Blockchain - Discussion

From the Invisible Hand to the Visible Hand

Morgan Peck:

A Nakamoto blockchain, then, becomes more secure as more people participate in the network. But why would they? In the case of Bitcoin, it’s because they are paid to do it. Every time a block gets solved, a virgin transaction is created with a handful of newly minted bitcoins signed over to the first miner who completed the work.

In old security models, you tried to lock out all of the greedy, dishonest people. Bitcoin, on the other hand, welcomes everyone, fully expecting them to act in their own self-interest, and then it uses their greed to secure the network.

“This is, I think, the main contribution,” says Ittay Eyal, a computer scientist at Cornell who studies Bitcoin along with other decentralized networks. “Bitcoin causes an attacker to be better off by playing along than by attacking it. The incentive system leads a lot of people to contribute resources toward the welfare of the system.”" (http://spectrum.ieee.org/computing/networks/the-future-of-the-web-looks-a-lot-like-bitcoin)

Disintermediating Banking and User Accounts

Noah Thorp:

"The revolution in progress can generally be described as “disintermediation”. It is the transference of trust, data, and ownership infrastructure from banks and businesses into distributed peer to peer network protocols.

A distributed “world wide ledger” is one of several technologies transforming our highly centralized structures. This technology, cryptically named the “block chain” is embodied in several distributed networks such as Bitcoin, Eris Industries DB, and Ethereum.

Through an encrypted world wide ledger built on a block chain, trust in the systems maintained by third party human institutions can be replaced by trust in math. In block chain systems, account identity and transactions are cryptographically verified by network “consensus” rather than by trust in a single third party.

Currencies are not the only assets that can be traded on block chain protocols. Distributed user accounts are the most basic element of the cryptographic network infrastructure. The next wave of innovation is in the transference of asset ownership of all types.

For example, ColoredCoins can be used to distribute asset ownership information via meta-data associated with low cost bitcoin transactions. In practice, ColoredCoins are used to represent and trade fractional ownership of art on Artlery.com and profit sharing rights of co-authored code at Assembly.com. Although ColoredCoins leverage the bitcoin protocol, other block chains authored by Stellar, Eris Industries, and Ethereum are quickly gaining momentum to offer similar functionality.

Whereas block chain protocols decentralize transactions, encrypted peer to peer file sharing networks promise to remove the need for centralized databases. In this area technologies like Inter Planetary File System (IPFS) and Maidsafe represent the edge of the innovating wave.

The world looks different when you combine distributed ledgers, file systems, cryptographic trust, and financial transactions. In this world interpersonal human trust is still essential — but opportunities for corruption are reduced.

As our infrastructure shifts, our broad stroke categorization of libertarian, socialist, and capitalist systems is under heavy strain. Republican pot growers will leverage crypto currency to provide protections that banks are afraid to provide. Intentional communities and cooperatives will embrace cryptographically enabled equity structures to power “off the grid” solar energy markets using financial instruments previously wielded exclusively by venture capitalists.

The protocol shift towards decentralization is revitalizing the libertarian, collaborative, and self-organizing memes that circulated at the dawn of the internet revolution. As the sharing economy enables peer to peer transactions of underutilized assets at scale, cooperatives are cool again. Holacracy and co-working memes have become water cooler conversations instead of fringe encampments. This contemporary ecology grows on the rich meme humus of Norbert Wiener (Cybernetics), John Perry Barlow (EFF), Dee Hock (Visa’s chaordic founder), Kevin Kelly, Stuart Brand, Howard Rheingold, The Whole Earth Catalogue, The Well, Wired Magazine, Burning Man’s 10 Principles, and the Long Now Foundation.

...

There are a couple important words for understanding these new structures. Let’s review them.

“Autonomous” means running on its own without intervention. A web hosted weather prediction service could run with minimal intervention. Self-driving cars are also autonomous.

“Smart contracts” are like spreadsheet scripts for a distributed ledger. Where a block chain defines the distributed immutable ledger of transactions, smart contract scripts define programmatic actions that will be triggered by block chain transactions. Smart contracts can legally signify buying and selling of equity, voting, and entering into contracts.

The earliest breakthroughs in merging block chains and smart contracts is promised by the Ethereum Foundation. Ethereum raised over $15 million in the second largest crowd equity fund to date. Their solution provides the first full featured programming environment that runs distributed applications on a block chain.

