Timur Makarov

Blockchain: An Inevitable Step Forward

There are numerous companies and institutions whose sole purpose is to affirm that you own something. Whether it's proving ownership of property, verifying document authenticity, ensuring the legitimacy of financial transactions, or confirming intellectual property rights, these entities play a critical role in modern society. However, their methodologies are often slow, susceptible to errors, lack transparency, and are single points of failure. Most importantly, these entities struggle with gaining universal trust because human beings, who are prone to error, manipulation, bias, and having a bad day, maintain the integrity of the data.

Blockchain technology tackles one of the fundamental problems of modern society: the need for unshakable trust in systems that manage and verify our critical data. By eliminating the fallible human element and creating a distributed, immutable ledger, blockchain offers an unparalleled method for ensuring data integrity.

By the word "Integrity" here presupposes such concepts as: security, consistency, correctness, and absence of corruption and errors.

This article does not describe any particular blockchain. This article only argues that the blockchain technology is an inevitable step forward.

  • 1. P2P Networks
  • 2. Replacing the Middlemen
  • 3. Definitions of Blockchain
  • 4. New Way of Managing Ownership
  • 5. Future to Look Forward to
  • 7. Conclusion

P2P networks

The term peer-to-peer, or P2P, means that the computers that participate in the network are peers to each other, that they are all equal, that there are no “special” nodes, and that all nodes share the burden of providing network services. The network nodes interconnect in a mesh network with a “flat” topology. There is no server, no centralized service, and no hierarchy within the network. Nodes in a P2P network both provide and consume services at the same time with reciprocity acting as the incentive for participation. P2P networks are inherently resilient, decentralized, and open. A preeminent example of a P2P network architecture was the early internet itself, where nodes on the IP network were equal. Today’s internet architecture is more hierarchical, but the Internet Protocol still retains its flat-topology essence. Beyond bitcoin, the largest and most successful application of P2P technologies is file sharing, with Napster as the pioneer and BitTorrent as the most recent evolution of the architecture.

For example, in a peer-to-peer file sharing system, for example BitTorrent(torrent), the individual files are stored on the users’ machines. When someone wants to download a file in such a system, he or she is downloading it from another person’s machine, which could be the next door neighbor or someone located halfway around the world. And all of them are both suppliers and consumers of resources (e.g. they download and share simultaneously).

Or another example, households that both consume power and produce it with solar panels on their roofs - trade energy among themselves within a decentralized marketplace and without a profit-driven utility company setting the rates.

It's a powerful idea: turning the computers of the users into nodes that make up the whole distributed system. As a result, the more users or customers use the software, the larger and more powerful the system becomes; i.e. files that you want to download form torrent will be doing it faster, because there are more users ready to share those files.

To connect peer-to-peer networks and blockchain, let's see an example.

Replacing the Middlemen

Right now we rely almost completely on big establishments, middlemen like banks, social media companies, governments to establish trust in our economy and in our day-to-day lives. And overall their services and software do a pretty good job. But there are problems. Some of them below:

  1. They are centralized. Therefore a single point of failure, a single point for hackers attacks and data leaks.
  2. Their software is closed-source. We cannot prove their claims about it's integrity, security and our privacy, nor we can bend it to our specific needs.
  3. Their decisions are behind closed doors. We must rely on the sanity and intelligence of the people behind those doors.
  4. They manage and collect our data. Our privacy is being undermined. We cannot fully manage our data, let alone monetize it. We can switch between 10 VPNs and buy new proxies till we blue in the face, but it still won't do much. We must trust their management of our data and their judgement in regards of it.
  5. Never-ending chaos. There are millions of companies, 200+ different countries and none are fully (or at all) trusted, because their histories are rewritten, their moves are unpredictable and their words are lies. And if not, they will be - that's how we behave. First, you obtain it. Second, you defend it. Third, you die. The further you go, the more values change. This is how you go from Jesus to the Crusades, from Marxism to the gulags, from a wedding chapel to divorce court. And then the whole process starts again.

We cannot just say "Let's go live in the woods". So I think we have to find a solution to the problem of gaining and maintaining trust without being the customers or the product for it's maintainers.

