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Preface
If you don't believe me or don't get it, I don't have time to try to convince you, sorry.
I don't know the future. I didn't come here to tell you how this is going to end. I came here to
tell you how it all begins.
I'm going to show people what the centralized authority don't want them to see. I'm going to
show them a world without absolute power. A world without manipulated rules and controls,
without borders or boundaries. A world where anything is possible.
This is what we get when we combined Satoshi Nakamotos quote with that of Neos from the
movie The Matrix, with a little bit of modification.
This book works in similar way. It is not a crystal ball to tell you how the future will look like. It
aint going to show you a clear path which you can take to get to your ideal world. However, it
shall give you enough ideas and better pictures of what is happening to part of the Blockchain
industry right now, in the year 2017, during the time of writing. It shall provide you with the
building blocks of how you can actually take part in this revolution. How you want to put the
pieces together will only be limited by your imagination.
As I strongly agree that the Blockchain is the web, all over again, I would like to take this
opportunity of a lifetime to record down what people are actually doing when something
revolutionary is happening, once again. My choice to be part of the history is to make whatever
relevant info or knowledge that I encounter during this project cycle into a documentary. This
book will be one of the tools that jot down what people do, how people react and working
towards a better world, besides the digital media channels that will be used to complement the
project, to bring it to a global scale.
I hope that readers will find Blockchain Insider an inspirational piece of work to read.
To explore Blockchain,
you need to study Bitcoin.
To understand Bitcoin,
you need to know what is money and how it works.
SAMPLE CHAPTER
______________________________________________________
Chapter 2
I decided to develop web based retail management system, after completed a few customized
software system. I saw that there was something with the internet, yet not so clear at that time. It
was about real time communication and big data management, though it was still the early days
of the internet, in my home country.
Back in 1998-2000, it took me quite some time to convince a retailer to accept the concept of a
connected, real time retail system, where multiple branches will be able to communicate with
each other, through a centralized system. We called our software BizSuite (short form for
Business Suite), and positioned it as a Web Based Retail Management System.
What was in our mind? Real time data and quick decision making.
For instance, a check of certain stocks balance for each outlet at any single point of time, where
HQ is able to make better decision based on real time data presented, to relocate stocks, such
as to transfer unmoving stocks from certain branch to another location that sells the stocks
better. Sounds quite a bold idea back then.
There are quite some challenges to be tackled. Not only that the concept sounds new and
creative, the technology involved was also quite geeky. It was an era where people were still
using dial up if they were to connect to the internet, the most they can go is with a 56k modem,
those where you can hear the ringtone as they were dialing up and hooking to the internet.
It was a time that may took some 30 minutes to an hour long just to download an mp3 song!
The connectivity was lousy, the speed was slow enough.
Technically, we were proposing a LAMP (Linux, Apache, MySQL, PHP) based open source
system. There were 2 major parts in the design - a front end Point of Sales (POS) System and a
back office interface for branches and HQ. We called our Linux based POS System gPOS, of
which I forgot what the g stands for, perhaps general. The web interface part of it was named
phpMyRetail, mimicking the naming of the popular phpMyAdmin web based MySQL database
administration tool. Yes, the software we developed was meant to administrate the whole retail
operation, thats why we called it Web Based Retail Management System.
Both hardware and software setup were quite a challenging task as technical personnel were
not easy to find, while most business users were still on the Windows platform due to its friendly
2017-2018. Koh How Tze. All Rights Reserved.
interface. Graphic user interface was just introduced in the latest version of Redhat Linux at that
time. It wasnt that user friendly either.
Ironically, we got our first project after we compared the costing structure and long-term
economic effect to our client. At the end of the day, dollars-and-cents count. The economic
consideration triumph over the technical difficulties.
What has all these got to do with Bitcoin and Blockchain? I am telling you all this because I
need you to know that I had went through certain processes, personally. I sense some similarity
between what I went through during the early days of the World Wide Web, and what is
happening to the whole Blockchain thing right now.
If you ever invested in the share market, you will know what is an IPO (Initial Public Offering).
