Instantly understand blockchain with this explanation

There’s been plenty of talk in Malta about blockchain over the past 12 months. I’ve followed the international news and am struck by the coverage. Blockchain is either going to solve all our problems or will cause civilisation to collapse. This is the first of a 3-part series that separates fact from fantasy.

I

In the interest of full disclosure, I’d like to point out I’m a techie. I’ve always enjoyed reading tech news at a personal level, as well as for my chosen career. The more complex an issue is, the more time one needs to fully understand it. I don’t work in fintech so blockchain is not something I work with. And yet I’m interested because it does look promising.

The most irritating aspect of blockchain articles in Maltese media is they’re poorly written. I don’t mean the quality of the language is rubbish. I’m talking about the level of technical understanding. For instance, I’ve noticed journalists tend to assume Blockchain and Bitcoin are interchangeable terms. They’re not. There’s a big difference. I understand journalists may not be techies, but on a linguistic level, those are two different words. They’re not synonyms.

The most irritating aspect of blockchain articles in Maltese media is they’re poorly written.

If journalists aren’t technical the details may be too much for them. I still expect them to do some basic research first. I hope I don’t fall into that trap here.

Leave a comment below if you find yourself laughing at me. I need your help to get it right.

II

I’m going to start with blockchain; I’ll explain why later.

Imagine a bunch of records. For example, think of your bank transactions over the past month. Each one of those is a record showing a single use of your account. We’re all familiar with this.

Banks tend to group these records for us. My bank sends me a statement every month. Each month, I receive a block of records to show me what happened that month, and what the result is.

If I collect the 12 blocks I have for 2017, I will be able to see what happened to my account from 1 January till 31 December. Of course, each block depends on the previous one. The block for February starts with the total as of 31 January and so on. In this way, the blocks are chained together.

And that is a blockchain – a chain of blocks where each block is a bunch of records, and where each block depends on the previous one.

It’s obvious I trust my bank otherwise I wouldn’t bank there. I can verify the details in my blockchain with them. They can reassure me the information is solid. I’m pretty sure my bank manager would be happy to sign a note saying my statements are genuine, correct and up-to-date. I’m sure he’d be happy to have a notarised memo certifying how accurate their statements are too.

That memo certifies the information in the blockchain. There’s an independent certification because it’s notarised. The blockchain and the independent certification of the data together make this setup secure.

This is what a blockchain is. There’s no notary, but digital signatures take care of that. They are that secure.

Imagine if someone at the bank noticed I deposited EUR 100 000 last January. They may think I would not notice if they remove a zero and change that to EUR 10 000. If they did this, it would change the result of the January block. And that would affect all the other blocks that came after it.

This is important: one reason all the records in the blockchain are secure because trying to alter any one ruins the chain.

A blockchain – a chain of blocks where each block is a bunch of records.

Someone who had full control of all the blocks could, in theory, try to change all the blocks to hide his thievery. To solve this problem, the blockchain is replicated and distributed so that there always is more than 1 copy of the entire chain. This distributed ledger makes the difference. We can trust the ledger because there are so many synchronised copies of it.

Now the sticky-fingered bank employee can’t get at my money.

This sounds cool but we’ve had bank accounts for centuries and no one gets that excited about them. Why is everyone raving about blockchain?

III

Let me use a different example.

Imagine I had a piece of land I wanted to sell you. You would ask me to prove I do own the land and I would get a certificate of ownership from the national land registry. In this case, we use a trusted third-party – the registry – to verify I do own the land. You then pay me and I transfer the title to you. Now you can register yourself as the proper owner. If someone else checks the registry to see who owns the land, they will see your name.

With Blockchain we can eliminate middlemen

If that register was a blockchain, we wouldn’t need a centralised registry anymore. The chain itself is replicated and distributed as I explained above. We could check it to see if I own the land. Since the full chain is available we could also check to see who I bought it from, and so on. When I sell you the land, I can transfer the title to you by adding another record to the last block on the chain. This shows you are now the owner. Once replicated, everyone can use a trusted register of land ownership.

We can cut out the middleman.

Anyone who works with bureaucracy knows using a trustworthy registrar will speed up transactions.

(Techies: I know I’ve left out encryption, electronic identity and public-private key usage here. I’m sticking to basic principles since I don’t know how technical my readers are. I’m happy to discuss tech separately.)

Ok, so we can drop middlemen. I can think of examples where these would be governmental middlemen but can this really make a difference to our day-to-day life?

