What is Holding Back The Blockchain?
I suppose it was the fact that sounded nice and it had the word “ether”, referring to the hypothetical invisible medium that permeates the universe and allows light to travel — Vitalik Buterin on why he chose the name Ethereum
Genius is the ability to put into effect what is in your mind — F Scott Fitzgerald
As I write this article, I witnessed a week where Bitcoin lost more than 23% of its value and Ether lost more than 27% of its value. Understandably, many thought the bubble had burst considering there is nothing backing today’s Crypto Currencies. They could be right but this article explains why they may not. Nobody knows for sure. The future of Blockchain’s global expansion depends on a new consensus building mechanism called Casper whose development is being led by Vitalik Buterin and Vlad Zamfir. This article explains why these two developers hold the key to the next evolution of the Blockchain.
What Prevents Blockchains From Going Mainstream?
The number one problem for the Blockchain to go mainstream is scalability. By now, you have probably read about the hideous amount of electricity that Bitcoin’s Blockchain consumes. If you have not, let me put it into perspective by using the Bitcoin Energy Consumption Index referenced here. As per the model, Bitcoin mining consumes 47.3 Twh (Terawatt-hours) of electricity every year. In other words, this is enough electricity to power the country of Singapore or 0.21% of the worlds electricity consumption which leaves an enormous carbon footprint if the electricity in question is generated by coal power plants. I think you get the picture. The Visa network can process approximately 2000 transactions per second versus 5 to 7 for Bitcoin and possibly 100 for Ethereum.
The Proof of Work (PoW) algorithm that the existing Blockchains including Bitcoin and Ethereum employ to validate transactions is extremely inefficient. Think of the inefficiency as the price to pay for decentralizing trust. As I described above, imagine the massive carbon footprint and electricity consumption required to maintain decentralization of trust. Now, let’s understand why the Proof of Work consensus building algorithm results in such inefficiency.
Shell Money and Proof of Work
It’s ironic that the most advanced of technologies today i.e. the Blockchain relies on a logic very similar to that used thirty thousand years ago by ancestors in the Solomon Islands. People in the Solomon Island used cowry shells as currency. The shells are used in creating strips of decorated clothing and the value of the shells as money was dependent on the amount of time it would take for creating the strips of clothing.
In most Blockchains today, the consensus building logic is similar and is called ‘Proof of Work’. A key feature of Proof of Work is the asymmetry i.e. the problem is relatively easy to verify by a server but it is hard enough to require some computational effort by the client in the network. It is very similar to the Client Puzzle which is designed to avoid Denial of Service (DoS) attacks on servers. The puzzle is hard enough to require some CPU power of the client but is easy for the server to verify. Therefore, hackers who typically launch attacks using several client machines will find it infeasible to connect to the server because it would take a lot of CPU power to launch attacks from multiple clients simultaneously.
In case of the Blockchain, the client computer that solves the puzzle first is the miner who gets a reward e.g. a Bitcoin. The problem is that because of asymmetry, the more computers or GPU’s that get added as nodes to the Blockchain, the more complicated the puzzle has to become to maintain asymmetry. Thus, forcing a very high resource requirements on the nodes connected to the decentralized Blockchain network. As a result, drawing large amounts of electricity and leaving an almost infeasible imprint on the environment. This obstacle must be overcome for Blockchains to become viable.
How Do We Make Blockchains Scalable?
Enter ‘Proof of Stake’ method of validating transactions. Under this method, a miner can only validate transactions to the extent of cryptocurrency held by him/her. So, if someone holds 10% of the cryptocurrency in question, he/she can validate only 10% of the transactions on the Blockchain.
However, this method suffers from a major drawback called the Byzantine General’s Problem. In a nutshell, the Byzantine Generals Problem means a dilemma where some of the nodes on the Blockchain decide to tamper with the ledger. The way to prevent that is to virtualize mining.
Today, under the Proof of Work method, money has to be spent on computers and GPU’s to mine Bitcoins or other cryptocurrencies. In a Proof of Stake method, the miners will actually deposit their cryptocurrencies as insurance for foul play. In case they decide to tamper with the Blockchain, their deposit will be forfeit. So, they have something at Stake. If they engage in foul play, the value of their own cryptocurrency goes down.
Two developers Vlad Zamfir and Vitalik Buterin are working on a version of Byzantine Fault Tolerant (BFT) Proof of Stake protocol called Casper. There are two teams working on developing a different versions of Casper
- Casper the Friendly Finality Gadget (FFG)
- Casper the Friendly GHOST: Correct-by-Construction (CBC)
The success of one or both of these versions holds the key to the problem of a scalable Blockchain.
The Bottom Line
Once Blockchains overcome the problem of scalability, they can truly become mainstream. It is important to remember that a Blockchain is essentially a ledger i.e. it is a recording system that can never go down because all the computers on the Blockchain have the same copy of the ledger since the ledger’s inception. This is also known as ‘Triple Entry Accounting’.
Let’s say Sam has $10 in his account (represented by his digital wallet signed by his private key) and he wants to pay Alice $5. Now, let’s also assume Alice has $5 in her account (represented by her digital wallet signed by her private key).
When Sam sends $5 to Alice, the double entry would be a credit to Sam’s cash ledger so that his cash balance goes down to $5 and a debit to Alice’s cash ledger so her balance goes up to $10. These are the typical double entries.
The Blockchain, then, becomes the third ledger i.e. a public ledger that records both these entries and becomes the third entry of the transaction. In short, all three parties i.e. Sam, Alice and the Blockchain will have three entries each. This becomes a three by three entry system known as ‘Triple Entry Accounting’.
In today’s world, literally everything is accounted for using the double entry system. The Blockchain, assuming it becomes scalable using protocols such as the Casper Proof of Stake consensus building algorithm for Ethereum, will be used everywhere accounting is today including perhaps recording the entire genome of individuals on it.
We may soon live in a world where triple entry accounting is the standard. If that reality comes into being, cryptocurrencies would have succeeded in justifying their value as symbols of a superior recording method. On the way, they will have upended many industries in their wake.
In addition, they will herald the dawn of a completely different type of internet i.e. an internet of value where virtually anything of value (i.e. money, commodities, equity shares etc.) can be transmitted online in a trusted and economically inexpensive way. Therefore, the future of the Blockchain depends on the success of the Proof of Stake consensus building mechanism. But then again, it could be a totally different world than we imagine today.