Ethics for IT Professionals/Blockhain

The Technology Behind Cryptocurrency

The technology behind cryptocurrency, blockchain, is a Distributed Trust Protocol. Nick Szabo coined the phrase “The God Protocol” while considering a be-all end-all technology protocol in the late 1990s. His concept was that, in a perfect world, God would be designated as the trusted third party in the middle of all transactions. “All the parties would send their inputs to God. God would reliably determine the results and return the outputs. God being the ultimate in confessional discretion, no party would learn anything more about the other parties’ inputs than they could learn from their own input and the output.” A decade later Satoshi Nakamoto released a white paper outlining this new protocol of peer to peer electronic cash system. He called this cash system bitcoin. Instead of relying on financial institutions serving as the trusted third party, it uses a distributed ledger representing a network consensus of every transaction that has ever occurred.

Within the bitcoin network all transactions are verified, cleared and stored in a block which is linked to the proceeding block thereby creating a chain. Each block must refer to the preceding block. Each block is time-stamped and encrypted. Each transaction is then broadcast to all nodes of the peer-to-peer network. Thus the concept of a distributed ledger. Everyone has the same ledger.

Satoshi Nakamoto’s paper was about money and not some greater goal. The concept of blockchain has evolved from solely an electronic cash system to potentially any trusted transaction between two or more parties authenticated by mass collaboration.

Blockchain does not require a central trust authority to verify information or authenticate transactions; rather, trust is built into the governance rules with pre-written code defining how actors can behave in the system.

Notable Attributes of Blockchain Technology

The combination of trust, transparency and immutability is unique to blockchain. Other attributes such as pseudonymity, security, verifiability, and controllability are not unique to blockchain, but are important for understanding the challenges and potential of blockchain.

Trust

Strict governance rules, cryptography, and immutability of transactions work together to provide strong security for individuals interacting directly on a distributed network without a central trusted authority.

Transparency

Identical copies of the entire record of transactions are available to all participants at all times. This is often referred to as a distributed ledger. In some cases, these ledgers are publicly available to anyone. The ledger provides transparency of transactions to anyone with access.

Immutability

Immutable transactions recorded on a blockchain cannot be changed or removed. To change a transaction on the blockchain, a new transaction needs to be added to reverse the effects of the original. In immutable ledgers, there is no way to “expunge” the record of a transaction.

Pseudonymity

Using public and private key systems, participants have a public-facing digital “address” that is not publicly associated to them, but over which they exercise unique control. This provides pseudonymity through encryption that creates the possibility of effective anonymity for participants.

Security

The use of encryption algorithms combined with the disaggregation of data across a distributed network of nodes (i.e., computers) provides security against attempts to destroy or change the record of transactions.

Verifiability

Transactions on a blockchain are immediately auditable in real time. As an immutable and sequenced digital ledger, a blockchain allows the complete record of transactions to be directly verified.

Controllability

The tracking of individual assets uniquely on a blockchain allows an individual to exercise effective and exclusive control over data or digital assets. Furthermore, transactions on a blockchain allow the secure transfer of control between individuals over the network.

Potential Uses of Blockchain Technology

Blockchain can be used in any transaction that could be digitized. “Transactions on a blockchain could represent either the transfer of a digital asset of value, such as a cryptocurrency token, or a way to link information to a particular profile, such as associating a university degree with a digital identity. Every transaction in a blockchain has a unique identity that is linked to a single entity who can exercise control over the information or asset from that transaction. Once a transaction is recorded on the blockchain, it is effectively irremovable and unchangeable. The result is an immutable and time-stamped record of a series of transactions.” Blockchain began in cryptocurrency, but potential uses could be birth and death certificates, marriage licenses, deeds and titles of ownership, education degrees, medical procedures, insurance claims or even voting.

Challenges with Blockchain Technology

There are several headwinds that will affect how and when blockchain moves forward. A few of these include government legislation, energy consumption, governance, and acceptance by society.

Government Legislation

How will governments respond to this new technology? China and Canada are investing billions of dollars into the development of blockchain. Over regulation or no regulation are not good options for any new technology and particularly not good for blockchain which is very technical in nature. Some countries are banning bitcoin which will crush its development and some countries are trying to find ways to tax it.

Energy Consumption

Blockchain is an energy consuming monster. For a large group of nodes to verify every transaction, which is fundamental to blockchain, requires energy. It is estimated that bitcoin alone consumes more electricity than the entire country of Argentina. If bitcoin were a country, it would rank in the top 30 of energy consumption. This amount will not get any smaller but will only grow with the use of smart contracts and a more widespread adoption of cryptocurrency.

Governance

A key component to most new technology is governance. Governance helps create standards when moving forward. The internet has it, financial and IT auditing has it, sports has it but blockchain doesn’t even want it. It is conceptually at odds with it. The blockchain concept is decentralized and open. How does a governing body fit within that concept is a question that needs to be answered.

Acceptance by Society

Acceptance into US society has been slow. Cryptocurrency has mainly been seen as an investment. It is similar to gold in that you don’t see anyone paying for their groceries with gold coins and yet gold has an assigned monetary value. An issue with smart contracts using blockchain is the lack of legal recourse. Currently there is no way to cancel the contract or a path of recourse if problems arise. If a mistake is made there is no way to amend the contract. Cryptocurrency has become associated with criminality. It is how ransomware is paid and has attained a stigma of payment of choice for the blackmarket.