Imagine that you created a lightweight corporation that automates all of its contract signing, profit distribution, and financial transactions. This entity stores its data and executes its code on a distributed peer to peer network. It is “autonomous” because it can run on its own after setup. It manages its bank account and transactions via a distributed network such as Bitcoin. Its accounts are owned by a corporate legal entity registered with the state, but it has no employees. Surprise, you just invented a Distributed Autonomous Corporation (DAC).

The first Distributed Autonomous Corporations (DACs) are likely to be escrow and gambling services. As we bring more of science fiction into being, DACs may control financial decision making for self-driving car rentals, drone services, personal internet of things networks, and unmanned corporations. Consider: Foxconn, the world’s largest Chinese manufacturer, is manufacturing 30k robots per year; the CEO of Baidu has proposed a state level Chinese initiative to develop AI in an effort similar to the Apollo Space program. The smarter smart contract code becomes the more autonomous organizational decision making will occur.

The biggest concern is one of control. Distributed or not, autonomous entities will make many decisions representing trade offs of value. It’s not a question of if machines will make decisions for us, it’s a question of what decisions and under what conditions. For instance, if a self-driving car has a choice of crashing into a school bus or driving the passengers off a cliff which should it choose? Programmers are coding ethical decisions like this at this very moment.

As David Nordfors, chair of the Innovation For Jobs Summit says “If we care more about tasks than about people, then tech will replace people. If we care more about people than about tasks, then tech will leverage people.” There are many ways in which technological innovation can disrupt unemployment and machines can work for society rather than society for machines — but we have to want that.

A new legal and technological entity called a Distributed Collaborative Organization represents a new way of organizing multi-stakeholder cooperatives at scale. Could the difference between dystopia and protopia pivot on the structure of ownership?

...

Imagine regularly entering into ad hoc equity relationships with hundreds of collaborators. Distributed Collaborative Organizations (DCOs) are an example of collective peer to peer ownership suitable for ecosystems of stakeholders. Legal innovations for DCOs, pioneered by companies like Swarm.Fund, use carefully crafted legal structures to enable crowd funded investment in portfolios of private companies by non-accredited investors. The sociological outcome is the empowerment of multi stakeholder cooperatives at scale.

Meanwhile, dynamic governance structures are evolving to compliment the unboxing of collaboration into dynamic equity arrangements. These newly ascendant species of dynamically governed entities include Holacracy, Sociocracy, Podulism, and the working practices of SEMCO, Gore, Valve, and Morning Star.

Dynamic governance systems still have not fully related to the emerging crypto economic layer. However, distributed peer to peer networks, adaptive organizations, and currency protocols are co-evolving." (https://medium.com/@noahthorp/how-society-will-be-transformed-by-crypto-economics-b02b6765ca8c)

Why the Bitcoin ledger is potentially so important

Brett Scott:

"Banks are information intermediaries. Gone are the days of the merchant dumping a hoard of physical gold into the vaults for safekeeping. Nowadays, if you have ‘£350 in the bank’, it merely means the bank has recorded that for you in their data centre, on a database that has your account number and a corresponding entry saying ‘350’ next to it. If you want to pay someone electronically, you essentially send a message to your bank, identifying yourself via a pin or card number, asking them to change that entry in their database and to inform the recipient’s bank to do the same with the recipient’s account.

Thus, commercial banks collectively act as a cartel controlling the recording of transaction data, and it is via this process that they keep score of ‘how much money’ we have. To create a secure electronic currency system that does not rely on these banks thus requires three interacting elements. Firstly, one needs to replace the private databases that are controlled by them. Secondly, one needs to provide a way for people to change the information on that database (‘move money around’). Thirdly, one needs to convince people that the units being moved around are worth something.

To solve the first element, Bitcoin provides a public database, or ledger, that is referred to reverently as the blockchain. There is a way for people to submit information for recording in the ledger, but once it gets recorded, it cannot be edited in hindsight. If you’ve heard about bitcoin ‘mining’ (using ‘hashing algorithms’), that is what that is all about. A scattered collective of mercenary clerks essentially hire their computers out to collectively maintain the ledger, baking (or weaving) transaction records into it.

Secondly, Bitcoin has a process for individuals to identify themselves in order to submit transactions to those clerks to be recorded on that ledger. That is where public-key cryptography comes in. I have a public Bitcoin address (somewhat akin to my account number at a bank) and I then control that public address with a private key (a bit like I use my private pin number to associate myself with my bank account). This is what provides anonymity.

