This is the second part of our ‘Making Sense of Blockchain’ blog post series – you can read part 1 on ‘6 Blockchain Principles’ here. This article is based on the original post by Dominic Perini here.
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Blockchain: Myths vs Realities
With so much hype surrounding blockchain, we separate the reality from the myths to ensure delivery of the ROI and competitive advantage that you need.
It’s not our aim here to discuss the data structure of blockchain itself, issues like those of transactions per second (TPS) or questions such as ‘what’s the best Merkle tree solution to adopt?’. Instead, we shall examine the state of maturity of blockchain technology and its alignment with the core principles that underpin a distributed ledger ecosystem.
7 Founding principles of blockchain
Blockchain technology aims to embrace the following high-level principles:
- ‘Workable’ consensus
- Distribution and resilience
- Transactional automation (including ‘smart contracts’)
- Transparency and Trust
- A link to the external world
1. Immutability of history
In an ideal world it would be desirable to preserve an accurate historical trace of events, and make sure this trace does not deteriorate over time, whether through natural events, human error or by the intervention of fraudulent actors. Artefacts produced in the analogue world face alterations over time while in the digital world the quantized / binary nature of stored information provides the opportunity for continuous corrections to prevent deterioration that might occur over time.
Writing an immutable blockchain aims to retain a digital history that cannot be altered over time. This is particularly useful when it comes to assessing the ownership or the authenticity of an asset or to validate one or more transactions.
We should note that, on top of the inherent immutability of a well-designed and implemented blockchain, hashing algorithms provide a means to encode the information that gets written in the history so that the capacity to verify a trace/transaction can only be performed by actors possessing sufficient data to compute the one-way cascaded encoding/encryption. This is typically implemented on top of Merkle trees where hashes of concatenated hashes are computed.
Legitimate questions can be raised about the guarantees for indefinitely storing an immutable data structure:
- If this is an indefinitely growing history, where can it be stored once it grows beyond the capacity of the ledgers?
- As the history size grows (and/or the computing power needed to validate further transactions increases) this reduces the number of potential participants in the ecosystem, leading to a de facto loss of decentralisation. At what point does this concentration of ‘power’ create concerns?
- How does verification performance deteriorate as the history grows?
- How does it deteriorate when a lot of data gets written on it concurrently by users?
- How long is the segment of data that you replicate on each ledger node?
- How much network traffic would such replication generate?
- How much history is needed to be able to compute a new transaction?
- What compromises need to be made on linearisation of the history, replication of the information, capacity to recover from anomalies and TPS throughput?
Further to the above questions, how many replicas converging to a specific history (i.e. consensus) are needed for it to carry on existing? And in particular:
- Can a fragmented network carry on writing to their known history?
- Is an approach designed to ‘heal’ any discrepancies in the immutable history of transactions by rewarding the longest fork, fair and efficient?
- Are the deterrents strong enough to prevent a group of ledgers forming their own fork that eventually reaches wider adoption?
Furthermore, a new requirement to comply with the General Data Protection Regulations (GDPR) in Europe and ‘the right to be forgotten’ introduces new challenges to the perspective of keeping permanent and immutable traces indefinitely. This is important because fines for breaches of GDPR are potentially very severe. The solutions introduced so far effectively aim at anonymising the information that enters the immutable on-chain storage process, while sensitive information is stored separately in support databases where this information can be deleted if required. None of these approaches has yet been tested by the courts.
The challenging aspect here is to decide upfront what is considered sensitive and what can safely be placed on the immutable history. A wrong choice can backfire at a later stage in the event that any involved actor manages to extract or trace sensitive information through the immutable history.
Immutability represents one of the fundamental principles that motivate the research into blockchain technology, both private and public. The solutions explored so far have managed to provide a satisfactory response to the market needs via the introduction of history linearisation techniques, one-way hashing encryptions, merkle trees and off-chain storage, although the linearity of the immutable history comes at a cost (notably transaction volume).
2. Decentralisation of control
One of the reactions following the 2008 global financial crisis was against over-centralisation. This led to the exploration of various decentralised mechanisms. The proposition that individuals would like to enjoy the freedom to be independent of a central authority gained in popularity. Self-determination, democratic fairness and heterogeneity as a form of wealth are among the dominant values broadly recognised in Western (and, increasingly, non-Western) society. These values added weight to the movement that introducing decentralisation in a system is positive.
With full decentralisation, there is no central authority to resolve potential transactional issues for us. Traditional, centralised systems have well developed anti-fraud and asset recovery mechanisms which people have become used to. Using new, decentralised technology places a far greater responsibility on the user if they are to receive all of the benefits of the technology, forcing them to take additional precautions when it comes to handling and storing their digital assets.
There’s no point having an ultra-secure blockchain if one then hands over one’s wallet private key to an intermediary whose security is lax: it’s like having the most secure safe in the world then writing the combination on a whiteboard in the same room.
