Satoshi's blockchain: Problems, Solutions and Challenges
I have read Satoshi Nakamoto 2008 paper "electronic Cash System" (Bitcoin Paper) 6 times and amazed by its simplicity and beauty. Bitcoin as the first BlockChain example opening the door for the next generation of human society evolution. Individual's values can be transferred with freedom to other parties. The integrity and trust can be ensured!
While people are talking most on the up and down of daily digital currency price, the essential part we need to focus is the core of the blockchain, the problems the blockchain tried to solve, the solutions and the challenges.
(1) Trust
Now "trading" or "transaction" are essential, basically individual's value needs to be transferred from one end to another and exchange for something meaningful. How do we trust the "transaction" is valid without a third-party trust entity?
"We started with the usual framework of coins made from digital signatures, which provides strong control of ownership... they'll generate the longest chain and outpace attackers" - Satoshi.
By signing the public key of the next owner with the transaction, so only the right owner can receive the transaction by using its own private key. By having the owner's signature, we ensure that the value belongs to the original owner. The longest chain is the value chain to be trusted because it is voted by the most CPU power of the network.
Challenge: Bitcoin address is not easy to operate, and when you lose private key or forced to give out the private key to somebody else, you lose the money.
(2) Double Spending Issue
How can a payee verify that one of the owners did not double-spend the coin?
"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" - Satoshi.
Every transaction needs to be placed in a block and confirmed by the network.The second spending shall be rejected on the confirmation process because of the immutable universal ledger.
Challenge: One merchant(e.g. a coffee shop) needs to wait for 1 hour (6 confirmations) for verify if the money has truly come, this is not scalable for payment.
(3) Proof of work
How to ensure the transaction is recorded?
"Each timestamp includes the previous timestamp in its hash, forming a chain, with each additional timestamp reinforcing the ones before it" - Satoish
The key solution is to hash the items and solve the puzzle. By doing with a nonce(so no short-cut for the solution and only CPU power with many trials) together with previous hash to generate a pre-defined string format pattern (a few "0"s at the beginning) to prove the block can be added into the chain. The validation with a node is relative easy and can be done in memory.
Challenge: Energy - It was expected that 35 terawatt hours (TWh) used by computers as they crunch through the mathematics required to mine new bitcoins is starting to become a concern. More than 150 individual countries in the world consume less energy annually.
(4) Incentive and Coins
Problem: How to give right incentive policy and how to prevent attackers?
"the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block...The incentive can also be funded with transaction fees" - Satoshi
The miners are the people who maintain the blockchain, and the incentives are for these miners to do their job. And the coins are the incentive for the miners. And these coins are worth dollars.
I think this is the magic of the design which often be overlooked by prevent attackers to the network :"(Attackers) ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth".
Challenge: The coins are with values and how to exchange these coins to the fiat currency and also exchange them self among different blockchains.
(5) Summary
Looked back to all technologies used by Satoish such as Hashcash, Merkle Tree, TimeStamp Server, basically:
a. Because it is hashed, so it is not reversed, so this protect the security.
b. Because it is time stamped, so it is unique at one time, so the value is with the time dimension, imagine if we shall have 100+ years of all transactions in the blockchain and all transactions are not changeable, this vision is great.
DAPP (decentralized apps) shall bring the new wave of applications together with IOT and AI power individual intelligence while BlockChain enable the transactions of each other.
Decentralization is a social change. WallStreet made money every year at 7% while GDP is growing <3%, why rich people are richer and CEOs gets more and more money than the company employees? Using blockchain maybe help to solve some critical social problems and even narrow the rich-poor difference?
Look around, these new techs in Blockchain are continuing Satoish's origina vision but with various more use case supported and function improvement (e.g. scalability):
- Ethereum - a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.
- Neblio - an open source blockchain platform, which is built to offer business blockchain solutions.
- ICON - a huge and revolutionizing platform, which would link different blockchain networks with each other via smart contract.
- MatrixAINetwork - to outperform the presently leading payments and deliver a record of at least 1M transactions each second.
- Civic - an identity management service that allows you to protect and authorize the use of your identity in real time
- NEM - calls itself a better way to implement an enterprise-grade blockchain data system that minimizes complexity and implements seamlessly with existing systems
- LitePay - connect to the world's first borderless payment network — Litecoin
- Petro - Venezuela’s new digital currency while facing crashing economy and 400% inflation problem. It has decided to sought-after cryptocurrencies, and transform its national fiat currency into a global digital token
(6) Are we there?
We have to admit, even with the great potential, Ethereum founder Vitalik Buterin asked these questions for reality check:
- How many unbanked people have we banked?
- How much censorship-resistant commerce for the common people have we enabled?
- How many Dapps [distributed applications] have we created that have substantial usage?
- How much value is stored in smart contracts that actually do anything interesting?
- How many Venezuelans have actually been protected by us from hyperinflation?
- How much actual usage of micropayment channels is there actually in reality?
Of course, there are long ways for blockchain to get to the mature and useful stage. Regulations are happening in many countries to ensure the health growth.
But, I strongly believe BlockChain shall bring huge social change beneficial to bottom individuals and make the society much more efficient and trustful!
Tapscott family wrote in their book "Blockchain Revolution" - "The first generation of the digital revolution brought up the internet of information. The second generation - powered by blockchain technology - is bringing us the internet of value". Well said!
Thanks to Satoshi!