation and distribution of a virtual currency – Bitcoin. Blockchain is the technology that supports Bitcoin creation and distribution. But it is also used for many other types of values. Its first objective was to avoid the double-spend problem: if I send money to a friend or to buy something online, the money must leave my account and go to my friend’s account (or the account of the seller), otherwise I might spend money twice and the system becomes fraudulent. Before Blockchain, third-party intermediaries solved this problem by clearing every transaction through one central database. Intermediaries would include money transfer services (Western Union), commercial banks or online payment platforms (PayPal for instance). [1] These intermediaries require a lot a time to perform the clearing and effectively transfer the funds, and a substantive fee.

The Bitcoin Blockchain platform functions differently: it is a distributed and transparent network with nodes as points of intersection or connections. Each node can both redistribute and receive information. As an integral component of the Bitcoin network, it validates the Blockchain by downloading a copy of it. Bitcoin nodes help distinguish legitimate transactions from attempts to re-spend coins that have already been spent elsewhere. Each block serves to confirm transactions to the rest of the network as having taken place.

In such permissionless platform, the number of nodes is expected to be large, and these nodes are anonymous and untrusted. Satoshi Nakamoto designed security mechanism called Consensus Mechanism, where the structure of the network itself ensures its integrity: each new block must refer to all the proceeding blocks (making impossible to omit or change previous data). This specific consensus mechanism is entitled Proof of Work and is possible thanks to bitcoin mining, a process by which transactions are verified and added to the preceeding chain of blocks. Bitcoin mining is also the way through which new bitcoins are released.[3] Data mining is therefore crucial to safeguards fairness and keep the network stable and secure.

To successfully mine a block, a miner needs “to hash”. Hash algorithms are what keep Bitcoin’s Blockchain secure. A hash algorithm takes data of any arbitrary size (numbers, alphabets, media files) and transforms it into a fixed alphanumeric string. This fixed size output is what is called a hash. The hash algorithm has two unique properties: it produces a unique output (or hash), and it is a one-way function. The mathematics behind the hash algorithm ensures that there is no way to generate the original data from its generated hash. This means the hash only functions in a linear progression. A simple analogy would be that you can’t produce a real human thumb from a thumbprint. This is why a hash can be treated as a “digital fingerprint” of the data processed through the hash function. The same hash will only be generated from the same input data. But if you modify the data with something miniscule, like a single space or a comma, it will completely change the hash output.

By comparing the computed “hash” (the output) to a known and expected hash value (or target), a person can determine the data’s integrity. For example, computing the hash of a downloaded file and comparing the result to a previously published hash result can show whether the download has been modified or tampered with.[4] In the case of bitcoins, a miner needs to hash the new block’s header (a specific part of each block dedicated to the security also called “nonce”) in such a way that the computed hash of nonce is less than or equal to the “target” (hash value).

The “nonce” in a bitcoin block is a 32-bit (4-byte) field whose value is set so that the hash of the block will contain a run of leading zeros. The rest of the fields may not be changed, as they have a defined meaning (bitcoin transaction). Any change to the block data (such as the nonce) will make the block hash completely different. For this reason, data on this Blockchain platform must be precisely dated (each bitcoin transaction is time-stamped for example to avoid the double-spend problem): the network permanently stamps every movement with exact day and time.

Since it is believed infeasible to predict which combination of bits will result in the right hash, many different nonce values are tried, and the hash is recomputed for each value until a hash containing the required number of zero bits is found. As this iterative calculation requires time and resources, the presentation of the block with the correct nonce value constitutes what Satoshi Nakamoto entitled the Proof of Work. And in this way, the miner first obtaining the correct Bitcoin Hash will get the block reward and receive a certain number of bitcoins. [5] It is statistically bound to happen every ten minutes.

Other types of Blockchain platforms such as Ethereum use other consensus mechanism: Proof of Stake (miners must invest in and keep some store value), Unique Node List (list of entrusted nodes), Proof of Activity (proof of work and proof of stake, where a random number of nodes must sign off before a block is added), Proof of Capacity (miners should allot a specific volume of their hard drive to mining), and Proof of Storage (miners must share disk space to a distributed cloud). [6]

Blockchain is expanding our technological, financial, social, and entrepreneurial horizon with a wide number of new applications. The network itself, thanks to its structure, ensures the integrity of all transactions and values recorded, without any third-party institution such as a private or public institution (a bank, a health insurance company, a national government, an international organization, etc.). It allows to record safely information such as land property rights, intellectual property rights, music or design copyright, university diploma, innovative chemical formula, social security number, etc.).

This first aspect of Blockchain platforms can also reveal useful for the international aid system, where all funds allocated to specific humanitarian projects can be easily monitored and tracked. The use of Blockchain platforms could therefore liberate vast amounts of resources that are currently allocated to managing and monitoring these flows of public money. Instead, these (human and financial) resources could be dedicated to foster innovation and support field projects. The next article will continue this discussion and focus on the second aspect of Blockchain proposed by Alex and Don Tapscott: distributed power.

[1] Don and Alex Tapscott (2017), Blockchain revolution. How the technology behind bitcoin is changing money, business, and the world. New York, Penguin Random House.

[2] Arati Baliga (2017), Understanding Blockchain consensus models. Retrieved from https://www.persistent.com/wp-content/uploads/2017/04/WP-Understanding-Blockchain-Consensus-Models.pdf

[3] Investopedia. https://www.investopedia.com/terms/b/bitcoin-mining.asp

[4] “Cryptographic Hash Function”. About.com.

[5] https://coinsutra.com/bitcoin-hash/

[6] Don and Alex Tapscott (2017), Blockchain revolution. How the technology behind bitcoin is changing money, business, and the world. New York, Penguin Random House.