According to Investopedia, an IPO is the first time that the stock of a private company is offered to
the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they
can also be done by large privately owned companies looking to become publicly traded. In an IPO,
the issuer obtains the assistance of an underwriting firm, which helps determine what type of
security to issue, the best offering price, the amount of shares to be issued and the time to bring it to
market.1
With the advancement of technology, alternative ways of funding had been introduced, such as
crowdfunding, equity funding, peer-to-peer funding etc. With cryptocurrencies coming into the
picture, we now have quite a new way for businesses to raise fund, which is ICO (Initial Coin
Offering).
On the good side of it, the ability to raise funds through token sales simplifies the fundraising
processes. ICO opens the markets by reaching out to global community at ease.
However, ICOs operate in legal grey area. They fall short from no standards in reporting and
exchange listing, with little to no regulation at all in most countries, thus opening a large window of
opportunity for scammers and pump and dump schemes.
1
https://www.investopedia.com/terms/i/ipo.asp
In short, ICO is one of the funding options, it can be a source of capital for startups. Indeed, most
ICOs we can find in the market now are startups.
Just like the time of the internet boom, ICOs are being offered almost everywhere, like mushroom
sprouting after a heavy pour. Almost anything could be presented as blockchain related matters, and
packaged and sold to investors (more likely speculators) via ICOs.
Take note that while ICO is the fastest developing market in 2017, Crypto has just been in retail with
enough liquidity for around 3 years. The stock market has existed for more than a decade.
Lets look at the general comparison for IPO and ICO in the table below:
During the dotcom boom, tech startups were listed and traded actively on Nasdaq, and Technology
Boards were specifically set up in some countries, just to list and trade tech related counters.
It is not much different with current situation. Under Cryptocurrencies hype, ICOs are being offered
almost over the internet. A search on the term ICO and you find yourself bombarded with all kind of
related ads and offers.
To date, there had been more than 1300 counters listed on CoinMarketCap.com, a website that
provides Cryptocurrency Market Capitalizations info.
2
https://en.wikipedia.org/wiki/Initial_coin_offering
As you can see, the listing requirements (if it is considered so) are way far more loosen and
unregulated compared to that of conventional IPO. If you noticed what we mentioned in previous
chapter using the football game analogy, ICO, is part of the game.
Documents Involved
Before we decide whether to invest in a soon-to-be public listed company or not, we read
through a prospectus, which is a formal legal document that is required by and filed with the
Securities and Exchange Commission.
In short, a prospectus provides details about an investment offering for sale to the public4.
Before invest into an ICO, people would go through the project white paper to decide whether a
project or a startup is viable. Though Bitcoin was not started by issuing ICO, I would prefer to
use it as an example as I dont prefer to endorse any kind of ICO, let alone to use them as
example. So, Bitcoins white paper will be the best fit for example here. The white paper was
published on the internet back in 2009, and Satoshi Nakamoto's original paper is still
recommended reading for anyone studying how Bitcoin works.5
https://bitcoin.org/en/bitcoin-paper
3
https://coinmarketcap.com/faq
4
https://www.investopedia.com/terms/p/prospectus.asp
5
https://bitcoin.org/bitcoin.pdf
Be it IPO or ICO, both speculation and volatility are inevitable. Prices may go up or down
aftermarket, sometimes drastically. As what Tom Lee (co-founder, FundStrat Global Advisor)
puts it, When people talk about bitcoins volatility today, theyre forgetting that when we went off
the dollar the gold standard on the dollar, golds volatility for 4 years was about the same as
bitcoins volatility today.
Take it to the extreme, and you may find yourself conned in a hit and run case, such as the case
of a cryptocurrency start-up that disappeared with $375,000 from an ICO, where nobody can
find the founders!6
In a free market, there will always be people trying to take advantage of whatever that falls in
the legal grey area, there will always be people trying to make quick bucks through pump and
dump projects. There is this joke saying that if you invest in the wrong ICO, you may land
yourself in ICU.
The difference between a coin and con is only an i. Therefore, before you part with your hard
earned money, it is always advisable to do all the due diligence that you could, and seek as
many professional advice as you can. Make your own decision based on your studies and
advises you get, and be mature enough to take the responsibilities for every action you take.
As a matter of advice, if Blockchain is the web all over again, take note that there was a dotcom
crash after peaking in 20007.
Crossing Borders
In ICOs, there are cross-border capital flows. This could be one of the reason why regulators are
hard to step into the picture, as it involves multiple countries jurisdiction and law enforcement.