Each industry that mainly acts as a middleman between producers and customers of digital goods and services is vulnerable to being replaced by a peer-to-peer system. This statement may sound a bit abstract, but you may discover many middlemen for immaterial and digital goods and services around you once you recognize the largest of them all: the financial industry.

What is it that you have in your bank account or on your credit or debit card? Is it really money? The money you own has been turned into immaterial bits and bytes long ago. Only a small amount of actual money exists as physical banknotes and coins. Banks and many other players of the financial industry are just middlemen between producers and consumers of bits and bytes that make up our money and our wealth. The act of borrowing, lending, or transferring money from one account to another is just the transfer of an immaterial good operated by middlemen. It is amazing how many middlemen are involved in seemingly simple transactions (e.g., transferring money from one bank account to another one in a different country involves up to five middlemen, which all need their processing time and impose their own fees). As a result, something as simple as transferring an amount of money from one bank account to another in a different country involves a long processing time and incurs high transactions costs.

In a peer-to-peer system, the same transfer would be much simpler and it would take less time and costs since it could be processed as what it is: a change in those bits and bytes. The advantage of peer-to-peer systems over centralized systems is that direct interactions occur between contractual partners instead of indirect interactions through a middleman, hence, there is less processing time and lower costs.

Replacing the middleman is also called disintermediation. It's a serious threat to many business and companies that mainly act as intermediaries between different groups of people, such as buyers and seller, borrowers and lenders, or producers and consumers.

The relation between purely distributed peer-to-peer systems to the blockchain is that the former uses the latter as a tool to achieve and maintain integrity. Hence, the argument that explains the excitement about and the potential of the blockchain is: Purely distributed peer-to-peer systems have a huge commercial potential as they can replace centralized systems and change whole industries due to disintermediation. Since purely distributed peer-to-peer systems may use the blockchain for achieving and maintaining integrity, the blockchain becomes important as well. However, the major fact that excites people is the disintermediation. The blockchain is only a means to an end that helps to achieve that.

Achieving integrity and trust in the best of all conditions is easy. The real challenge is to achieve integrity and trust in a distributed system in the worst of all conditions. And this is the problem that the blockchain is supposed to solve.

The problem to be solved by the blockchain is achieving and maintaining integrity in a purely distributed peer-to-peer system that consists of an unknown number of peers with unknown reliability and trustworthiness

Definitions of Blockchain

In this discussion about the blockchain, the term is used as follows:

  • • As a name for a data structure.
  • • As a name for an algorithm.
  • • As a name for a suite of technologies.
  • • As an umbrella term.

A Data Structure
A data structure is a way to organize data regardless of their concrete informational content. When used as a name for a data structure, blockchain refers to data put together into units called blocks. One can think of these blocks much like pages in a book. These blocks are connected to one another like a chain, hence the name blockchain.
The pages are connected with one another via their position in the book and via the page numbers. You can determine if someone removed a page from the book by checking whether the page numbers continue without leaving out a number. The chaining of the data blocks in the data structure is achieved by using a very special numbering system, which differs from the page numbering in ordinary books. And allows easily detect any change in the data structure.

An Algorithm
The term algorithm refers to a sequence of instructions to be completed by a computer. These instructions often involve data structures. When used as a name for an algorithm, blockchain refers to a sequence of instructions that negotiates the informational content of many blockchain-data-structures in a purely distributed peer-to-peer system.

A Suite of Technologies
When used to refer to a suite of technologies, blockchain refers to a combination of the blockchain-data-structure, the blockchain-algorithm, as well as cryptographic and security technologies that combined can be used to achieve integrity in purely distributed peer-to-peer systems.

An Umbrella Term
Blockchain can also be used as an umbrella term for purely distributed peer-to-peer systems of ledgers that utilize the blockchain-technology-suite. Note that in this context blockchain refers to a purely distributed system as a whole instead of referring to a software unit that is part of a purely distributed system.

Expanding the Definition

The blockchain is a purely distributed peer-to-peer system of ledgers that utilizes a software unit that consist of an algorithm, which negotiates the informational content of ordered and connected blocks of data together with cryptographic and security technologies in order to achieve and maintain its integrity.

