What is Blockchain?

by Andrei Povarov

Emerging technologies can become disruptive. This happens when innovations they introduce lead to drastic changes in business, economy, and quality of life. Russia – and specially Moscow – is today becoming a hub of various technology pilots, of some of the most recent, influential and sometimes the most expensive to implement innovations. Moscow already benefits from many of them on a day-to-day basis. And all of us are surrounded by these new ideas; long-term plans are announced, practical projects are suggested etc.

Examples of Disruptive Technologies are concepts such as ‘Big Data’ or ‘Internet of Things.’ Surprisingly, however, a word that is becoming the buzz-word technology – Blockchain, is something that we might never have heard about, and this is bigger than all of these.

What is Blockchain? A few years ago, in 2008, it existed solely in the form of a white paper written by the mysterious Satoshi Nakamoto. We do not know whether this was a real person or not, but his research, and the open code he published have started what we see today as a new industrial revolution. And the first act of this was the successful launch and world-wide acceptance of a new global peer-to-peer payments system – Bitcoin.

The implementation of Bitcoin was based on Blockchain technology, similar to the way in which an application is built on top of an operating system. Bitcoin made governments and businesses seriously consider Blockchain as a reliable base for mission-critical future applications – and not only payments-related applications.

What is so special about Blockchain and why could this technology be so attractive? First of all, it enables fast and secure peer-to-peer transactions between participants – players who should not need to trust each other – in a total absence of a trusted third party. Instead of banks carefully verifying our credentials, Blockchain mathematics are sufficient to secure transactions. Thus a trust in central authorities is replaced by a trust in algorithms.

How does it work? All ongoing transactions are verified and assembled into blocks, and each block is securely and irrevocably attached to the rest of an already existing chain of such blocks (hence the name – block-chain). Not only the sequence of the blocks, but also their internal content can’t be changed so whatever has entered Blockchain is immutable until the end of time.

Verification involves going through the whole chain and making sure the initiator of a transaction (e.g. sender of a cryptocurrency unit) has enough power to perform it based on historical transactions done by him in the past. Verification is fulfilled by the collective efforts of users reaching consensus through a fine-tuned mathematical ‘game’ with substantial computing processing power applied.

The algorithms are designed so that it is extremely hard (although not impossible) to falsify a transaction – enormous computer power would be required and its cost would actually be much more than the expected gain. Furthermore, in such an event, the trust to this particular cryptocurrency would be destroyed and the beneficiary will lose most of the value obtained in such way.

How about the size of quickly growing chain of blocks? And where is it stored? Everywhere. Indeed, it is replicated on every single participating computer of each user. And with the right data structures the Blockchain size is well manageable – e.g. Bitcoin’s chain takes less than 100GB today.

As mentioned above, Blockchain can keep an open log of whatever has entered the chain (user identities or selected parts of the log may remain hidden). This brings on board a large group of applications called Distributive Ledgers maintaining digital records of who-owns-what, but unlike traditional systems, there is no central administrator or a central data base, thus no vulnerability or bad will at a central point.

For example, if you need a confirmation paper from a state registry regarding your property rights or civil acts that you have undertaken, in the Blockchain-based economy you will get it instantaneously from your own PC (or any public PC), in a fully secure way (your private crypto-keys will guarantee this) and with no risk of a registry bureau’s central server going down, thus postponing your actions for whatever security checks or technical reasons.

Not only the recording, but making more involved change-of-ownership operations with property or other assets, is managed by Smart Contracts applications. They extend the concept of payments (cryptocurrencies) to any value transfer and enable the adding of self-verifiable conditions to its fulfilment. Smart Contract applications make it possible to release deposits at a specific moment in time, based on other pre-requisites secured within a contract logic etc. An army of real estate agents and lawyers will have to find new jobs when this technology takes over.

In Russia, Blockchain is being actively discussed, and practical development is taking place. Small start-ups and large companies are involved, as well as government and public institutions. In 2016, the influence of the Blockchain idea become so strong that a discussion which has lasted for over two years between different Russian authorities, trying to develop a single position on cryptocurrencies seems finally to be over, and the threat of a cryptocurrencies ban will not materialise.

On the business side, the most active participant is the payment service QIWI. They even proposed to introduce a Bitruble in 2015, but this has not been accepted by the authorities. Qiwi’s director general has been recently appointed to lead the FinNet working group of National Technological Initiative, working on decentralized financial technologies. QIWI, as the very first Russian member, has joined the R3 Blockchain Consortium. R3 aims to deliver advanced distributed ledger technologies to the global financial markets uniting more than 60 financial institutions worldwide (such as Morgan Stanley, JP Morgan, Bank of America, Merrill Lynch, Goldman Sacks, BNY Mellon, ING, HSBC, Banco Santander, Nordea, Royal Bank of Scotland, UBS).

Many government and public organizations are currently pretending to be in Blockchain projects, however in most cases there is no real project running or even conceived. In some rare cases, things are better. A National Settlement Depository has been developed and has tested a sample of a Blockchain-based electronic voting system. But their next step specified as ‘to perform security assessment’ shows that the path to production is still extremely long.

On the cryptocurrency level, most of the major cryptocurrencies are ‘in circulation’ in Russia. In Moscow there are at least two physical cryptocurrency-to-rouble exchange points operating with 4-5 cryptocurrencies at any one time.

What is my general advice? Do always check how close to realisation the declared project is in Russia. In the commercial sphere remember that for Blockchain to work within a specific ecosystem, all of its participants have to adopt it.

To summarize, we are witnessing the opening the first pages of a new exciting book – a Blockchain driven economy. In few years’ time we should be able to fully enjoy the benefits of Blockchain-based applications in our day-to-day life.

There is no mystery in Blockchain as a technology – it is based on a relatively simple idea implemented by elegant mathematically and practically proven algorithms. But the magic is in converting an all-cumbersome centrally-based economy to quick, easy, reliable ones. This will significantly reshape our economy and will bring a new quality of life. And right now Blockchain – this new Disruptive Technology – is at the very beginning of its inevitable massive adoption.