However, the recent case of Tezos, a blockchain technology project that made headlines in July
2017 by raising USD 232 million, which turned sour could open doors for ICO litigation.8
If you read through the fine lines, there are some projects which restrict residents from certain
countries to participate in their ICOs. A point to ponder. Will there be virtual borders being set up
soon, be it through regulation or certain technical blockage?
6
Cryptocurrency start-up Confido disappears with $375,000 from an ICO, and nobody can find the founders
https://www.cnbc.com/2017/11/21/confido-ico-exit-scam-founders-run-away-with-375k.html
7
http://time.com/3741681/2000-dotcom-stock-bust/
8
The Beginning? Tezos Could Open Doors for ICO Litigation
https://www.coindesk.com/just-beginning-tezos-lawsuits-mean-ico-litigation/
2017-2018. Koh How Tze. All Rights Reserved.
Responsible Investment
While this is definitely not a book on investment, some advice may still apply. A piece of advice
my stock remisier told me nearly 20 years ago - no free lunch, whatever investment it may be.
People should be matured enough and take full responsibility for their investment decision.
You may want to refer further to Andreas Antonopoulos sharing on ICOs and responsible
investment in this video: https://www.youtube.com/watch?v=C8UdbvrWyvg
The video was recorded during a sharing session by Andreas on Thoughts on The Future of
Money, which is part of a talk that took place on July 7th 2017 at a Bloktex event hosted by the
Wisma BeeOn Group in Kuala Lumpur, Malaysia.
For those holding a printed copy of this book, the info here might give you some ideas:
So yes, people lose money at ICOs, I hope they learned lesson number one, dont invest too
much. In that way, they can learn. Two years from now, there will still be another round of
ICOs that goes, oh, what do you have? a white paper? And no team and no investment, or
startup experience and you havent yet hire any developers and you have three slides in your
presentation? UmmNO.
How do you learn that? Because the first 3 things you invested in blew up in your face and
you make no money.
Lessons in life are only learned one way by making mistakes. And if you try to prevent
investors from making mistakes, they dont learn, and then, the person responsible for
preventing the mistakes gains all this power and they abuse it.
While technology advanced, human behaviour stays the same9. At the time of writing, Bitcoin
just hit a record high.
The cryptocurrency Bitcoin reached a new high on Thursday (November 2) when it surged past
the $7,000 (5,278) barrier and peaked at $7,355.35 (5,604.04)10.
9
Bitcoin bubble dwarfs tulip mania from 400 years ago, Elliott Wave analyst says
https://www.cnbc.com/2017/07/20/bitcoin-bubble-dwarfs-tulip-mania-from-400-years-ago-elliott-wave.html
10
Bitcoin price soars to record high of $7,000: But why is bitcoin rising so high?
http://www.express.co.uk/finance/city/874249/bitcoin-price-record-high-why-is-bitcoin-rising-BTC-value
2017-2018. Koh How Tze. All Rights Reserved.
Take a look of the table below comparing Bitcoin and Tulip:
In my humble opinion, while the speculative part is quite similar, Bitcoin is not the tulip. Bitcoin
was started with a much more noble purpose, which is to return the financial power to the
people, where the time it was born happened to be around the brink of monetary system
collapse. Whether it is a bubble pending to burst, or it will become the default cryptocurrency
with status like the US Dollar being the reserve currency under the current system in its digital
world, only time will tell.
It looks more like the dot-com hype. It was a bumpy ride before we see the Amazon, Google,
Facebook, and Alibaba of the Web. It will be more or less the same with the Blockchain. Bitcoin
might not stay for long, just like what we had witnessed on ICQ, MSN Messenger, Yahoo, AOL
etc. But the fundamental will stay, just like communication for World Wide Web, it will be trust for
Blockchains.
While Bitcoin is the first Blockchain, it is definitely not the only Blockchain. There will be all kind
of Blockchains emerging, with each of their own consensus or inherited elements from that of
Bitcoin and Ethereum, or other ancestors of their time.
With the invent of the world wide web and the internet, we can scale information, we can scale
communication, but not until 2009 that we found the way to scale trust and decision making
through Bitcoin.
Bitcoin brings to the table a way to scale trust and decision making, globally.
The consensus algorithm, which is the most fundamental of Bitcoin and other digital currencies,
enables us to achieve trust at massive scale on a completely non-hierarchy, flat network. It is a
When we have a structure that allows us to scale trust, the best application would be money
and payments. But we can do more.