The result of these two elements, when put together, is the ability for anonymous individuals to record transactions between their bitcoin accounts on a database that is held and secured by a decentralised network of techno-clerks (‘miners’).

...

A deeper movement is developing. It focuses not only on Bitcoin’s potential to disrupt commercial banks, but also on the more general potential for decentralised blockchains to disrupt other types of centralised information intermediaries.

Copyright authorities, for example, record people’s claims to having produced a unique work at a unique date and authoritatively stamp it for them. Such centralised ‘timestamping’ more generally is called ‘notarisation’. One non-monetary function for a Bitcoin-style blockchain could thus be to replace the privately controlled ledger of the notary with a public ledger that people can record claims on. This is precisely what Proof of Existence and Originstamp are working on.

And what about domain name system (DNS) registries that record web addresses? When you type in a URL like www.e-ir.info, the browser first steers you to aDNS registry like Afilias, which maintains a private database of URLs alongside information on which IP address to send you to. One can, however, use a blockchain to create a decentralised registry of domain name ownership, which is what Namecoin is doing. Theoretically, this process could be used to record share ownership, land ownership, or ownership in general (see, for example, Mastercoin’s projects).

The biggest information intermediaries, though, are often hidden in plain sight. What is Facebook? Isn’t it just a company that you send information to, which is then stored in their database and subsequently displayed to you and your friends? You log in with your password (proving your identity), and then can alter that database by sending them further messages (‘I’d like to delete that photo’). Likewise with Twitter, Dropbox, and countless other web services.

Unlike the original internet, which was largely used for transmission of static content, we experience sites like Facebook as interactive playgrounds where we can use programmes installed in some far away computer. In the process of such interactivity, we give groups like Facebook huge amounts of information. Indeed, they set themselves up as information honeytraps in order to create a profit-making platform where advertisers can sell you things based on the information. This simultaneously creates a large information repository for authorities like the NSA to browse. This interaction of corporate power and state power is inextricably tied to the profitable nature of centrally held data.

But what if you could create interactive web services that did not revolve around single information intermediaries like Facebook? That is precisely what groups like Ethereum are working towards. Where Bitcoin is a way to record simple transaction information on a decentralised ledger, Ethereum wants to create a ‘decentralised computational engine’. This is a system for running programmes, or executing contracts, on a blockchain held in play via a distributed network of computers rather than Mark Zuckerberg’s data centres.

It all starts to sounds quite sci-fi, but organisations like Ethereum are leading the charge on building ‘Decentralised Autonomous Organisations’, hardcoded entities that people can interact with, but that nobody in particular controls. I send information to this entity, triggering the code and setting in motion further actions. As Bitshares describes it, such an organisation “has a business plan encoded in open source software that executes automatically in an entirely transparent and trustworthy manner.”" (http://furtherfield.org/features/articles/visions-techno-leviathan-politics-bitcoin-blockchain)

The Revolution will not be based on a global receipt depository!

Alan Avans:

You don't have to be an expert to see that the basic banking software, B2B trading software, corporate treasury stations etc. have been available in largely off-the-shelf form for almost three decades And more if you count that time when ERP existed as a conceptual glint in SAP's eye before it took on the frankenstein discombobulation surrounding legacy systems and siloed business processes.

Creditary relations are social relations, and this is something that in one way or another those who choose to weigh their anchor in the Blockchain continually miss. The kind of horizontal creditary relations that would conform to standards of P2P-edness, being social relations, require social organization and the very opposite of anonymity. What is required is a way to build the road as one travels, and I suspect that road will not lead to the Blockchain, much less be a fork in the Blockchain.

• I do not believe that the Blockchain is useless. It's just no place to anchor a currency since ultimately the resiliency of a creditary system is predicated on agreed definitions of creditworthyness and access to (but not necessarily ownership of) productive capacity. Receipts are not credit and receipts cannot serve as a basis for currency without duplicating much the same relation as exists between the horizontal and vertical relations that exist between governments, central banks and the commercial banking sector today. The highest and best use of a receipt is that of a spent ticket or of a cleared invoice."

(fb, January 2015)

The Political Vision behind the ledger

Brett Scott:

"When asked about why Bitcoin is superior to other currencies, proponents often point to its 'trustless' nature. No trust needs be placed in fallible ‘governments and corporations’. Rather, a self-sustaining system can be created by individuals following a set of rules that are set apart from human frailties or intervention. Such a system is assumed to be fairer by allowing people to win out against those powers who can abuse rules.