The expanded definition does not say anything about Bitcoin or managing ownership of cryptographic money. This may come as a surprise since many articles and books written about the blockchain claim that its purpose is to manage ownership of digital currencies. The truth is, managing ownership of cryptographic money is a very prominent and natural application case of the blockchain, but it is not the only one. The blockchain has a wide and diverse range of applications. However, there are two reasons why the management of ownership of digital goods is the most discussed application of the blockchain. First, it is the easiest to understand and to explain. Second, it is the use case with the most impact on the economy. A huge proportion of the activities of banks, insurance companies, custodians, lawyers, courts, solicitors, and consulates are concerned with just the management of ownership rights or their enforcement. Hence, any technical innovation that could change the way we manage ownership will have a huge impact.

New Way of Managing Ownership

Have you ever thought about what makes you the owner of the things that belong to you?

One can state that proving ownership involves three elements:

  • • An identification of the owner.
  • • An identification of the object being owned.
  • • A mapping of the owner to the object.

The testimony of witnesses accomplishes all of these. Historically, eyewitnesses have often been the only source of clarifying these elements. However, relying on oral testimonies of witnesses is time-consuming. As a result, these elements have been replaced by documents issued by trustworthy entities. Nowadays, we can identify people with ID cards, birth certificates, and driver’s licenses. Serial numbers, production dates, production certificates, or a detailed description can be used to identify objects. These documents do not change once they are created because the identities of people and objects do not change.

The mapping between owners and objects is typically done with a ledger or register. This is not a document that stays constant once created. Every transfer of ownership needs to be documented in such a register because an outdated register or ledger cannot be a trustworthy witness for testifying ownership. The importance of having an up-to-date and orderly managed register has led to the development of special institutions. The more valuable certain kinds of objects are, the higher the chance for the existence of a government-regulated ledger that documents the ownership of those objects.

A witness in the form of a government-regulated ledger is the key in clarifying ownership of valuable goods. But what happens if such a ledger is damaged or destroyed? Or what happens if someone responsible for updating the ledger makes an error or forges it on purpose? In this case, the ledger does not reflect reality. This is disastrous because everybody believes that the ledger represents the truth, similar to a witness in court.

The problem of having only one ledger as the source for clarifying ownership can be solved in the same way as it has been solved for trials in court. Basing a verdict only on the testimony of one single witness is risky since this witness could be dishonest. Having more witnesses is better. The more independent witnesses who are interrogated, the higher the chance that those facts that are consistently mentioned among the majority of testimonies reflect the truth.

Applying this finding to the use of a ledger for clarifying ownership is straightforward:

  • • Instead of maintaining only one single ledger that could be forged, one should utilize a purely distributed peer-to-peer system of ledgers and clarify requests concerning ownership on that version of the reality on which the majority of peers agree.
  • • Instead of describing the current state of ownership by inventory data (i.e., by listing the current possessions of all owners), one maintains a list of all transfers of ownership in a ledger in an ongoing fashion. Every transfer of ownership is described by transaction data that clearly point out which owner hands off ownership of what item and to whom at what time. The whole history of transaction data stored in a ledger becomes an audit trail that provides evidence of how everyone achieved his or her possession.

The blockchain maintains the whole history of all transactions that have ever happened by storing their transaction data in the blockchain-data-structure in the order in which they occurred. Any transaction not being part of that history is regarded as if it never happened. Hence, adding transaction data to the blockchain-data-structure means making this transaction happen and allowing it to influence the result of using the history in order to identify the current owner.

Since transaction data contain all the information about the account that hands off ownership, the account that receives ownership, and the item and the amount to be transferred, one can reconstruct ownership information for each account as long as the whole history of transactions is available. As a result, the whole history of all transaction data is sufficient to document ownership.

Future to Look Forward to

In 1994, a computer scientist and inventor described a software system he was about to develop:

  • • Decentralization: No central authority and no single point of failure.
  • • Nondiscrimination: Everyone is free to choose his own way to connect to the system.
  • • Openness: The system will be developed in full view of everyone, encouraging maximum participation and experimentation.
  • • Universality: All the computers involved communicate with each other regardless of their hardware or location.
  • • Consensus: The system and its users will comply with standards that are created through a transparent participatory process based on consensus.

That list of properties reads like a short description of the blockchain. However, back in 1994, the blockchain did not exist. Actually, the system described by these points was the Internet, or at least Tim Berners-Lees’s vision of the Internet.

