Behind and Beyond the Blockchain Chapter 1

We are living in a very exiting period for Blockchain and Distributed Ledger Technologies.

The evolution of the technological stack is enabling new business models and is strongly impacting how Financial Services, and all other industry sectors, are designing their future.

I have really enjoined my journey in this fascinating technology across the last 10 years.

This is the first Blog of a series of five, on my direct experience and on what I have learned studding, playing and working with these technologies.

Each Blog will contain my steps within one of the Blockchain’s main evolutions. I really hope you will enjoy following me in this amazing journey, looking forward to be surprised, like always, by what innovation will reserve us in the next years.

Blockchain 1.0 – Crypto Currencies

“At some point I became convinced there was a way to do it without any trust required at all and couldn’t resist to keep thinking about it.” 

It was October 2008 when Satoshi Nakamoto "mined" the first Bitcoin.

Like many young professionals passionate about Finance and Technology, I spent several days and nights reading about the concept of a Crypto Currency and the Technology behind it.

The Blockchain is an open, distributed ledger that can efficiently record transactions between two parties in a verifiable and permanent way. The decentralized ledger is, by definition, not owned or controlled by any central authority.

I must admit that many more nights where required to read and understand the math behind the Blockchain, but as an Engineer and a passionate of Algorithms that was a challenge I couldn’t loose.

Satoshi was looking for a fully decentralized ledger solution with no central authorities as guarantors of its Correctness. The biggest breakthrough introduced, had been the use of a Proof-of-Work (PoW) as a probabilistic solution to the Byzantine Generals Problem.

For a deep description you could refer to a famous email written by Satoshi in 2008:

https://www.mail-archive.com/[email protected]/msg09997.html

The aim of Satoshi’s algorithms was to ensure the Correctness of the Ledger, because due to the value stored, bad actors have a huge economic incentive to try and creates faults of the system.

In distributed solutions the concept of Correctness could be described in term of Liveness and Safety. If interested in more details you could read to the work of Leslie Lamport (1977) published in the paper “Proving the Correctness of Multiprocess Programs”.

To achieve Correctness in a distributed system both the properties must be satisfied.

The first point addressed by Satoshi was the introduction of a Consensus Algorithm aimed to manage Correctness of the Ledger. At highlevel, the logic applied is quite easy. In a Proof-of-Work consensus, the first announced valid block containing a solution to a predetermined computational puzzle is considered correct and the longest chain is considered the official chain.

The second point addressed by Satoshi was to define the computational puzzle to be incorporated in the Consensus Algorithms. To achieve his scope, he decided to use a Cryptographic solution based on an Elliptic Curve Digital Signature Algorithm, also known as ECDSA.

This algorithm uses an elliptic curve and a finite field to "hash" data in such a way that third parties can verify the authenticity of the hashing while the signer retains the exclusive ability to create the hash.  Satoshi used a double key signature based on a private key and a public one where the first is used in the signing algorithm and the second is used in the verification process.

I have to admit that at this point I started thinking my math skills needed some refresh and it was an optimistic thought. I had to work hard and read many books ... I really cannot remember all now ... but at the end I had an idea of how it was working.

Like result of these algorithms we could think about the Blockchain as a series of data blocks, each containing information about events that have occurred and where data verification and validation is carried out by “miners,” individuals who use cryptographic software and the processing power of their computers to confirm the activity.

In each Block, data are hashed using cryptographic algorithms. The hash is then stored in the next Block which makes it nearly tamper proof.

Each data Block contains a reference to the previous block, the list of included transactions including the transaction summary which is created by hashing all the transactions in the block, a time stamp, and optionally a cryptographic proof that ensures that the nodes stay true.

Blocks are then stored together into a chain and broadcasted across to all the nodes of the network. Each node validates the blocks and comes to a consensus about the block’s validity before the block is added to the decentralized ledger.

This Proof-of-Work Consensus makes difficult for bad nodes and fraudsters to hack the system and force faults until the majority of nodes is safe, this is the base for trustiness and integrity without the need for a central authority.

In the following years the original Bitcoin’s Blockchain designed by Satoshi has inspired a wide range of Blockchains and Distributed Ledger Technologies. New form of Consensus has been introduced to ensure the Correctness of the Ledger and new Cryptographic Algorithms have designed.

Anyway, for about seven years the Blockchain has been relegated to the role of Distributed Ledger for Crypto Currencies.

After several months and long nights playing around, reading documents and coding, I had closed my interesting experience with Bitcoins and the Blockchain fully satisfied, thinking that was my last time in the crypto world.

Anyway just few years later, something made me change my mind, but this is another story ....