Since Bitcoin is the first programmable money, and it can be scaled down to 100 million units
per Bitcoin11, we can actually assign different properties to each unit. Each unit of Bitcoin can be
programmed to represent a kilowatt hour of energy, a certificate of ownership in some form of
entity, even a hundred barrels of oil etc.
Of course, the most common and widely used representation in the business and investment
scene today is none other than how much USD one Bitcoin represents. It is commonly used to
anchor or judge the market value of Bitcoin at the moment.
A vote in an election is another possible application for Bitcoin, or the Blockchain technology.
There are possibilities to create global governance and global decision making network with
such a method as presented via Bitcoin. Its programmable nature, open characteristic makes all
these features possible.
Not only it allows us to completely rebuild and innovate our financial services, it also streamlines
our administrative processes. It significantly decrease bureaucracy, while making them more
transparent at the same time.12
In the very near future, we shall be communicating more and more with machines, and these
machines will interact with each others perhaps even more frequent than our inter-human
communications.
With more established Internet of Things networks and advancement of Artificial Intelligence, it
wont be simply about Big Data, Data Mining, or Business Intelligence anymore. Interaction
among machines will become a norm, advanced Industrial Automation will be brought by 4th
Industrial Revolution.
Blockchains that manage and verify online data could enable us to launch companies that
entirely run by algorithms, making self driving vehicles more safe, help protecting your online
identity and track the billion of devices on the IoT.13
11
https://en.bitcoin.it/wiki/Satoshi_(unit)
12
The Bitcoin and Blockchain Technology Explained
https://www.youtube.com/watch?v=oSP-taqLWPQ
13
Understand the Blockchain in Two Minutes
https://www.youtube.com/watch?v=r43LhSUUGTQ
Eventually, Blockchain technology will evolve. There will be more and more powerful
implementations down the road, just like what the Web technology had brought us.
When we talk about blockchains, trust is an important element that is embedded into the
system.
If the World Wide Web is about information, the Blockchain is about trust.
Ironically, the very thing that keeps the blockchain secure and verified, is our mutual distrust.
Using the blockchain, we can create a shared reality across non-trusting entities. All of these
nodes in the network do not need to know each other or trust each other, because they each
have the ability to monitor and validate the chain for themselves14.
Where does trust comes from? Pure mathematics and computer logics. What makes Blockchain
so secure? Is it really that secure?
14
How the blockchain will radically transform the economy | Bettina Warburg
https://www.ted.com/talks/bettina_warburg_how_the_blockchain_will_radically_transform_the_economy/transcript?la
nguage=en
2017-2018. Koh How Tze. All Rights Reserved.
Military Grade Security
The interesting thing about Bitcoin is since its inception, no ones cracked it. Yet its completely
in the open.
Blockchain, or Bitcoin, to be specific, survived not because it had not been attacked. Indeed, it
had been attacked 24/7 since day one.
In order to understand how secure a blockchain could be, we shall look into the technical and
system design part of it, namely Asymmetric Cryptography and Distributed System.
Once you have the basic idea of how things are being construct, you shall have more confident
on the security part of it.
Asymmetric Cryptography
Cryptography is not something new. Prior to the computer era, it is generally known as cipher,
where messages were turned into a code that could only be understood by intended parties.
Generally, cryptography is about constructing and analyzing protocols that prevent third parties
or the public from reading private messages15.
Hash
Hashing is a way to cipher messages in the digital world. It ensures that transmitted messages
are not compromised.
For instance, turning "Blockchain Insider" into a hash using SHA256 algorithm will produce this
hash : ef225f48eace3ff0d92a4e597ced40af2fe6c932a761eedefc6c5785cd6aaa4f
15
https://en.wikipedia.org/wiki/Cryptography
2017-2018. Koh How Tze. All Rights Reserved.
How it works in communication?
The sender generates a hash of the message, encrypts it, and sends it with the message itself.
The recipient then decrypts both the message and the hash, produces another hash from the
received message, and compares the two hashes. If they're the same, there is a very high
probability that the message was transmitted intact16.
Keys
To illustrate the public and private keys concept, we shall use the home address analogy.
Your home address is open to anyone who knows you. That is your public key. Anyone who
would like to get intact with you would have that piece of information.