The vision thus is not one of bands of people getting together into mutualistic self-help groups. Rather, it is one of individuals acting as autonomous agents, operating via the hardcoded rules with other autonomous agents, thereby avoiding those who seek to harm their interests.

Note the underlying dim view of human nature. While anarchist philosophers often imagine alternative governance systems based on mutualistic community foundations, the ‘empowerment’ here does not stem from building community ties. Rather it is imagined to come from retreating from trust and taking refuge in a defensive individualism mediated via mathematical contractual law.

It carries a certain disdain for human imperfection, particularly the imperfection of those in power, but by implication the imperfection of everyone in society. We need to be protected from ourselves by vesting power in lines of code that execute automatically. If only we can lift currency away from manipulation from the Federal Reserve. If only we can lift Wikipedia away from the corruptible Wikimedia Foundation.

Activists traditionally revel in hot-blooded asymmetric battles of interest (such as that between StrikeDebt! and the banks), implicitly holding an underlying faith in the redeemability of human-run institutions. The Bitcoin community, on the other hand, often seems attracted to a detached anti-politics, one in which action is reduced to the binary options of Buy In or Buy Out of the coded alternative. It echoes consumer notions of the world, where one ‘expresses’ oneself not via debate or negotiation, but by choosing one product over another. We’re leaving Earth for Mars. Join if you want.

It all forms an odd, tense amalgam between visions of exuberant risk-taking freedom and visions of risk-averse anti-social paranoia. This ambiguity is not unique to cryptocurrency (see, for example, this excellent parody of the trustless society), but in the case of Bitcoin, it is perhaps best exemplified by the narrative offered by Cody Wilson in Dark Wallet’s crowdfunding video. “Bitcoin is what they fear it is, a way to leave… to make a choice. There’s a system approaching perfection, just in time for our disappearance, so, let there be dark”.

...

But where exactly is this perfect system Wilson is disappearing to?

Back in the days of roving bands of nomadic people, the political option of ‘exit’ was a reality. If a ruler was oppressive, you could actually pack up and take to the desert in a caravan. The bizarre thing about the concept of ‘exit to the internet’ is that the internet is a technology premised on massive state and corporate investment in physical infrastructure, fibre optic cables laid under seabeds, mass production of computers from low-wage workers in the East, and mass affluence in Western nations. If you are in the position to be having dreams of technological escape, you are probably not in a position to be exiting mainstream society. You are mainstream society.

Don’t get me wrong. Wilson is a subtle and interesting thinker, and it is undoubtedly unfair to suggest that he really believes that one can escape the power dynamics of the messy real world by finding salvation in a kind of internet Matrix. What he is really trying to do is to invoke one side of the crypto-anarchist mantra of ‘privacy for the weak, but transparency for the powerful’.

That is a healthy radical impulse, but the conservative element kicks in when the assumption is made that somehow privacy alone is what enables social empowerment. That is when it turns into an individualistic ‘just leave me alone’ impulse fixated with negative liberty. Despite the rugged frontier appeal of the concept, the presumption that empowerment simply means being left alone to pursue your individual interests is essentially an ideology of the already-empowered, not the vulnerable.

This is the same tension you find in the closely related cypherpunk movement. It is often pitched as a radical empowerment movement, but as Richard Boase notes, it is “a world full of acronyms and codes, impenetrable to all but the most cynical, distrustful, and political of minds.” Indeed, crypto-geekery offers nothing like an escape from power dynamics. One merely escapes to a different set of rules, not one controlled by ‘politicians’, but one in the hands of programmers and those in control of computing power.

It is only when we think in these terms that we start to see Bitcoin not as a realm ‘lacking the rules imposed by the state’, but as a realm imposing its own rules. It offers a form of protection, but guarantees nothing like ‘empowerment’ or ‘escape’.

Technology often seems silent and inert, a world of ‘apolitical’ objects. We are thus prone to being blind to the power dynamics built into our use of it. For example, isn’t email just a useful tool? Actually, it is highly questionable whether one can ‘choose’ whether to use email or not. Sure, I can choose between Gmail or Hotmail, but email’s widespread uptake creates network effects that mean opting out becomes less of an option over time. This is where the concept of becoming ‘enslaved to technology’ emerges from. If you do not buy into it, you will be marginalised, and thatis political.