Is the increased level of personal responsibility that goes with the proper implementation of a secure blockchain a price that users are willing to pay? Or, will they trade off some security in exchange for ease of use (and, by definition, more centralisation)?
The consistent push towards decentralised forms of control and responsibility has brought to light the fundamental requirement to validate transactions without a central authority; known as the ‘consensus’ problem. Several approaches have grown out of the blockchain industry, some competing and some complementary.
There has also been a significant focus on the concept of governance within a blockchain ecosystem. This concerns the need to regulate the rates at which new blocks are added to the chain and the associated rewards for miners (in the case of blockchains using proof of work (POW) consensus methodologies). More generally, it is important to create incentives and deterrent mechanisms whereby interested actors contribute positively to the healthy continuation of chain growth.
Besides serving as an economic deterrent against denial of service and spam attacks, POW approaches are amongst the first attempts to automatically work out, via the use of computational power, which ledgers/actors have the authority to create/mine new blocks. Other similar approaches (proof of space, proof of bandwidth etc) followed, however, they all suffer from exposure to deviations from the intended fair distribution of control. Wealthy participants can, in fact, exploit these approaches to gain an advantage via purchasing high performance (CPU / memory / network bandwidth) dedicated hardware in large quantities and operating it in jurisdictions where electricity is relatively cheap. This results in overtaking the competition to obtain the reward, and the authority to mine new blocks, which has the inherent effect of centralising the control. Also, the huge energy consumption that comes with the inefficient nature of the competitive race to mine new blocks in POW consensus mechanisms has raised concerns about its environmental impact and economic sustainability.
Proof of Stake (POS) and Proof of Importance (POI) are among the ideas introduced to drive consensus via the use of more social parameters, rather than computing resources. These two approaches link the authority to the accumulated digital asset/currency wealth or the measured productivity of the involved participants. Implementing POS and POI mechanisms, whilst guarding against the concentration of power/wealth, poses not insubstantial challenges for their architects and developers.
More recently, semi-automatic approaches, driven by a human-curated group of ledgers, are putting in place solutions to overcome the limitations and arguable fairness of the above strategies. The Delegated Proof of Stake (DPOS) and Proof of Authority (POA) methods promise higher throughput and lower energy consumption, while the human element can ensure a more adaptive and flexible response to potential deviations caused by malicious actors attempting to exploit a vulnerability in the system.
4. Distribution and resilience
Apart from a decentralising authority, control and governance, blockchain solutions typically embrace a distributed peer to peer (P2P) design paradigm. This preference is motivated by the inherent resilience and flexibility that these types of networks have introduced and demonstrated, particularly in the context of file and data sharing.
A centralised network, typical of mainframes and centralised services is clearly exposed to a ‘single point of failure’ vulnerability as the operations are always routed towards a central node. In the event that the central node breaks down or is congested, all the other nodes will be affected by disruptions.
Decentralised and distributed networks attempt to reduce the detrimental effects that issues occurring on a node might trigger on other nodes. In a decentralised network, the failure of a node can still affect several neighbouring nodes that rely on it to carry out their operations. In a distributed network the idea is that the failure of a single node should not impact significantly any other node. In fact, even when one preferential/optimal route in the network becomes congested or breaks down entirely, a message can reach the destination via an alternative route. This greatly increases the chance of keeping a service available in the event of failure or malicious attacks such as a denial of service (DOS) attack.
Blockchain networks where a distributed topology is combined with a high redundancy of ledgers backing a history have occasionally been declared ‘unhackable’ by enthusiasts or, as some more prudent debaters say, ‘difficult to hack’. There is truth in this, especially when it comes to very large networks such as that of Bitcoin. In such a highly distributed network, the resources needed to generate a significant disruption are very high, which not only delivers on the resilience requirement but also works as a deterrent against malicious attacks (principally because the cost of conducting a successful malicious attack becomes prohibitive).
Although a distributed topology can provide an effective response to failures or traffic spikes, you need to be aware that delivering resilience against prolonged over-capacity demands or malicious attacks requires adequate adapting mechanisms. While the Bitcoin network is well positioned, as it currently benefits from a high capacity condition (due to the historical high incentive to purchase hardware by third-party miners), this is not the case for other emerging networks as they grow in popularity. This is where novel instruments, capable of delivering preemptive adaptation combined with back pressure throttling applied to the P2P level, can be of great value.
Distributed systems are not new and, whilst they provide highly robust solutions to many enterprise and governmental problems, they are subject to the laws of physics and require their architects to consider the trade-offs that need to be made in their design and implementation (e.g. consistency vs availability).
In order to sustain a coherent, fair and consistent blockchain and surrounding ecosystem, a high degree of automation is required. Existing areas with a high demand for automation include those common to most distributed systems. For instance; deployment, elastic topologies, monitoring, recovery from anomalies, testing, continuous integration, and continuous delivery. In the context of blockchains, these represent well-established IT engineering practices. Additionally, there is a creative R&D effort to automate the interactions required to handle assets, computational resources and users across a range of new problem spaces (e.g. logistics, digital asset creation and trading).
