Blockchain Bias

Over the past couple of years I’ve spent a lot of time listening to people wittering on about “the blockchain”. They’ve claimed it can solve a plethora of society’s ills – everything from the elimination of poverty to the overthrow of fiat currencies and the nation state.

Being charitable this is evidence of pro-innovation bias in all its perverse glory. Being cynical it’s evidence of people trying to scam investment funds by capitalizing on the halo effect. The blockchain is a brilliant piece of innovation, which will one day – probably – lead to significant economic benefits, but in the end it’s just another piece of technology.

Ledgers, Everywhere

Blockchain is most commonly associated with Bitcoin but is, in fact, a separate innovation upon which the world’s least efficient payment system is built. Technically, blockchain itself is a single example of a broader class of systems known as Distributed Ledger Technology or DLT. 

A ledger is technology that’s been around for a thousand years (see: In the Beginning Were the Accountants) – it records transactions so that you know who owns the various assets it records (including money). A distributed ledger simply means that the same ledger is copied to all of the people who use it – so imagine every bank in the world using a copy of the same database. 

The key idea here is that the entities using a network underpinnined by DLT don’t need to trust each other, but can still trust the information on the ledger. This is, obviously, counter-intuitive, but it’s a revolutionary idea.

Byzantine

The genius of the technology is in something called a consensus protocol, which is the mechanism that allows the users of the ledger agree to put a new record on it without trusting each other. In Bitcoin consensus is achieved through “data mining”, which is a solution to a problem in Game Theory (see: Games People Play) known as The Byzantine General’s Problem, originally described by Leslie Lamport, Robert Shostak and Marshall Pease.

In the problem a bunch of generals are surrounding a city and must decide whether to attack or retreat. Their challenge is how to come to a consensus on what to do when they only have remote communication and some of them may defect and start lying. Data mining via proof-of-work is the Bitcoin solution, but that’s just one example of a DLT consensus protocol.

Owning Assets in the Interweb

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