However, if they want to enter your home sweet home, they will need to have the key to open
your door. That, is your private key. Only those with your private key can gain access into your
property. Never lose your private keys.
Digital Signatures
If you ever signed any paper documents with a pen, it is not much different in concept when it
comes to the digital signature. Only this time, it is done in the virtual world, digitally.
There are some technical stuffs going behind the scene, where authentication and timestamping
are being done background to make sure that you are the genuine identity, which could be a
person or an object (when it comes to Internet of Things), to authorize or acknowledge a
document or approve a transaction.
A valid digital signature gives a recipient reason to believe that the message was created by a
known sender (authentication), that the sender cannot deny having sent the message
(non-repudiation), and that the message was not altered in transit (integrity)18.
16
https://www.webopedia.com/TERM/H/hashing.html
17
Definition of computer security terms: Asymmetric Encryption
http://hitachi-id.com/resource/itsec-concepts/asymmetric_encryption.html
18
https://en.wikipedia.org/wiki/Digital_signature
Distributed System
In a centralized system, the point of attack is obvious. You cant attack effectively when you
dont have a clear target. In other words, in a distributed systems environment, hackers cant
just hack a computer and consider job done.
They will have to hack every single node or computer in the network, almost at the same time,
or in a very limited time frame, in order to make changes to the same piece of information.
Image below clearly illustrates the differences between centralized and distributed system20.
In a distributed environment, no central company or person owns a system, yet everyone can
use it and help running it. There is no single point of failure.
19
E-signatures and digital signatures, Emilie Low, in The Sun Daily 6th Nov 2017, page 11
http://thesun-epaper.com/mon/06112017/files/assets/common/downloads/publication.pdf
20
Understand the Blockchain in Two Minutes (0:37)
https://www.youtube.com/watch?v=r43LhSUUGTQ
2017-2018. Koh How Tze. All Rights Reserved.
Conventional Database Design
In conventional way of storing data, there are two options: file-based system, and the database
model. We shall use the database model for our illustration.
When we talk about database, there are tables involved. Lets do an example, by looking at it as
though they are Spreadsheets.
Say we have a real estate developer, and he wants to keep track of the transactions of his
properties.
The Property Table will keep track of informations regarding the piece of real estate. The Owner
Table will keep track of house owners personal information. The Ownership Table is meant for
recording the most updated owner info of a property, and the Transaction Table will log every
trades which changes the ownership of a property. We shall look further into each of these table
with some sample data to illustrate how things work as simple yet as clearly as possible.
: : : :
: : : :
: : : :
Owner Table - stores the information of owners, such as their name, their contact number, their
address and other data that might be useful for the developer.
: : : :
: : : :
: : : : :
: : : : :
: : : : :
TRX001 3/3/17 OID1 OID3 PID001 OID1 sold PID001 to OID3 on 3/3
TRX002 8/8/17 OID2 OID3 PID002 OID2 sold PID002 to OID3 on 8/8
TRX003 10/10/17 OID3 OID1 PID004 OID3 sold PID004 to OID1 on 10/10
: : : : : : :
: : : : : : :
: : : : : : :
After 10th October 2017, besides his originally owned property PID003, Mr.C will owns two
more properties, PID001 and PID002 which were sold to him on 3rd March 2017 and 8th August
2017 respectively. Since Mr.C sold his other property, PID004 to Mr.A, he will now owns only 3
properties as at 10th October 2017.
: : : : :
: : : : :
: : : : :
If a hacker were to change the ownership of PID001, what he needs to do is simply hack into
the database, make the changes in related tables and data field, and the frontend system will
shows the hacked, or modified info.
In this example, say the hacker is OID7, Mr. Hacken. As he hacked into the system, he only
needs to amend 2 tables, namely the Transaction Table and the Ownership Table. He simplies
need to insert a valid record in the Transaction table:
TRX001 3/3/17 OID1 OID3 PID001 OID1 sold PID001 to OID3 on 3/3
TRX002 8/8/17 OID2 OID3 PID002 OID2 sold PID002 to OID3 on 8/8
TRX003 10/10/17 OID3 OID1 PID004 OID3 sold PID004 to OID1 on 10/10
TRX004 11/11/17 OID3 OID7 PID001 OID3 sold PID001 to OID7 on 11/11
: : : : : :
: : : : : :
: : : : : :
: : : :
: : : :
: : : :
The front end system interface will reflect the changes when searches or listing are made.
