From birth to death – and perhaps even after death – man traverses a series of records and accounts. His entity, so to speak, and all the necessities and affairs associated with it, remain bound to some archive or the other. Were you to visualize an individual as one link in a chain of countless linked accounts, you would not be far from the truth. Imagine innumerable and unlimited accounts, all strung together. The facts recorded in each link are what man is; they serve as proof of his existence, and also provide him with what he needs from time to time. Trust me, this is no religious or philosophical wrangling I am indulging in; I am merely presenting that system according to which we exist, and which serves to be a practical prototype for the blockchain.
When we are born, the hospital issues a birth certificate, which is followed by a ‘bay-form’ usually from the office of the local councilor. Then, for the ultimate proof, a NADRA-issued Birth or Family Certificate is obtained. This voucher serves as a verification of your existence. Without this, your existence cannot legally be proved. Moving along, when you get your vaccinations, they are recorded in yet another register. Similarly, you buy a house, get your identity card or passport made, acquire your driver’s license, bank account, arms license, marriage certificate, your children’s birth certificates, school admissions, university degrees, and right down to your death, you receive some kind of certificate or the other – a proof of entry in some account or the other out there. I interpret this system as an invisible blockchain. Last but not least, consider our very Book of Deeds: isn’t that too a register in which everything is divinely being taken account of.
Valuable goods, natural resources, national assets, population census – all have always required that the maintenance of their accurate record remains a possibility. In 1944, following the Second World War, the Bretton Woods Conference took place and spawned institutions like the International Monetary Fund (IMF), World Bank (WB) and later, organizations such as the United Nations (UN) and World Trade Organization (WTO). The idea was to control all the resources of the world under a centralized system. All countries, big or small, and their helpless citizens, be they weak or powerful, all are brought under this central system where they proclaim to all and sundry their emancipation and their personal status. The truth is that ultimately, going through this central system, all their reserves and resources will come into the hands of a handful of individuals or institutions who in the name of policies, plans and procedures, will turn all free men into vassals.
Look around you and consider – isn’t your entire life spliced with some central account-keeping mechanism or the other? Bank accounts, property documents, hospital records, identity documents, marriage license… the list goes on. What, then, is the problem with this? Why do we need an alternative system? Why must we forage for another possibility when everything seems to be going well?
There are three main problems with investing one’s trust (or rather, blind trust) in a centralized system.
Under the pretext of competition, censorship or interest of the ‘greater good’, the system or those who run it can remove anybody from the system anytime that they want. By placing Pakistan on the Terrorism Watch List, limitations have been placed on the free movement of capital and goods. Similarly, Iran, Venezuela, Palestine, North Korea or any other nation for that matter which is not playing your tune is either excluded, or their inclusion made next to impossible. Paypal, for example, doesn’t serve Pakistan. Over a billion people in the world do not possess the documents for their personal identification. From citizenship to government aid, from employment to medical access, they are unable to so much as prove their existence.
People place their trust in an individual but he, in turn, indulges brazenly in injustice, plunder and corruption. People put their life savings in some institution and its board members squander it to their will. People pay taxes to their government, and instead of spending it on the welfare of the citizens, its representatives splurge it on luxuries.
3. Loss of Records
What if somebody were to hack a central institution or bank and destroy all its records? What if a bank employee erroneously entered information into your account; or the records were obliterated by human error? What if a natural disaster, such as a fire, destroyed data files? In unfortunate situations like this, who then guarantees the rights of the victims?
The inequitable distribution of resources, illegitimate use of power, and unaccountable management of the system are additional reasons which continue to lend an air of mistrust. If one reflects on the previous century, one can sense that the greatest degradation in man happened in matters of trust. People have uniformly lost their trust, be it in institutions, governments, courts of law, relations, religions, leaders, or any other guarantors. The loss of collective trust and how to establish it between two or more parties in a centralized system is one of the foremost issues which have remained moot for the last 50 years.
Could we create such a register of accounts which can be read and written on so that all entries remain transparent? Could we remove the account of finances from the reins of any government, institution or individual? Why should any institution or individual take the responsibility of such a register? How is it possible that in an open account such as this, fraud and dishonesty can be impeded? Would such an account allow for changes?
In order to find answers to dozens of questions such as these, teams of researchers in mathematics, computer science, economics and psychology began churning the cogs. Like drops of rain, piecemeal, different parts of this new system began to emerge. Finally in 2008, a person with the fictional name Satoshi Nakamoto presented to the world a practical solution to this problem, which we know as blockchain.
What is blockchain and how does it work? Understanding this is a little difficult because one has to first become acquainted with all the ingredients that go into it. First, let us examine the qualities of this system and then gradually try to make sense of it with the help of examples.