This is important. While individual instances of blockchain technology can clearly be useful, as a class of technologies designed to mediate human affairs, they contain a latent potential for encouraging technocracy. When disassociated from the programmers who design them, trustless blockchains floating above human affairs contains the specter of rule by algorithms. It is a vision (probably accidently) captured by Ethereum’s Joseph Lubin when he says “There will be ways to manipulate people to make bad decisions, but there won’t be ways to manipulate the system itself”.

Interestingly, it is a similar abstraction to that made by Hobbes. In his Leviathan, self-regarding people realise that it is in their interests to exchange part of their freedom for security of self and property, and thereby enter into a contract with aSovereign, a deified personage that sets out societal rules of engagement. The definition of this Sovereign has been softened over time – along with the fiction that you actually contract to it – but it underpins modern expectations that the government should guarantee property rights.

Conservative libertarians hold tight to the belief that, if only hard property rights and clear contracting rules are put in place, optimal systems spontaneously emerge. They are not actually that far from Hobbes in this regard, but their irritation with Hobbes’ vision is that it relies on politicians who, being actual people, do not act like a detached contractual Sovereign should, but rather attempt to meddle, make things better, or steal. Don’t decentralised blockchains offer the ultimate prospect of protected property rights with clear rules, but without the political interference?

This is essentially the vision of the internet techno-leviathan, a deified crypto-sovereign whose rules we can contract to. The rules being contracted to are a series of algorithms, step by step procedures for calculations which can only be overridden with great difficulty. Perhaps, at the outset, this represents, à la Rousseau, the general will of those who take part in the contractual network, but the key point is that if you get locked into a contract on that system, there is no breaking out of it.

This, of course, appeals to those who believe that powerful institutions operate primarily by breaching property rights and contracts. Who really believes that though? For much of modern history, the key issue with powerful institutions has not been their willingness to break contracts. It has been their willingness to use seemingly unbreakable contracts to exert power. Contracts, in essence, resemble algorithms, coded expressions of what outcomes should happen under different circumstances. On average, they are written by technocrats and, on average, they reflect the interests of elite classes.

That is why liberation movements always seek to break contracts set in place by old regimes, whether it be peasant movements refusing to honour debt contracts to landlords, or the DRC challenging legacy mining concessions held by multinational companies, or SMEs contesting the terms of swap contracts written by Barclays lawyers. Political liberation is as much about contesting contracts as it is about enforcing them." (http://furtherfield.org/features/articles/visions-techno-leviathan-politics-bitcoin-blockchain)

The Bitcoin Protocol Is More ‘Cloud’ Than ‘P2P’

BY PRIMAVERA DE FILIPPI:

"For many, bitcoin — the distributed, worldwide, decentralized crypto-currency — is all about money … or, as recent events have shown, about who invented it. Yet the actual innovation brought about by bitcoin is not the currency itself but the platform, which is commonly referred to as the “blockchain” — a distributed cryptographic ledger shared amongst all nodes participating in the network, over which every successfully performed transaction is recorded.

And the blockchain is not limited to monetary applications. Borrowing from the same ideas (though not using the actual peer-to-peer network bitcoin runs on), a variety of new applications have adapted the bitcoin protocol to fulfill different purposes: Namecoin for distributed domain name management; Bitmessage and Twister for asynchronous communication; and, more recently, Ethereum (released only a month ago). Like many other peer-to-peer (P2P) applications, these platforms all rely on decentralized architectures to build and maintain network applications that are operated by the community for the community. (I’ve written before here in WIRED Opinion about one example, mesh networks, which can provide an internet-native model for building community and governance).

Thus, while they enable a whole new set of possibilities, blockchain-based applications also present legal, technical, and social challenges similar to those raised by other P2P applications that came before them, such as BitTorrent, Tor, or Freenet. But some of these challenges haven’t been seen before in the context of traditional P2P networks.

Although all blockchain-based applications are based on a decentralized network architecture, most of these applications distinguish themselves from standard P2P applications in at least two ways:

Users’ data (including personal data) are not stored locally into users’ devices. They subsist “in the cloud”, in the sense that they are hosted in a distributed database — the blockchain in this case — that is shared amongst all users in the network. This means that data is ubiquitous: It can be accessed at anytime and from anywhere, regardless of the user’s device. But the data is also more transparent: All actions or transactions performed by users are recorded on the blockchain and thus publicly available to everyone (although the identity of users can be kept secret and the content of such transactions can of course be encrypted).