It will take some time for people to realize records were changed.
Though there might be access log, hackers can still make relevant changes to the log as well.
Of course, this is oversimplified example. The point to make here is that when things are
centralized, the point for attack exists, clearly. All it takes is to buy some time to get into the
system, locate the point, and make the changes.
What if this is an insiders job? Then, what makes the Blockchain immutable?
A Chain of Blocks
In a blockchain situation, data are logged in sequence, timestamped. Simply put, it is kinda like
a chain of blocks organized chronologically. Did I mention encrypted?
Tx_root: root hash value of a hash tree (w:merkle tree) over all
transactions.
Nonce: any number to make sure the resulting hash value of this
block is below the target hash value. The Nonce is a 32 bit number
and the 2^32 number space is exhausted during mining within less
than a second.
Image : Graphic of data fields in Bitcoin blockchain. Simplified depiction: some fields are missing.
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. The
system is secure as long as honest nodes collectively control more CPU power than any
cooperating group of attacker nodes.
If each of the new blocks are appended to the chain every 10 minutes, imagine you want to
change the record of what happened 8 hours ago. What if the transaction or data that you want
to change is something happened few years ago?
Not only you need to go back in time through thousands of blocks, at the time you are trying to
do this, new blocks will be keep coming in every 10 minutes. In other words, you have 10
21
https://commons.wikimedia.org/wiki/File:Bitcoin_Block_Data.png
2017-2018. Koh How Tze. All Rights Reserved.
minutes to traverse back the chain to get to that intended block, make all the changes you want,
reconstruct the chain, and convince all others that this is the valid chain. Mission impossible?
There are sayings that Quantum Computing might be able to achieve this at the time of writing.
Yet people are still waiting to see a solid proof.
The design of the Bitcoin system is in such thinking that rather you spend all the resources in
cheating, which could be very expensive and be punished real quick, it is always better to be on
the right side of the system. This is how Satoshi put it in his original White Paper:
If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would
have to choose between using it to defraud people by stealing back his payments, or using it
to generate new coins. He 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.
Secure By Design
Blockchains are secure by design. It is a distributed computing system with high Byzantine fault
tolerance. The consensus algorithm forms the very fundamental of how a blockchain works.
By design, there are quite a lot of considerations involved, as it is an open system to transfer
values, without any intermediaries. Where does trust comes from? How should responsibilities
be shouldered? Things are well taken care of through computer logics and mathematical
equations.
Consensus Algorithm
For any organization, a constitution serves as a reference point should any disputes happen
among the community members. Disputes happen because the possibilities of people not
playing according to rules exist. people are tempted to exploit the system to maximize their
personal benefits, when loopholes are obvious. While no perfect solutions exist, precautionary
measures should be put in place.
22
https://en.wikipedia.org/wiki/Consensus_(computer_science)
2017-2018. Koh How Tze. All Rights Reserved.
Proof of Work is a consensus where some requirements need to be performed in order to create
a new block of trustless transactions on a Blockchain. It is an expensive computer calculation,
which is also known as mining, as it involves high computational power and burning a lot of
energy in order to carry out the works. There are game theory and economic reasons behind.
We shall look further into this when we explore more on mining in next chapter - Smart Money.
Proof of Stake is a different way to validate transactions but it has the same purpose with that of
Proof of Work, which is to deter cyber-attacks. It is a more greener and cheaper distributed form
of consensus as it does not require as much energy needed to carry out computational jobs
when compared to that of Proof of Work protocol.
Rewards First miner who solves each No block reward. Miners take
blocks problem get the reward. transaction fees.
After defined number of coins are
mined, transaction fees could
become the reward.
Game Theory
Remember that million dollar question of how do we achieve trust without authorities and
intermediaries, in a widely distributed, non-hierarchy system?
What mathematicians John von Neumann and John Nash, as well as economist Oskar
Morgenstern suggest - a model of optimality taking into consideration not only benefits less
costs but also the interaction between participants, which is Game Theory, might give us a good
answer.
23
https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/
To better comprehend how Game Theory is being implied, lets look at the few challenges that
Bitcoin system solved.
