Rohan's Blog

The block chain is an innovation so ground breaking that it is already being likened to the internet. Though, as of today, cryptocurrencies like bitcoin represent the most largescale and famous use of the concept, there’s a lot more to block chain than just bitcoin. It represents perhaps the most revolutionary use of the mathematical concept of cryptography.

Before we begin to understand what the enigma ‘block chain’ really is, we must understand where the idea stems from. In 1998, Nick Szabo wrote a short paper entitled “The God Protocol.” Szabo mused about the creation of a be-all end-all technology protocol, one that designated God the trusted third party in the middle of all transactions. This was indicative of a larger trend at that time, one that is still very much operational today, that of there being the need for extensive third party involvement in verifying every single online transaction. This ‘need’ translated to huge processing fees in real terms, combined with inconvenient and often complicated rules and paperwork, the system was always in need of an overhaul. This is where the mysterious ‘Sakoshi Nakamoto’ stepped in, with his brilliant, revolutionary and completely (at that time) unknown cryptocurrency, named bitcoin.

Blockchain is a type of distributed ledger or decentralized database that keeps records of digital transactions. Rather than having a central administrator like a traditional database, a distributed ledger has a network of replicated databases, synchronized via the internet and visible to anyone within the network. Blockchain networks can be private with restricted membership similar to an intranet, or public, like the Internet, accessible to any person in the world. When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred in the last 10 minutes and sent out to the entire network. Miners (members in the network with high levels of computing power) then compete to validate the transactions by solving complex coded algorithms. The first miner to solve the problems and validate the block receives a reward. The validated block of transactions is then timestamped and added to a chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain, thus effectively time stamping each transaction. The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to prove who owns what at any given time.

The maths behind the ledger is quite intuitive. Blockchain is basically a publicly available ledger where participants enter data and certify their acceptance of the transaction via an elliptic curve digital signature algorithm (ECDSA). An elliptic curve is an equation such as y2 = x3 + a x + b. In Bitcoin and most other implementations, a = 0 and b = 7, so this is simply y2 = x3 + 7 (see graph). Elliptic curves have numerous interesting properties, such as the fact that a non-vertical line intersecting two non-tangent points will always intersect a third point on the curve. Indeed, one can define “addition” on the curve as finding that third point corresponding to two given points. This is basically what is done in ECDSA, except that the operations are performed modulo some large prime number M.

The existing financial system is very complex at the moment, and that complexity creates risk. A new decentralized financial system made possible with cryptocurrencies could be much simpler by removing layers of intermediation. It could help insure against risk, and by moving money in different ways could open up the possibility for different types of financial products. Cryptocurrencies could open up the financial system to people who are currently excluded, lower barriers to entry, and enable greater competition. Regulators could remake the financial system by rethinking the best way to achieve policy goals, without diluting standards. We could also have an opportunity to reduce systemic risk: Like users, regulators suffer from opacity. Research shows that making the system more transparent reduces intermediation chains and costs to users of the financial system.

Email is what got the early internet into the mainstream; it’s what drove adoption and strengthened the network. Bitcoin is ‘e mail’ for the blockchain. Bitcoin drives adoption of its underlying blockchain, and its strong technical community and robust code review process make it the most secure and reliable of the various blockchains. Like email, it’s likely that some form of Bitcoin will persist. Furthermore, the blockchain will also support a variety of other applications, including smart contracts, asset registries, and many new types of transactions that will go beyond financial and legal uses. With the surge in popularity of cryptocurrency and the mass deployment of the blockchain in new fields, it is official ; the block chain has arrived, it is here to stay in and revolutionize our world.

Information for this article has been sourced from the Harvard Business Review, Forbes, The Scientist and The American Science Journal.