Blockchain is an ‘open’, ‘distributed’ register which is accessible to everybody, in which everybody (under special conditions) can make entries, and which has been made secure using complex mathematics. This is the basic concept.
As we have seen, in order to maintain records man has made use of registers or ledgers for centuries. At one time, these records were in the form of clay tablets. Other epochs made use of paper archives. In the modern world, records exist securely in computers in the form of bytes. Blockchain (a decentralized account) is a distributer ledger which keeps a chronological record of transactions. Each individual in the network possesses a complete copy of it. When some change occurs, or if some transaction takes place, each person updates his account. If somebody attempts to record a false transaction, the other people will reject it, for they will not have any record of that transaction in their accounts.
A common observation in marriage ceremonies is the medley of guests. Actually, all these guests serve to be a conscious blockchain who bear witness to the marriage. If at a future date, somebody were to claim marriage to this woman, all those guests will bear witness that this woman has already been wedded.
Consider the memorization of the Holy Quran. Each hafiz or memorizer is a node – each has a copy of the same public ledger, the Holy Quran, secured in his brain. Now, if in the future, some hare-brain, God forbid, attempts to bring forth a new verse (ayah), then the blockchain system of the hufaz will reject it and throw it out of the system. The blockchain we are examining works in exactly the same way.
Let us consider another example from our daily life. Abdullah is in need of money and calls his friend Jamshed on the phone and requests him for some. Jamshed, the kindly soul that he is, immediately opens his online account and transfers ten thousand rupees into Abdullah’s account. Abdullah receives this amount in his bank in a matter of minutes.
Now, what went on behind his ordinary transaction? Of course, no actual currency or notes were physically transferred. When Jamshed opened his online account, he made a request to send ten thousand rupees. The computer system checked the availability of this amount of money in Jamshed’s account. Had his account contained less than ten thousand rupees, the transaction would not have taken place. In this case, since his account did contain sufficient funds, ten thousand of them were deducted from his account and in Abdullah’s account, ten thousand were increased. In this entire scenario, nothing more than a change of entry in the accounts took place. The only thing was that in order to transfer money between two individuals, a third party needed to be involved and trusted by both. Usually, this third party institution takes a fee in return for such services. Similar ordinary transactions between cities and countries, in fact, take even 10% of the amount and there is additionally a lag of 3 to 7 days. The amount would immediately be deducted from Jamshed’s account but would take some time to be seen as an increase in Abdullah’s.
When making use of a third party, in additional to service fees and time lags, all those issues prevail which we discussed earlier when talking about the problems of a centralized system. Additionally, the permission of the government and other institutions is also needed. Moreover, there is a further deduction in the transfer of foreign exchange. Add to this the probability of theft or human error and the fact that the convenience of transaction is also not particularly significant. It is as if we have kept all the eggs in a single basket – and that too, in somebody else’s, which is commonly known as a bank.
Instead, can we not make a register of accounts among ourselves and keep entering our transactions in that? Ideally this can be achieved, but the practical problem of double-spending arises. This, Satoshi Nakamoto has brilliantly solved, and the solution is known as blockchain. We create a public ledger and keep a record of all transactions from the beginning to the end of time. If Abdullah goes ahead and gives five thousand to somebody else, then everybody knows that he had ten thousand and is therefore able to give five thousand, and also that those ten thousand came to him from Jamshed. Now, if hundreds and thousands of people are on this system, all their transactions will be entered and updated on this public register of the blockchain.
Each time that a page gets filled up with the transaction entries, all the people (nodes) will make use of the hash function to seal it and turn it into a block. They will then start working on the next block. The meaning of the seal is to establish that whatever was recorded on the page or block is correct and that no changes can ever be made to it. This is known as the immutability of the blockchain.
In layman terms, the hash function is a complex function of mathematics, somewhat like a machine, in which one can input whatever one wishes, and in answer, it will generate different answers of the same size. The hash function is a one-way function. This means that whenever we enter an input, the answer will be consistent. For example, the answer to ‘4’ will always be ‘dcbea’. However, there is no such way by which one can use the answer to arrive at the original number. And yes, it is easy to test it. If you know both ‘4’ and ‘dcbea’, then with the help of this function, you can check to see in a matter of seconds whether the output is consistent with this input.
Now, if I were to say to you to tell me such an input which generates an output that begins with three zeros, how will you find this out? The only way to find such an input is brute force. You keep entering one number after another as input and keep checking the outputs. Sometime or the other, the output that satisfies the condition will come up.