Take the Proof of Work consensus as an example, while miners job is to record the
transactions precisely (which is to verify the legitimacy of a transaction, or avoiding the
so-called double-spending issues as in any monetary system) and chronologically, how should
they be compensated? In the case of Bitcoin, new digital currencies will be created and be
rewarded to the first miner who successfully completed the job.
This is what happens behind the scene when transactions are being executed:
1) Transactions are broadcast to all nodes and bundled together into a block;
2) Miners verify that transactions within each block are legitimate through mathematical
puzzle solving, which is, the proof-of-work.
3) The first miner who solves the blocks problem gets the reward;
5) Nodes express their acceptance of the block by working on creating the next block in the
chain, using the hash of the accepted block as the previous hash.
Here comes another question, how to determine who gets the reward? The first one who gets
the work done correctly.
The work (which is the mathematical puzzle) is relatively complex on the requester side but
easy to check for the network.
24
https://en.wikipedia.org/wiki/Game_theory
If you were presented a 3x3 Sudoku grid, you can easily solve it within seconds, perhaps. When
the difficulty increases, say from 3x3 grid to 9x9 grid, the time it takes to solve the puzzle will
increase too, and perhaps, not proportionally but exponentially. However, if you were to check if
a Sudoku puzzle is filled up correctly, the time it takes is not much different for that of a 3x3 and
9x9, or even 10x10.
In other words, solving the problems is relatively difficult compared to checking if the solutions
are correct. Its a matter of how should workers be compensated, and how rewards should be
distributed.
When you have millions, or even billions of node scattered over a wide network trying to
coordinate to accomplish a certain task, you will have the Byzantine Generals' Problem26.
Imagine you are in a war situation, where you need to take down a city. You have 7 generals on
your side, surrounding that city with each of their troops, and each of the generals now have a
decision to make, to attack or to retreat.
Say 3 generals decided to attack, and 3 others prefer a retreat. The 7th general, who has yet to
make a decision, would affect the whole armys upcoming action. He will be a crucial
determining factor to what comes next.
What if he decided to attack yet messages couldnt pass through to some of the generals? How
to synchronize the moves? How would you ensure that while he pass out an attack decision and
yet in reality he is retreating his troops?
In a distributed system, nodes could go on and off, due to power failures, malfunctioning of
system hardware, network errors etc. Among the failure modes, these are considered the most
general and most difficult class, especially in a distributed system.
Satoshis original white paper on Bitcoin addressed the problem solving in its abstract as such:
25
http://www.sudoku.com/
26
https://en.wikipedia.org/wiki/Byzantine_fault_tolerance#Byzantine_Generals.27_Problem
How the system actually does it is described in section 5 of the white paper, concerning the
Network part of it:
New transaction broadcasts do not necessarily need to reach all nodes. As long as they reach
many nodes, they will get into a block before long. Block broadcasts are also tolerant of dropped
messages. If a node does not receive a block, it will request it when it receives the next block
and realizes it missed one.27
Prisoners Dilemma
The prisoner's dilemma is a standard example of a game analyzed in game theory that shows
why two completely "rational" individuals might not cooperate, even if it appears that it is in their
best interests to do so.28
Lets assume that 2 criminals were arrested and imprisoned in separate location where it is
impossible for them to communicate. There is a lack of evidence to convict the pair on the
principal charge. However, the prosecutors would like to get both sentenced to prison on a
lesser charge. They offer each prisoner a bargain at the same time, where each criminal is
given the opportunity to betray the other by testifying that the other committed the crime.
While it is pretty clear that if both Prisoner A and Prisoner B cooperate, each of them will only
need to serve 1 year in prison, the actual outcome doesnt work out this way, because the
27
https://bitcoin.org/bitcoin.pdf, page 4
28
https://en.wikipedia.org/wiki/Prisoner%27s_dilemma
Two individuals acting in their own self-interest will pursue a course of action that does not
result in the ideal outcome.
In a computer system, consequences are predictable through logics and mathematics. What
if scenarios can be analyzed and best solutions can be chosen in a blink of an eye. If it will
lead to a worse result when two parties are both acting in self-interest, we can avoid the
situation through pre-programmed algorithm, and choose only the best outcome.