As a result of technical progress, the emergence of Internet commerce, and the rise of Internet giants nowadays, the Internet may not have very much in common with Tim Berners-Lees’s vision of the Internet formulated back in 1994. The fact that technology evolves and as a result diverges from the vision of its inventors should be kept in mind when considering the future of the blockchain.

Disintermediation
The blockchain does not destroy the role of the middleman but instead it establishes itself as a digital and strictly rule-following middleman. Replacing one middleman with another may not be a big deal, but replacing a human organization that relies on the trust of its customers with a software system that encodes trust is a huge achievement. Furthermore, replacing a cascade of middlemen with one system that orchestrates the direct interactions of peers in a secure way is indeed a huge achievement.

Automation
In order to fulfill its role as digital middleman, the blockchain relies on automation. The more the blockchain is used, the more it will replace manual tasks of established intermediaries by automated interactions between peers.

Standardization
The automated processing of transactions offered by the blockchain is based on the existence of rules and standards. Hence, the more the blockchain is used, the more transactions and interactions between contracting parties will be standardized.

Streamlining Processes
As a consequence of standardization and automation, business processes will become more transparent and streamlined. Organizations will review and analyze their business processes as a side effect of preparing themselves for transition to the blockchain.

Increased Processing Speed
Disintermediation, standardization, streamlined processes, and automation lead to a significant speed up of processes. Hence, one can expect that the more the blockchain is used, the more timely transactions and interactions between contracting parties will be executed.

Cost Reduction
The economic consequence of automation, disintermediation, and standardization is often a reduction of costs. History has shown that cost-reducing effects of automation have driven and reshaped many industries and as a result made many goods affordable to a wider range of people. The cost-reduction of intermediation could be the most noticeable long-term contribution of the blockchain from an economic point of view.

Shift Toward Trust in Protocols and Technology
The blockchain replaces trust in humans or human organizations with the trust in the unerring logic of computer-based verification and the power of consensus. This may change our perception of trust and reliability on the individual level as well as on the level of the society. Hence, the shift toward trust in security protocols and computationally attained consensus may be regarded as one of the most important long-term effects of the blockchain from a sociological point of view.

Making Trust a Commodity
Automation and standardization did not only reduce production time and costs in many industries but also made many consumer goods that were expensive in the past affordable for a huge number of people. We can expect that trust and secure initiation, execution, and settlement of business interactions will become inexpensive and ubiquitously available due to the automation and standardization introduced by the blockchain.

Conclusion

Blockchain in itself is not something completely new. All the parts of the concept of the blockchain technology were already thought of and even tried out in public, but the release of Bitcoin tied them together, set the accurately calculated democratic rules for distribution and mining of coins, adding improvements, and coming to one true state of the blockchain. All that while having no authority, no middleman, and a big narrative (2008 crisis) which grows only stronger each year and each new crisis.

The text above is the description of what the word "blockchain" means and why would we replace the current middlemen. But if you still aren't convinced, then you don't need more lengthy explanations and arguments on "why should we use it?" topic, like this one. I think, and I want to be wrong, you need to just look outside.

We rarely think what we associate ourselves with - money, political party, governments, nations, companies, some person, family etc.. We rarely think "Who has power over those things?", "Who can change the value of money or values of a nation?", "Why do we believe in those things in the first place?", "Why do I chose to associate myself with them?".

Right now our battles are not for gods, they are between them. And every year they become more meaningless, and we more desperate.

I believe that the blockchain is a step forward, one of a lot of steps. Because machines, don't rely on hope, rituals, beliefs, followers and enemies - No, machines rely only on the right order of 1's and 0's. And the blockchain technology, being only a set of rules for the machines, does have the potential to be the one to promote virtue and replace some of the current problems with better ones.

I believe it's a step to the future where would be considered "cool" and meaningful, not to be at the extremes of any spectrum: the most patriotic, right, traumatized, depressed or powerful - but achieving excellence in your thinking and craft. The future where people have more principles, and less values. The future where people do not fear death, but see that it irradiates with meaning every our breath. The future where people do not reject, rewrite or be embarrassed by our history, the history of humanity, but embrace it and learn from it. The future where people do not wish for more wishes, but simply for reality.