Instead of being run locally, blockchain-based applications operate globally. They are deployed on the blockchain itself and are run — in a distributed manner — by relying on the resources provided by all users connected to the network. Although each client runs locally on the user’s device, these applications are constantly available, even when individual devices are turned off (as long as there are enough resources dedicated to them).

In this sense, blockchain-based applications are — in spite of their inherently decentralized nature — more similar to cloud-based services than traditional P2P applications.

However, these applications do significantly differ from traditional cloud-computing applications in that they are autonomous and independent from any central server or authority in charge of regulating or managing the network. Applications are run through an aggregate of individual, peer-to-peer clients that contribute their own resources to the network. In addition to being autonomous, the network is also more resilient and anonymous: no single point of failure, no single point of control.

We need to make sure we don’t exchange the tyranny of large online operators for the “tyranny of code” instead. As such, the bitcoin platform (or blockchain) allows for the deployment of decentralized applications that combine the benefits of cloud computing — in terms of ubiquity and elasticity — with the benefits of P2P technologies in terms of privacy and anonymity. Even though the blockchain is inherently transparent (as every transaction is recorded on a public ledger), users can have multiple identities that don’t necessarily relate to their real persona.

Blockchain-based applications can therefore address user’s privacy through anonymity." (http://www.wired.com/2014/03/decentralized-applications-built-bitcoin-great-except-whos-responsible-outcomes/)

What Are the Challenges?

BY PRIMAVERA DE FILIPPI:

"In general, most challenges encountered by decentralized network applications are related to the limited availability of resources and the inherent difficulty of managing and coordinating them.

Long-term sustainability can only be achieved by providing an incentive for users to contribute to the network — for altruistic to selfish reasons — so that there are always a sufficient amount of resources available at any given time. In the case of decentralized applications featuring a specifically designed credit system (such as bittorrent) or assuming the function of a cryptocurrency (such as bitcoin, namecoin, and ethereum), this objective is much easier to achieve to the extent that these platforms provide an additional economic and/or utilitarian incentive for users to contribute to the overall operations of the network.

But blockchain-based applications raise important legal challenges, too. The challenges similar to those raised by traditional P2P networks is that the anonymity inherent in these networks supports or even encourages criminal behaviors and other illicit or reprehensible activities.

In previous decentralized networks, these issues were dealt with by establishing shared or distributed liability amongst all users connected to the network. Even though it’s often difficult to determine identity and assess the degree of responsibility each should be held accountable for, there are always specific individuals to blame. (Ultimately, the difficulty lies in assigning more or less responsibilities to one or more users in the network.)

So what happens when the figure of the “user” itself disappears; when the resulting P2P applications live outside a central authority? Who is liable and accountable? While we can borrow lessons learned from the world of previous P2P applications to respond to some of these challenges, it cannot be denied that blockchain-based applications raise new and important legal issues — and of a completely different kind than those found in traditional P2P architectures." (http://www.wired.com/2014/03/decentralized-applications-built-bitcoin-great-except-whos-responsible-outcomes/)

Towards an internet of (block)chains

John Robb:

"The future of the Internet is a confederation of chains.

Chains that'll do almost everything.

Chains that act like companies (without any of that "organic and financial overhead" that costs us so much).

Chains that cut across borders.

Chains for closed social networks. Chains for virtual legal systems. Chains for industries...

Even chains for global insurgencies and alternative economies (the topic of my new book).

Lots of chains.

It's inevitable at this point. Bitcoin was simply the plausible promise of what was possible with this tech.

I'm also getting a very good feel for how this is going to roll out and what I'm seeing is pretty cool.

How so?

The rollout of these blockchains is going to be full on creative destruction.

Chains will generate or control more wealth in the next two decades than the world has produced since inception.

They also enable us to destroy wealth with equal alacrity by allowing us to shift our thinking on what we consider valuable (to the old and currently wealthy --> you are toast). " (http://globalguerrillas.typepad.com/globalguerrillas/2014/10/the-internet-of-chains.html)

How the blockchain works for trust

The Economist:

“It is the blockchain that replaces this trusted third party. A database that contains the payment history of every bitcoin in circulation, the blockchain provides proof of who owns what at any given juncture. This distributed ledger is replicated on thousands of computers—bitcoin’s “nodes”—around the world and is publicly available. But for all its openness it is also trustworthy and secure. This is guaranteed by the mixture of mathematical subtlety and computational brute force built into its “consensus mechanism”—the process by which the nodes agree on how to update the blockchain in the light of bitcoin transfers from one person to another.

