I am delighted to publish a 15-video series dedicated to my book, “Blockchain + Antitrust: The Decentralization formula”. You can access all the chapters over here, and all the transcripts over here.
In this video, I’d like to tell you about what I call the “blockchain toolbox.” This toolbox addresses all you need to know about blockchain should you be a social scientist, a government official, or, more generally, a non-computer scientist interested in the subject. So, let’s go.
I want to start with commonalities between all blockchains out there. Blockchain is essentially a shared database run by a core software that all blockchain users agree to use. This ‘database’ has two main characteristics that you need to grasp.
First, (1) blockchain relies on encryption. When using a blockchain, for example, to send a token to another user, the real-space identity of users does not appear. Only their public key appears. It corresponds to the private key they used to sign the transaction. This signature process protects each user’s identity because one cannot revert a public key into a private one and, even less so, into a real-life identity.
On top of that, all transactions are automatically encrypted by the blockchain core software. What comes out of the encryption process is called the hash value. It looks like that (see video). This could mean that I sent you one bitcoin. Now, behind the scenes, these hash values are grouped before being recorded into the blockchain. Once they are put together, there are different processes for recording these blocks of transactions. All of them rely on encryption and require performing calculations. If the blockchain uses proof of work, computers compete to find what is called a “nounce”. The most powerful computer will find it first and be chosen to validate the block and get a reward. Each block of transactions is assigned its own hash value. And here’s the trick. Each block’s hash value is recorded onto the next block of transactions, hence the word blockchain, a chain of blocks linked by hash values.
Allow me one side note here. When I talk about the “validation” of transactions, it does not mean that someone verifies whether the transaction is legal, or that it corresponds to a service that has been rendered. The validation simply means that users exist and have not already spent the tokens they are sending.
Moving on to blockchain (2) second key characteristic: blockchain is immutable. Immutability is explained by the fact that blockchain is both decentralized and distributed. In a nutshell, decentralization means control, while distribution designates the location. Let me explain. Blockchain is decentralized because no single user controls the information or data on the blockchain. This means that no single user can prevent another one from acquiring a token, sending it, etc. This lack of centralized control applies to blockchain developers, courts, and other forms of public intervention.
Blockchain is also distributed because its mechanisms and data are located across many computers through the network. For one, the blockchain core software runs on all computers. A handful of users cannot impose updates to the software: each user needs to agree to update its software. In addition, blockchains users can download a copy of the entire ledger. That explains why blockchain is immutable.
Look at what is happening should you want to delete one transaction in your copy. Immediately, the block in which the transaction was is assigned a new hash value. But remember, the original hash value of that block has been recorded into the next block. There is, then, a mismatch between the new and the original identity, but only in your copy of the blockchain. It is then put away. This is why you can trust the integrity of a blockchain without centralized power. The more users, the better.
This is also why you can use blockchain not only to record what happened in the past, such as retrieving information about a transaction in Bitcoin between two users in 2013, but also to organize the future with certainty. Users can indeed condition transactions to future events, such as buying tokens if the value drops below a certain level or sending one if it snows. These future transactions are called smart contracts. I will come back to them in a future video.
OK, moving on to blockchain differences. All blockchains are different, but I want to capture two common discrepancies.
First, (1) blockchains can be public, private, permissionless, or permissioned. Access to a blockchain defines whether it is public or private. When a blockchain is public, anyone can access it. On the contrary, users need the authorization to access private blockchains. Now, on top of blockchain’s public or private nature, writing permissions on the ledger define whether a blockchain is permissioned or permissionless. It is permissionless when anyone can write on the blockchain and validate blocks. The blockchain is permissioned when only specific users can write on it. Therefore, public blockchains can be permissionless or permission, while private blockchains are, by definition, always permissioned.
Second, (2) and last, I need to discuss blockchain consensus. It materializes in the code (run by the blockchain core software) that governs the transfer of value between users. Let me start with private blockchains here. Generally, they run on a consensus that typically gives one or several participants the power to control transactions. They are, in a sense, not real blockchains as they feature a clear pilot in the cockpit. I will come back to that point later.
As we speak, most public blockchains (e.g., Bitcoin and Ethereum) use Proof of Work to achieve consensus. It requires users who want to validate transactions to provide computing power to the blockchain to find a nounce and be chosen to validate blocks. I shall mention that one of the most popular alternatives is the Proof of Stake mechanism, which is now being implemented on the Ethereum chain. Here, a user’s chances to validate blocks increase with the number of tokens the user owns and the duration of possession. The idea is that the more a user has tokens, the more she or he has stakes in the game and will therefore verify transactions properly.
The upshot is that these consensus mechanisms attempt to strike the right balance between the network’s security and scalability. And new mechanisms are constantly being developed to achieve that goal. In all likelihood, tomorrow’s most commonly used protocol has yet to be created.
That is all for today. Thank you very much for listening. Take care of yourself, and, if you can, someone else too. Cheers.