Now, we have to seal the page / block of our transaction. We will, for example, add up all the transactions that appear on the page (or for that matter, get a number in any other way). Now the relevant question is, which number should I put at the sum of the page such that there are three zeros in the beginning of the output.
Now, we will try out luck with number after number. In due course, an appropriate number appears which satisfies the condition. Now with the help of this, we will seal our page or block.
This entire activity is known as mining, which, in the technical jargon of bitcoin, we call proof of work.
In addition to sealing the block, we have to attach it to the blockchain. Before joining each new block to the blockchain, a mathematical puzzle has to be solved, in which the previous page number, the new number which we are searching, and a new variable (nonce) are added, in order to arrive at the output.
If some person were to attempt to add a fake block, he will not only have to join his current block, but also all the blocks that have ever been made in the blockchain, and then solve the mathematical puzzle. In order to accomplish this, he must gain access to 51% of all the networks in the world – otherwise, such a feat is not possible. This is known as 51% attack.
At each new block, miners receive cryptocurrency as a reward. In the beginning, miners received 50 bitcoins, then 25 and currently 12.5. For the person with 51% power, it will be far more profitable to mine more blocks rather than destroy the entire system, after which nobody stands to gain anything. This is how the entire network remains honest and aboveboard.
There are three types of blockchain.
1. Public Blockchain
As you have seen, bitcoin and Ethereum are examples of this. In public blockchains, anybody from anywhere can join the network whenever he wishes and leave whenever he wishes. In order to maintain the integrity in the nodes, they are given compensation for their work – new coins and transactions in the form of fees. The complex mathematical functions make it secure and hack-proof.
2. Private Blockchain
Private Blockchain is a company’s internal public ledger which only those can join whom the company allows. Here, since trust already exists between the people, since legal action can be taken in case of dishonesty, and because the true identity of the node is known, the act of mining is not very difficult. Consequently, the pace and capacity of such a block is thousands of times higher than that of a public blockchain.
For example, a bitcoin is able to complete a transaction every 7 seconds and a block is made every 10 minutes. In Ethereum, a block is made every 15 seconds. Paypal and credit card companies, in comparison, carry out hundreds of thousands of transactions per second. For such capacities in cryptocurrencies, lighting networks are being introduced.
3. Consortium Blockchain
This blockchain is between a group of companies or partners and can only be joined by members. Here, rather than consensus, the rules of membership are applied.
To summarize, blockchain is a special kind of public ledger which is the basic underlying technology of cryptocurrencies such as bitcoin. This is a kind of data structure in which transaction in the form of blocks is joined to each other like links in a chain and with the help of the mathematical hash function. In the various kinds of blockchains, the public blockchain is the open kind. To join this, no kind of permission is required. Whoever wishes can join or leave it whenever they wish. In order to maintain trust between nodes that are strangers to each other, cryptocurrencies are awarded as recompense and discipline is made possible with the help of the different complex mathematical stages. Trust in private or closed blockchains, on the other hand, is usually made possible through the company’s policies and agreements. Thus, in such blockchains, cryptocurrency is not given as reward. All the rest of the phases, such as consensus and voting, for example, are more or less the same.
The origins and forms of money have varied much – from salt to animal skin, from the rai stone to tobacco. If something had access and demand, it was used by way of currency. Along with the internet was born digital currency as well. In 1882, David Chaum presented the blind signature and e-cash. In 1997, Adam Back came up with Hash Cash; in 1990 Wei Dai with B-Money; in 1998 Nick Szabo with Bit-Gold; and in 2004 Hal Finney with Reusable Proof of Work RPOW. These theories and inventions culminated in 2008 with Satoshi Nakamoto introducing the world to Bitcoin.
Currently, it is unlikely that there exists any large bank in the world that is not studying the blockchain in some form or another. In 2015, IBM in collaboration with Linux Foundation, started the Hyper Ledger Fabric project which, to date, has been brought into use by hundreds of companies. With investment of billions, over 2,500 patents and more than 800 crypto assets, blockchain is about to bring the kind of changes to the economic system which email brought to the postal system and cellphones to the landline communication system.
Foresight is in assimilating this technology to greater and greater extent in the coming years and making its effective uses a reality. According to one survey, in 2020 the world will need at least 500,000 blockchain developers. Currently, there are not even 5,000. If you were to invest yourself in this today, your employment and business prospects in the future are full of promise.
I’ve recently published a book — Introduction to Blockchain with Case Studies and it’s available from Amazon worldwide, Gufhtugu Publishers in Pakistan and here is my Urdu Book (بٹ کوائن، بلاک چین اور کرپٹو کرنسی) on the subject as well.