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EXPLAINED: Why Best Thing About Cryptocurrency May Be The Blockchain Tech That Anchors It

The founders of Bitcoin had proposed the blockchain mechanism prior to the launch of the first cryptocurrency in 2009

The founders of Bitcoin had proposed the blockchain mechanism prior to the launch of the first cryptocurrency in 2009

Governments and organisations around the world have shown an interest in the tech that anchors cryptocurrencies for the protection and efficiency it offers

Many of us have increasingly become used to making transactions using digital wallets and online payment systems. We are also exhorted to never share our PIN numbers and passwords to prevent hackers and fraudsters from breaking into out account and stealing money. So, while the transactions are digital, the fears are pretty analog, akin to having our pocket picked or property burgled. Such worries though are largely non-existent in the world of cryptocurrency for all the talk of the unsavoury ways in which they are used. That is because of the blockchain technology underlying cryptocurrencies, which ensure that it is terribly difficult to tamper with records or get away with unauthorised transactions.

What Is The Blockchain?

It’s a combination of two words ‘block’ and ‘chain’, and the meaning is quite direct. To begin with, what you need to know is that Bitcoin — the earliest and the most valuable cryptocurrency — records transactions in tranches known as ‘blocks’, and then adds such one block to another in a continuing ‘chain’ of all transactions. Much like a ledger or an account book, where entries are listed one below the other. Except that here there is no single person who records the entries but everybody who owns the cryptocurrency gets to play an active role in the upkeep and fidelity of the account book.

Why Was The Blockchain Created?

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Any cryptocurrency is a digital token. That is, say you own 10 Bitcoins, you don’t actually hold them in your hands. Your crypto assets will exist as lines of code on a computer and any transaction you make will have to be digitally executed and verified.

Now, to have a purely digital currency, which exists only as code, can be more complicated than physical money. That is because with physical money, if you have a Rs 10 note and you gave it to a shopkeeper to buy a pen, you will not be able to use the same note again because you have lost, or exchanged, custody of the Rs 10 note for the item you bought. However, with a digital currency there is a problem that the same line of code, which represents a set monetary value, can be sent to multiple people. How would they know that one hasn’t already spent the money that is being offered afresh?

You can point out that when we spend money online, even if the transaction is digital, we do not manage to spend the same funds twice. That is because, the wallet or account that is being used for online transactions is monitored by a third-party — the bank or the payment service provider — which keeps tabs on how much money you hold in the account and how much you have spent.

But Bitcoin, and the other cryptocurrencies that have followed in its wake, were created to be decentralised currencies, that is, ones that wouldn’t need a bank or a third-party monitor to verify transactions. The blockchain, then, was the key tech proposed by the creator, or creators, of Bitcoin to solve the problem of not having a central authority to oversee transactions.

How Does The Blockchain Work?

In a 2008 white paper, Satoshi Nakamoto, the pseudonymous person or group of people who led the creation of Bitcoin, said, “We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work."

That, in a nutshell, is the basic idea behind blockchain with, of course, a statement of the other technicalities that go into making the system a robust online account book. Since there is no central authotrity keeping a tab on transactions, the blockchain is said to represent what is called a “decentralised ledger".

The creators of Bitcoin had noted that to remove the role of a trusted third-party, “what is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other". But there was the ‘double-spend’ problem and, to counter it, the creators proposed “a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions". Sounds like complicated code, but what it lays out is the philosophy of the blockchain.

The Bitcoin paper assumes, simply enough, that to be able to detect any case of ‘double-spend’, a user must be aware of any previous transactions made with the same coin, or code, since it’s digital money we’re talking about.

“The only way to confirm the absence of a transaction is to be aware of all transactions… To accomplish this without a trusted party, transactions must be publicly announced, and we need a system for participants to agree on a single history of the order in which they were received," the paper said. Accomplish this and, voila, you have your peer-to-peer, decentralised, and secure, cryptocurrency.

How Does Bitcoin Use Its Blockchain?

So, first, when a transaction is made using Bitcoin, it is broadcast to all the nodes, which is nothing but Bitcoin parlance for any computer that any user uses to access her Bitcoins. What happens after the details of a transaction is shared with all the nodes is that each node bunches them into a block. So far so good. But what prevents a node to broadcast a fraudulent transaction and getting it uploaded? To counter this, Bitcoin has an elaborate ‘proof-of-work" and ‘consensus’ mechanism.

What ‘proof-of-work’ involves is the nodes getting down to solving a complex algorithm — once a block has been created — that would generate a key to add the transaction to the chain of all preceding transactions. But solving the algorithm is a task that requires massive computational power, something that yields Bitcoin — the so-called mining — and also ensures the integrity and security of the distributed ledger.

“When a node finds a proof-of-work, it broadcasts the block to all nodes. Nodes accept the block only if all transactions in it are valid and not already spent," the Bitcoin paper says, describing how a block is added to the chain. Now comes the part about why it’s so tough to tamper with the Bitcoin ledger.

Since the nodes in the Bitcoin system have to accept the transactions in a block, there is a majority decision system involved here. That is, 51 per cent of all the computing power in the Bitcoin network would have to okay a block for it to be added to the blockchain. The Bitcoin paper says that “the majority decision is represented by the longest chain, which has the greatest proof-of-work effort invested in it".

“If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains. To modify a past block, an attacker would have to redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the work of the honest nodes," given the computational power required to verify and add one block, this is something that Bitcoin users believe can never happen.

Unless, one group controls 51 per cent of the computational power. Then it can force the other users to accept whatever transactions it clears. But the Bitcoin paper notes that transactions will be “computationally impractical for an attacker to change if honest nodes control a majority of CPU power".

What Other Uses Can It Have?

From maintaining databases of land records to facilitating voting at elections, the use of blockchain tech is being explored in multiple sectors. IBM is said to have devised a logistics tracker for food based on blockchain while the tech is being developed for sectors like banking, healthcare, etc. “Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved," IBM says. Within the crypto-verse itself, the blockchain is now used to also support the creation of non-fungible tokens (NFTs), a new digital asset category that allows users to digitally mint artwork, etc. and trade those as signature property.

Coming back to real-world uses, tampering of documents and records and vote manipulation are issues that a blockchain-based system can address given that there is no central authority or central database that manipulators can hack.

In its draft ‘National Strategy on Blockchain‘, the Ministry of Electronics and Information Technology (MeitY) said that blockchain is “an apt technology for applying to resolve shortcomings of any property record management system. Immutability in Blockchain can provide an assurance to citizens that their property records are never tampered".

The Securities and Exchange Board of India (Sebi) has also reportedly directed the setting up of a blockchain system to track aspects related to the stock market.

But that’s not to say that the blockchain does not have its drawbacks, the chief among which is the huge requirement of energy to run the system. The cracking of the algorithm that enables the addition of a block to the chain requires users to devote massive computational power. When it comes to Bitcoin, the spending of so much energy is rewarded with the cryptocurrency, but it is one aspect of the system that has been flagged as not being environmentally sustainable.

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first published:August 18, 2021, 09:26 IST