Let us say that Alice wants to pay Bob for services rendered. Both have bitcoin “wallets”—software which accesses the blockchain rather as a browser accesses the web, but does not identify the user to the system. The transaction starts with Alice’s wallet proposing that the blockchain be changed so as to show Alice’s wallet a little emptier and Bob’s a little fuller.

The network goes through a number of steps to confirm this change. As the proposal propagates over the network the various nodes check, by inspecting the ledger, whether Alice actually has the bitcoin she now wants to spend. If everything looks kosher, specialised nodes called miners will bundle Alice’s proposal with other similarly reputable transactions to create a new block for the blockchain.

This entails repeatedly feeding the data through a cryptographic “hash” function which boils the block down into a string of digits of a given length (see diagram). Like a lot of cryptography, this hashing is a one-way street. It is easy to go from the data to their hash; impossible to go from the hash back to the data. But though the hash does not contain the data, it is still unique to them. Change what goes into the block in any way—alter a transaction by a single digit—and the hash would be different.

That hash is put, along with some other data, into the header of the proposed block. This header then becomes the basis for an exacting mathematical puzzle which involves using the hash function yet again. This puzzle can only be solved by trial and error. Across the network, miners grind through trillions and trillions of possibilities looking for the answer. When a miner finally comes up with a solution other nodes quickly check it (that’s the one-way street again: solving is hard but checking is easy), and each node that confirms the solution updates the blockchain accordingly. The hash of the header becomes the new block’s identifying string, and that block is now part of the ledger. Alice’s payment to Bob, and all the other transactions the block contains, are confirmed.

This puzzle stage introduces three things that add hugely to bitcoin’s security. One is chance. You cannot predict which miner will solve a puzzle, and so you cannot predict who will get to update the blockchain at any given time, except in so far as it has to be one of the hard working miners, not some random interloper. This makes cheating hard.

The second addition is history. Each new header contains a hash of the previous block’s header, which in turn contains a hash of the header before that, and so on and so on all the way back to the beginning. It is this concatenation that makes the blocks into a chain. Starting from all the data in the ledger it is trivial to reproduce the header for the latest block. Make a change anywhere, though—even back in one of the earliest blocks—and that changed block’s header will come out different. This means that so will the next block’s, and all the subsequent ones. The ledger will no longer match the latest block’s identifier, and will be rejected.

Is there a way round this? Imagine that Alice changes her mind about paying Bob and tries to rewrite history so that her bitcoin stays in her wallet. If she were a competent miner she could solve the requisite puzzle and produce a new version of the blockchain. But in the time it took her to do so, the rest of the network would have lengthened the original blockchain. And nodes always work on the longest version of the blockchain there is. This rule stops the occasions when two miners find the solution almost simultaneously from causing anything more than a temporary fork in the chain. It also stops cheating. To force the system to accept her new version Alice would need to lengthen it faster than the rest of the system was lengthening the original. Short of controlling more than half the computers—known in the jargon as a “51% attack”—that should not be possible. …

Most of the data in the blockchain are about bitcoin. But they do not have to be. Mr Nakamoto has built what geeks call an “open platform”—a distributed system the workings of which are open to examination and elaboration. The paragon of such platforms is the internet itself; other examples include operating systems like Android or Windows. Applications that depend on basic features of the blockchain can thus be developed without asking anybody for permission or paying anyone for the privilege. “The internet finally has a public data base,” says Chris Dixon of Andreessen Horowitz, a venture-capital firm which has financed several bitcoin start-ups, including Coinbase, which provides wallets, and 21, which makes bitcoin-mining hardware for the masses. 

For now blockchain-based offerings fall in three buckets. The first takes advantage of the fact that any type of asset can be transferred using the blockchain. One of the startups betting on this idea is Colu. It has developed a mechanism to “dye” very small bitcoin transactions (called “bitcoin dust”) by adding extra data to them so that they can represent bonds, shares or units of precious metals.

Protecting land titles is an example of the second bucket: applications that use the blockchain as a truth machine. Bitcoin transactions can be combined with snippets of additional information which then also become embedded in the ledger. It can thus be a registry of anything worth tracking closely. Everledger uses the blockchain to protect luxury goods; for example it will stick on to the blockchain data about a stone’s distinguishing attributes, providing unchallengeable proof of its identity should it be stolen. Onename stores personal information in a way that is meant to do away with the need for passwords; CoinSpark acts as a notary. Note, though, that for these applications, unlike for pure bitcoin transactions, a certain amount of trust is required; you have to believe the intermediary will store the data accurately.