51% Attack
Theoretically, if a group of miners can control more than 50% of the network's mining hashrate,
or computing power, they would be able to prevent new transactions from gaining confirmations,
allowing them to halt payments between some or all users. The attackers could double-spend
the coins by reversing the transactions that were completed. This attack happens when a single
adversary is controlling multiple nodes by forging identities in peer-to-peer networks.
However, as Bitcoins model suggested since day one, the cost of hijacking the system in such
a way will be way far expensive than to play it by the rules.
In summary, to have a better understanding of how a Blockchain stores secure data (such as
coins) and how secure it could be, you can look at it from both the technical and the design
related terms.
If the World Wide Web is about information, the Blockchain is about trust. If the World Wide
Web is about the transfer of information, the Blockchain is about the transfer of values.
The web was about replacing some intermediaries. Now the blockchain is about replacing other
intermediaries, once again. The blockchain will do to banking what the web did to media.
In the near future, we will be doing 'Googling' equivalent over blockchains looking for truth and
authentication.
Its doesnt have to be pure Web or native Blockchain applications. We can build hybrid
systems. Solutions that traverse between the web and blockchains. Of course, integration is one
of the key concerns. Is there any real-life project for reference? Yes, Civic29 - a secure identity
platform that verified identity, decentralized with blockchain technology.
It is an identity management service that allows you to protect and authorize the use of your
identity in real-time.
29
https://www.civic.com
30
https://tokenmarket.net
2017-2018. Koh How Tze. All Rights Reserved.
You can now login some websites with your identity on FB, G+, Twitter, or Civic.
The Blockchain technology brings to the World Wide Web a very important and critical element -
trust. People search for news, products and services information, and communicate over the
internet. The problem with existing ecosystem is, people cant be sure if the piece of
information, or the party whom they are communicate with is the genuine or real person.
Blockchain complements this part of the puzzle.
With trust as a built in protocol, it delivers promises about the genuinity of identity, ownership
and transactions. While the best use case is money and payment system, which we are seeing
in place now, the applications could reach out to many other sectors, with even new industry
being created. For instance, energy, law and enforcements, properties and belongings, etc. As
we can see from the illustration below, when trust is in place, we shall have no issues with
identity and ownership.
The best place to prototype the concept by putting all pieces together would be through a small
scale property development project, which we shall go through the design part of it, piece by
piece.
The former can be corrupted by lust, greed, fear etc, where decision making could be emotional
at some point of times. The latter is purely mathematics and logics, with high resistance to
censorship, coercion and geopolitical manipulation. The highest risk for machines would be total
offline when main energy supply stops. For instance, the complete shutdown of the whole
internet.
Technically, when it comes to hybrid solutions, it is important to know when to use a traditional
database and when to use a blockchain, optimizing their dual operations will be critical for
security, stability, and scalability.
Of course, there are endless possibilities. To embrace technology and take the middle path
could be a better option rather than to go extreme on both ends.
BLOCKCHAIN INSIDER
What Bitcoin and Blockchain Technology have to offer the world
If you would like to be part of this project or have some suggestions for the betterment of this
project, please do not hesitate to drop us an email: blockchaininsider@gmail.com
Koh How Tze, an entrepreneur with a Degree of Bachelor of Engineering (Computer) from UTM, Skudai,
Malaysia, had been serving clients from retail and servicing industry since the dinosaur age of the
internet. He started his career as a programmer working on Web Based Retail Management System,
during an era where people are still using dial-up connections with 56k modem (the fastest that time) to
go online. He witnesses how the ICT industry and the internet grew from DOS based system to the
modern days mobile system, to what it is today.
Serving clients from start-ups to MNC throughout his 20 years career path (since 1997), he understands
clearly the in and outs of web-based systems, which he advises, consults and integrates for many of his
clients. One of the most successful implementation was a retail chain who grew their businesses from 13
outlets to current public listed status with more than 200 outlets across the nation. This is one of the
earliest web-based retail management systems in the market, running on open source LAMP (Linux,
Apache, MySQL, PHP) environment. Another system development and implementation using similar
framework were for a coach company, with hundreds of tickets issued daily through an online ticketing
system. Many can be added but to cut a long story short, they are all customised software solutions.
From ICT system development and integration, he went into consultation and currently moved into the
digital media landscape. He is betting the future on this sunrise industry with strong confidence in
Malaysias rich cultural heritage and multi-ethnics resources.
THANK YOU
http://www.BCInsider.MY