IV

This is where the simplicity of the solution comes into its own.

For many years, anyone working with electronic assets had a simple problem: how can I protect my assets? How do I protect (and profit from) my digital assets?

I’ll give you a simple example. Let’s say I want to sell photographs online. I’ve already spent money on training to become the best photographer ever. I’ve spent thousands on the best equipment. I spend time and more money to get the best shots. Then I upload them to my website and wait until you come along and buy one of my photos for EUR 10.00. How do I know you won’t share it with all your friends? Everyone who receives a free copy of it is depriving me of EUR 10.00.

The truth is it’s easy to copy digital assets from one place to another. This is the biggest problem that technology has faced over the past 3, maybe 4, decades.

Tech companies have come up with many ways of working around this problem. Watermarks and those stupid DVDs that refuse to work on certain players – these are all workarounds. In every case, if you’re technical enough you will succeed in copying things. So instead of solving the problem, they just made it difficult for you to make copies. That just led to another problem; if you want to make a genuine copy it is difficult to do so.

The ultimate digital asset is something with real, tangible value.

But if your computer just referred to a blockchain to see if you are the genuine owner of the asset, then there will be no problem at all.

Using this blockchain architecture, you can sell digital assets or transfer them to someone else with ease. And there won’t be any problem with who is supposed to own it. For the first time in human history, we can transfer digital assets in a safe and secure way. We will all be able to verify the transfer took place. No one can challenge it.

The ultimate digital asset is something that has real value.

Like money.

Up till now I could not have a digital EUR 10.00 note. What would stop me from copying it? If the EUR 10.00 in my e-pocket is unique, and if the blockchain shows that EUR 10.00 is mine, then I can use it to buy things online.

Or I can give the money to my brother.

Blockchain lets me control and monetise my digital assets.

Without using banks.

Without the hassle of bank transfers, bank charges and the 3-day waiting for a transfer between banks.

What would we need to get this in place?

V

This is where the conversation turns to the legality of things.

It’s worth pointing out that the 2002 Electronic Commerce Act allows for electronic contracts. You can sign a contract using a digital signature, provided certain measures to ensure security are in place.

The precise wording is in Article 9.

‘An electronic contract shall not be denied legal effect […] solely on the grounds that it is wholly or in part electronic‘.

Yes, we’ve had this on the books for 16 years now. It’s based on a European Union directive so the same rules apply across the Union.

Electronic transactions, like in blockchain, are already allowed by law.

Taking my example above:

• Can I get an electronic bank statement? Yes.
• Can I get an electronic block of statements? Yes.
• Can my bank manager sign an electronic note stating my blocks are authentic? Yes.
• Can my bank manager give me an electronic memo that is a notarised note certifying my blocks? Yes.
• Can I add my blocks to a digital distributed ledger? Not quite.

In theory there’s no reason the answer to the last question can’t be yes. In practise, I want to be able to trust the technology used for that distributed ledger. You can decide, on your own, to trust a particular technology or company. You can decide to hide your money in a hole in the tree in your garden and trust the squirrels don’t eat it.

But if they eat it you’re the one who’s nuts.

That’s why you put your money in a trusted entity like a bank. One way we know to trust our local banks is because it a central authority regulates them.

There’s more to Blockchain than meets the eye.

Hang on, I hear you say, we don’t have a good record of central authorities in Malta do we?

VI

No, we don’t.

Malta’s upcoming legislation on distributed ledgers proposes creating such a central authority. We trusted Malta’s Financial Services Authority with Pilatus Bank.

And we want to create another Authority. An authority to tell us if it’s safe to use technology to handle electronic money.

The other Authority couldn’t regulate use of real money.

There’s more to this than meets the eye.

First I want to look at electronic currencies like Bitcoin. Then I want to look at what Malta is doing, and what it should be doing instead.

References

1. Blockchain; Investopedia.com; (Retrieved 2018-05-14)
2. What Is Blockchain?; Jacob Kleinman; Life Hacker; 2018-01-16
3. What is blockchain? The most disruptive tech in decades; Lucas Mearian; ComputerWorld; 2018-01-18
4. Is blockchain technology the new internet? Ameer Rosic; Block Geeks; (Retrieved 2018-04-18)
5. PS confident new Bills will appease banks concerns over blockchain, crypto companies; Helena Grech; The Malta Independent; 2018-04-24

All references were valid and correct when this article was published. Changes to referenced websites or web pages may render some references invalid. If this is the case, please leave a comment below.