The trend of social interactions has seen a significant shift towards scripting for transactional operations. This is where smart contracts and constrained virtual machine (VM) interpreters have emerged – an effort pioneered by the Ethereum project.
The ability to define how to operate an asset exchange, by which conditions and actioned following which triggers, has attracted many blockchain enthusiasts. Some of the most common applications of smart contracts involve lotteries, trade of digital assets and derivative trading. While there is clearly exciting potential unleashed by the introduction of smart contracts, it is also true that it is still an area with a high entry barrier. Only skilled developers that are willing to invest time in learning Domain Specific Languages (DSL) have access to the actual creation and modification of these contracts.
The challenge is to respond to safety and security concerns when smart contracts are applied to edge case scenarios that deviate from the ‘happy path’. If badly-designed contracts cannot properly rollback or undo a miscarried transaction, their execution might lead to assets being lost or erroneously handed over to unwanted receivers.
Another area in high need for automation is governance. Any blockchain ecosystem of users and computing resources requires periodic configurations of the parameters to carry on operating coherently and consensually. This results in a complex exercise of tuning for incentives and deterrents to guarantee the fulfilment of ambitious collaborative and decentralised goals. The newly emerging field of ‘blockchain economics’ (combining economics; game theory; social science and other disciplines) remains in its infancy.
Clearly, the removal of a central ruling authority produces a vacuum that needs to be filled by an adequate decision-making body, which is typically supplied with automation that maintains a combination of static and dynamic configuration settings. Those consensus solutions referred to earlier which use computational resources or social stackable assets to assign the authority, not only to produce blocks but also to steer the variable part of governance, have succeeded in filling the decision making gap in a fair and automated way. Successively, the exploitation of flaws in the static element of governance has hindered the success of these models. This has contributed to the rise in popularity of curated approaches such as POA or DPOS, which not only bring back a centralised control but also reduce the automation of governance.
We expect this to be one of the major areas where blockchain has to evolve in order to succeed in getting widespread market adoption.
6. Transparency and Trust
In order to produce the desired audience engagement for blockchain and eventual mass adoption and success, consensus and governance mechanisms need to operate transparently. Users need to know who has access to what data so that they can decide what can be stored and possibly shared on-chain. These are the contractual terms by which users agree to share their data. As previously discussed users might be required to exercise the right for their data to be deleted, which typically is a feature delivered via auxiliary, ‘off-chain’ databases. In contrast, only hashed information, effectively devoid of its meaning, is preserved permanently on-chain.
Given the immutable nature of the chain history, it is important to decide upfront what data should be permanently written on-chain and what gets written off-chain. The users should be made aware of what data gets stored on-chain and with whom it could potentially be shared. Changing access to on-chain data or deleting it goes against the fundamentals of immutability and therefore is almost impossible. Getting that decision wrong at the outset can significantly affect the cost and usability (and therefore likely adoption) of the particular blockchain in question.
Besides transparency, trust is another critical feature that users legitimately seek. Trust has to go beyond the scope of the people involved as systems need to be trusted as well. Every static element, such as an encryption algorithm, the dependency on a library, or a fixed configuration, is potentially exposed to vulnerabilities.
7. Link to the external world
The attractive features that blockchain has brought to the internet market would be limited to handling digital assets unless there was a way to link information to the real world. It is safe to say that there would be less interest if we were to accept that a blockchain can only operate under the restrictive boundaries of the digital world, without connecting to the analog real world in which we live.
Technologies used to overcome these limitations including cyber-physical devices such as sensors for input and robotic activators for output, and in most circumstances, people and organisations. As we read through most blockchain white papers we occasionally come across the notion of the Oracle, which in short, is a way to name an input coming from a trusted external source that could potentially trigger/activate a sequence of transactions in a Smart Contract or which can otherwise be used to validate some information that cannot be validated within the blockchain itself.
Bitcoin and Ethereum, still the two dominant projects in the blockchain space are viewed by many investors as an opportunity to diversify a portfolio or speculate on the value of their respective cryptocurrency. The same applies to a wide range of other cryptocurrencies with the exception of fiat pegged currencies, most notably Tether, where the value is effectively bound to the US dollar. Conversions from one cryptocurrency to another and to/from fiat currencies are normally operated by exchanges on behalf of an investor. These are again peripheral services that serve as a link to the external physical world.
Besides oracles and cyber-physical links, interest is emerging in linking smart contracts together to deliver a comprehensive solution. Contracts could indeed operate in a cross-chain scenario to offer interoperability among a variety of digital assets and protocols. Although attempts to combine different protocols and approaches have emerged, this is still an area where further R&D is necessary in order to provide enough instruments and guarantees to developers and entrepreneurs. The challenge is to deliver cross-chain functionalities without the support of a central governing agency/body.
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