Few things have spurred as much interest in the ICT sector in recent times as Blockchain technology. It stems from an article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” published on May 24, 2008 by a certain Satoshi Nakamoto , along with a computer application launched a few months later (November 1, 2008).
Whether or not Satoshi Nakamoto (whose identity remains mysterious, but considering the work done, may well have been more than one person) realized that his work was going to cause an “earthquake”, we really don’t know. Technologically speaking, Bitcoin didn’t use anything that hadn’t already been used before. However, what was original was the way in which it combined everything and, above all, its purpose.
Nakamoto was looking for a way to prevent an information system that handled digital financial transactions from using the same currency unit twice (double-spend) without going through a trusted third party. This trust lays at the heart of the financial system. To solve the double-spend problem, Nakamoto proposed to use a consensus mechanism or Proof-of-Work (POW) approach among network participants, so that transactions are approved by a majority consensus. For this, Nakamoto launched a virtual currency called Bitcoin and gave it some peculiar characteristics:
• Bitcoin supply was limited to 21 million coins, created at a fixed rate.
• Bitcoin generation was linked to the Proof-of-Work or “mining” process, harking back to the time when precious metal reserves – obtained through mining – were used to fix currency values.
• Ownership rights for a certain number of Bitcoin depended on knowing cryptographic keys, without requiring any kind of registration system.
These characteristics gave Bitcoin an anti-inflationary nature, with a value independent from central banks and countries’ macro-economic parameters (such as GDP, unemployment, inflation, etc.), freely accessible to all, and quickly and easily operated over the Internet. It corresponded to implementing the “DISINTERMEDIATION” paradigm (increasingly relevant of late), applied to the financial world.
From a technological point of view, Bitcoin is regarded as one of the best software applications ever to be built. It features:
Use of cryptographic functions
• Hashing. Consists of obtaining a sequence of fully predictable fixed-length characters from certain data. It is used to check that the Bitcoin information has not been altered.
• Asymmetric cryptography. ECDSA Elliptic Curve algorithms are used, with 256-bit private keys. The public key is derived from the private key and used to create the user address in the Bitcoin system.
• Merkle tree. This is built from data at the base of a pyramid in which every node is the result of applying a hash function to lower nodes until the root node, or “Merkle Root”, is reached. It guarantees highly efficient data verification.
Chain of data blocks
Generation of a chain of data blocks that cannot be changed. Each block is linked to its predecessor through a cryptographic glue that prevents any data (no matter how small) from being modified without detection.
Distribution and replication of the Blockchain to users. When starting up for the first time, the Bitcoin client will try to discover other peers in the system (Peer-to-peer network). When it finds one, it requests a full or partial copy of the Bitcoin block chain, which is verified to make sure it is complete. From this point, the client can start to operate.
The Bitcoin protocol and its software are published as MIT-licensed open code (Open Source). Furthermore, it is a free license (Free Source) without copyleft. Any programmer can download, make changes and use it to create their own application, without restrictions.
While, technically speaking, the ideas are simple, this is the first time they have been used in this way. Such conceptual simplicity is possibly the reason for Bitcoin’s rapid growth. In little more than ten years, Blockchain has gone from a proposal to implement a digital currency to an economic and social revolution called the Internet of Value. To explain this concept, I’ll need to write another blog post further down the line.
Cibernos, one of Teldat’s partners, is a consultancy with a wide range of products and services including, among many others, the Internet of Value. We provide Teldat with specialized Wi-Fi solutions for its product suite for mobile environments and corresponding SaaS.