It is the third bucket that contains the most ambitious applications: “smart contracts” that execute themselves automatically under the right circumstances. Bitcoin can be “programmed” so that it only becomes available under certain conditions. One use of this ability is to defer the payment miners get for solving a puzzle until 99 more blocks have been added—which provides another incentive to keep the blockchain in good shape. Lighthouse, a project started by Mike Hearn, one of bitcoin’s leading programmers, is a decentralised crowdfunding service that uses these principles. If enough money is pledged to a project it all goes through; if the target is never reached, none does. Mr Hearn says his scheme will both be cheaper than non-bitcoin competitors and also more independent, as governments will be unable to pull the plug on a project they don’t like.” (http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable)

The dispute on the size of blocks

The Economist:

“ Consider the civil war being waged over the size of blocks. One camp frets that quickly increasing the block size will lead to further concentration in the mining industry and turn bitcoin into more of a conventional payment processor. The other side argues that the system could crash as early as next year if nothing is done, with transactions taking hours.

Mr Hearn and Gavin Andresen, another bitcoin grandee, are leaders of the big-block camp. They have called on mining firms to install a new version of bitcoin which supports a much bigger block size. Some miners who do, though, appear to be suffering cyber-attacks. And in what seems a concerted effort to show the need for, or the dangers of, such an upgrade, the system is being driven to its limits by vast numbers of tiny transactions.

This has all given new momentum to efforts to build an alternative to the bitcoin blockchain, one that might be optimised for the storing of distributed ledgers rather than for the running of a cryptocurrency. MultiChain, a build-your-own-blockchain platform offered by Coin Sciences, another startup, demonstrates what is possible. As well as offering the wherewithal to build a public blockchain like bitcoin’s, it can also be used to build private chains open only to vetted users. If all the users start off trusted the need for mining and proof-of-work is reduced or eliminated, and a currency attached to the ledger becomes an optional extra.

The first industry to adopt such sons of blockchain may well be the one whose failings originally inspired Mr Nakamoto: finance. In recent months there has been a rush of bankerly enthusiasm for private blockchains as a way of keeping tamper-proof ledgers. One of the reasons, irony of ironies, is that this technology born of anti-government libertarianism could make it easier for the banks to comply with regulatory requirements on knowing their customers and anti-money-laundering rules. But there is a deeper appeal.

Industrial historians point out that new powers often become available long before the processes that best use them are developed. When electric motors were first developed they were deployed like the big hulking steam engines that came before them. It took decades for manufacturers to see that lots of decentralised electric motors could reorganise every aspect of the way they made things. In its report on digital currencies, the Bank of England sees something similar afoot in the financial sector. Thanks to cheap computing financial firms have digitised their inner workings; but they have not yet changed their organisations to match. Payment systems are mostly still centralised: transfers are cleared through the central bank. When financial firms do business with each other, the hard work of synchronising their internal ledgers can take several days, which ties up capital and increases risk.

Distributed ledgers that settle transactions in minutes or seconds could go a long way to solving such problems and fulfilling the greater promise of digitised banking. They could also save banks a lot of money: according to Santander, a bank, by 2022 such ledgers could cut the industry’s bills by up to $20 billion a year. Vendors still need to prove that they could deal with the far-higher-than-bitcoin transaction rates that would be involved; but big banks are already pushing for standards to shape the emerging technology. One of them, UBS, has proposed the creation of a standard “settlement coin”. The first order of business for R3 CEV, a blockchain startup in which UBS has invested alongside Goldman Sachs, JPMorgan and 22 other banks, is to develop a standardised architecture for private ledgers.

The banks’ problems are not unique. All sorts of companies and public bodies suffer from hard-to-maintain and often incompatible databases and the high transaction costs of getting them to talk to each other. This is the problem Ethereum, arguably the most ambitious distributed-ledger project, wants to solve. The brainchild of Vitalik Buterin, a 21-year-old Canadian programming prodigy, Ethereum’s distributed ledger can deal with more data than bitcoin’s can. And it comes with a programming language that allows users to write more sophisticated smart contracts, thus creating invoices that pay themselves when a shipment arrives or share certificates which automatically send their owners dividends if profits reach a certain level. Such cleverness, Mr Buterin hopes, will allow the formation of “decentralised autonomous organisations”—virtual companies that are basically just sets of rules running on Ethereum’s blockchain.” (http://www.economist.com/news/briefing/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable)