Should I Wet My Pants Over the Blockchain?

Are you getting ready for the holidays? We’re past Thanksgiving in the US and now on the short sprint to Christmas and the Holiday break. I’m looking forward to it and I bet you are too – but, hey! There’s a lot to do, and lot to get ready – am I right? This weekend I have to get the tree, round up the kids to decorate it and then spend at least a day stamping on Amazon boxes in my garage.

So I can forgive you if you haven’t spent too much time thinking through clever remarks on the Blockchain that you can use to pepper Holiday conversations.

We all know that Bitcoin is going to be a big topic of conversation over the Holidays, and I’m sure you’ve got some sage remarks up your sleeve, like “Ya’know, Bitcoin isn’t really a currency, a currency is a store of wealth”. You may have read some of the good articles around, like The Wealthy Accountant’s, and gleaned some other clever comments, but to really take your cryptocurrency chops to the next level you need to remark on the Blockchain.

In terms of my plans, I was going to comment during the hors d’oeuvres and profoundly remark that “The Blockchain is what underpins all the cryptopcurrencies; Bitcoin is not the innovation, it’s the Blockchain that’s the disruptor”. That’s good and will get you some knowing nods, but it’s not the kind of insight that will garner gasps of shocked admiration, immediately silence the bickering of small children or require the comforting of less robust family members.

But luckily for you, actuary on FIRE has your back! Let’s dig into the Blockchain (yeah!) and figure out whether we should really be wetting our pants over this innovation.

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What is the Blockchain?

The Blockchain provides an immutable consensus organization with no governing entity and is globally distributed with no single point of failure.

Errrr what?

Let’s break this down.

The Blockchain is a list of information that has a strict order where one item follows another. The information might contain a list of who owns what, or a record of financial transactions. You can then look back over the Blockchain for a public record of all current and past records.

The unusual innovation with the Blockchain is that there is no single entity that holds the master record. That in itself is pretty crazy if you think about it.

If you want to examine local property records you go to the Townhall – right? If you want to look at transactions from your bank account you contact your bank. For almost all sources of information there is one central record that holds the master. This is the version that hold the authoritative version.

Instead of a single place of record the Blockchain is held and distributed by ‘nodes’. These are computers all around the world that spend their time adding new blocks to Blockchain and then distributing the current Blockchain to all the other nodes.

Have you heard of Bitcoin miners? That’s just another word for a node of the Blockchain.

Another feature of the Blockhain is that it’s impossible to change the Blockchain. Once you add an item to the Blockchain it is irrevocable. Adding a new block to the Blockchain involves all sorts of digital signatures that cannot be removed.

What’s So Good About the Blockchain?

Look at the ingredients I described.

It has no central governing authority, with no single point of failure and it is transparent.

You don’t have to be a libertarian or Bitcoin fanboy/girl to like the sound of that.

The crowning achievement of the Blockchain, and currently the most widespread implementation, is of course Bitcoin. Without the invention of the Blockchain, Bitcoin would not exist. The Blockchain has allowed the creation of a ‘currency’ where exchanges are recorded and unchangeable, but there is no single entity that provides a master-record. That is admittedly mind-blowing, but should we be wetting our pants over this? Let’s dig a bit deeper…

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Tell Me About Security

The Blockchain is touted as being super secure, and this probably stems from the fact that there is no single point of failure that can be hacked. There is no denial of service attack that can impact the Blockchain. If you take out one node, there are thousands more ready to distribute the current Blockchain.

But there is one point that is common to all the nodes and that is the core software that each node must run. If this is corrupted then the Blockchain can be compromised. For example if you can hack the core Bitcoin software then you can potentially stage the biggest robbery in history.

This is not an idle worry. In August of 2016 the organization responsible for the Bitcoin core software were so concerned at State sponsored hacking that they issued advice to anyone downloading the core software. They recommended verifying the download with multiple cryptographic signatures from a number of the developers and also checking the cryptographic keys from multiple sources to prevent fraud. Still think your Bitcoins are safe?

C’mon surely it’s Secure!

The way that nodes add a new block to Blockchain is that they have to solve a particular hard cryptography problem, and this involves considerable time and computing resource. Blockchains financially reward nodes who successfully add blocks. [Actually, they are not ‘solving a hard problem’ they are simply applying trial and error to a problem that cannot be reverse engineered. These problems are sometimes called ‘Trapdoor problems’, since you can only go one way.]

All the nodes are incentivized to keep the Blockchain robust and unique. If you have two different versions of the Blockchain then you have chaos. In the world of Bitcoin this would mean that transactions would be disputed and there would be no consensus around who owns what Bitcoins, and they would rapidly become valueless.

But if one person owns 51% of the nodes, or 51% of the computing power in the nodes, they can control the Blockchain. This was identified as a vulnerability by the inventor of the Bitcoin, Satoshi Nakamoto, in the original specification paper. With a diversified set of nodes this is a vanishingly small issue, but it has reared its head in the past. In 2014 a conglomeration of Chinese Bitcoin miners attained over 50% of the computing power in the Bitcoin network.

Do We Need the Blockchain?

The Blockchain is certainly innovative, but is it really as pant-wettingly useful as we are led to believe?

Do you want to store information and have it retrievable by different users?

Just set up a database.

Do you want to have the information secure?

Just encrypt the database.

Want to have it transparent so that every user can see a complete record of current items and past items?

Simply make the database history available to all the users.

So you see for most situations you don’t need the Blockchain. Maybe I’m lacking in imagination, I can see how it’s useful for recording financial transactions but I’m not convinced that it’s useful for all situations. It’s also incredibly inefficient. By not having a single central point you must then have thousands of nodes, all with large computing resources and consuming considerable power.

But if you want a distributed set of information without a central record, that is publicly available to all, impossible to change, and cryptographically secure, then the Blockchain is your tool.

To me that seems like quite a narrow solution set in search of a problem.

What do you think, was I unduly harsh or naïve about the Blockchain? Had you wet your pants about this and now regretted your decision? Comment below and let me know.

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14 thoughts on “Should I Wet My Pants Over the Blockchain?”

  1. I read an interesting book that explained the benefits of the blockchain technology. This post explained more of the vulnerabilities of the technology, which I’d briefly read about but now understand better. We are not investing in Bitcoins anytime soon, so all of this info is, as you put it, dinner table conversation. It’s interesting all the same, because I have a feeling we’ll eventually move to public records etc., stored on the blockchain or some other similar technology.

    1. Thanks for dropping by Laurie. As a repository for public records, I think you’re correct, it could be really useful.

  2. It’s somewhere in between honestly. The vulnerabilities you list here are real… but imagine a private version of the technology. Effectively a company could replace western union with less friction costs. That isn’t to say that I believe bitcoin itself is the future. Just that the underlying technology has industrial applications.

    1. I am eager to see what happens with Blockchain technology. It really is a new concept that could not have been invented even a couple of decades ago. So I’m sure we will see it come of age in the coming decade.

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  4. It would appear the computational costs are NOT TRIVAL, and that’s a problem. I bought some BTC a few years ago to see what owning it is like. I also tried to mine some to see what that was like. I don’t have the computational horsepower. My conclusion is it is not a currency nor is it a store of wealth. It is a vehicle that measures “greed”, like VIX is a measure of “fear”. Once the futures and options are in place it may become an independent source of uncorrelated diversity.

    1. There was a good article on Yahoo the other day about a Bitcoin miner not having to pay for heating for the last three years as the heat from his mining system was heating the whole house. He even had the windows open in freezing weather. At the moment the mining profit outweights the electricity costs for him. But in the past you had to own a hydro-electric dam to make it worthwhile.
      I think when the chaos has died down a bit it will be a useful diversifier. Any sniff of a geo-political crisis then people will but BTC. Similar to Treasuries at the moment.

      1. I bought BTC during the Greek freeze up when banks cc and atm’s were inaccessible. I read about a guy who had some BTC and was able to buy a plane ticket home from the Greek islands. I figured it should increase in value because the supply is limited but nothing like this. I think there is underlying neurochemistry with BTC similar to gaming or Facebook which is self perpetuating. If I were to invest today I would buy a stake, let it double or triple and sell the original stake turning it into a free trade and let the profit ride. You will be on the elevator but if it crashes you will be out nothing

    1. Jason – thanks man for calling me out on that! I’ve been thinking whether a flippant reply, or a serious reply? So I’ll go for neither.
      I think in a few years Blockchain technology will be used in a load of different areas, but not that widespread. However it’ll be under the radar for most people. It will be useful for recording all sorts of documents and transactions but most people won’t realize that it’s a blockhain that they are accessing. In the same way that 99% of Bitcoin holders could not care less about the underlying Blockchain.
      So on balance…. not pant-wettingly material.

        1. Hmmm I was reserving “pant-wettingly” for A.I. which I think will be seriously disruptive. But you’ve now upped the game on hyperbole. So maybe I will have to write an article – “Should I totally soil myself over A.I. developments?”

  5. “But if one person owns 51% of the nodes, or 51% of the computing power in the nodes, they can control the Blockchain.”

    No. Every node has a copy of the blockchain, so a 51% controlling share can not steal your Bitcoins. What they can do is mess around with the new transactions that are added to the chain (so they can double-spend).

    About the databases… So you set up your database, how do you resolve disputes? Suppose Joe claims he payed me 100 units of whatever and I deny it. What happens? You either need a central authority, or you need a proof-of-work type algorithm.

    So what are the use-cases for Blockchains? Right now, it’s for evading laws and privacy. Doesn’t sound game-changing, but can be a lot of help if you’re in Venezuela, Russia, Argentina, etc. Or if you want to buy illegal substances.
    Those are big markets already; but the speculative future potential is even bigger (think decentralized prediction markets for example!).

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