Graphical representation of the blockchain cycle

As Bitcoin slides the Blockchain grows

Confidence in Bitcoin's value is sliding after a less-than ideal 2014, but money may not be its legacy. Now the aim is to secure users' funds and reduce the risk of 'double spending' with the introduction of the blockchain.

2014 was not good for Bitcoin as a digital currency. After surging in value from $100 to more than $1,000 per Bitcoin by the end of 2013, the price slipped throughout 2014 to sink just below $200 by mid-January. The virtual currency was hit by a number of issues including the collapse of the Mt Gox exchange, which saw more than half a million Bitcoins go 'missing'.

Yet 2015 could be good for the underlying technology. Despite these failures of confidence, underpinning Bitcoin is a concept that could change the nature of ensuring trust online, using its infrastructure to authenticate any transactions without the need for a central authority.

Even the concept's creator went missing without a trace. Under the name Satoshi Nakamoto, the inventor of the blockchain published a paper in late 2008, titled 'Bitcoin: A Peer-to-Peer Electronic Cash System', in which he proposed the system of electronic cash. Such a system needs to let the P2P network's members be autonomous, yet keep track of all the money in the system.

Without some form of universally accepted ledger, it would be easy for people to 'double spend' by sending money to someone and then sending it again to someone else. Nakamoto's answer was the blockchain: a growing chain of numbers that encapsulates the history of every Bitcoin ever created. But it could also be the transactional history of just about anything that can be traded in a virtual space. Even if the value of the Bitcoin evaporates as quickly as it spiralled upwards in the style of the financial manias that preceded it, the blockchain could live on.

Writing in January for the Brookings Institute, venture capitalists Mohit Kaushal and Sheel Tyle put forward a number of businesses and services that could benefit from the blockchain's mechanism for ensuring trust. Several projects are already moving beyond Bitcoin's usage model as a blockchain for storing value.

Examples of this include Stone, which enables people to publish their own messages in the blockchain, and Proof of Existence, which hashes documents uploaded by users, creating a time-stamping service that proves they existed on a certain date. Counterparty, a service for creating custom tokens built on the Bitcoin blockchain, says they can be used for everything from crowdfunding to voting.

These applications all embed their own information into transactions on the Bitcoin blockchain, often using a part of the transaction record built to store extraneous information. But the more things people try to store, the bigger the blockchain grows. Its nature means that old data cannot simply be archived away. Each part of the chain is based on its predecessors - it's one of the features that makes it possible for many different people to contribute to the blockchain.

The piggy-backing on the blockchain has caused consternation among people already concerned about its ever-increasing size. Bitcoin's blockchain more than doubled to reach 26Gb in 2014 - its fifth year of existence. During its first two years, the blockchain barely needed 1Mb of space.

"The blockchain is not good at storing and indexing arbitrary data," warns Gavin Andresen, chief scientist at The Bitcoin Foundation and formerly lead developer for Bitcoin who worked online with Nakamoto during the cryptocurrency's early days.

Blocks on blocks

We can think of the blockchain as a digital skyscraper, with each floor built on top of the one beneath. Each floor is a 'block' of data, containing information about the transactions that happened on the network while that block was being created. In Bitcoin, a new block is created roughly every 10 minutes. This creates an ever-lengthening tower of blocks.

Detailing every single transaction ever created in the network, the blockchain is open and transparent. Anyone can download and explore it using software tools to find out which addresses transacted with each other, when, and for how much.

If there is no central authority, who is in charge of adding blocks to the network? This depends on the blockchain's most innovative principle: its consensus algorithm.

Someone cannot simply decide to add a new block and expect it to be accepted. The block has to take a specific form that is computationally difficult to create. The block needs to be accompanied by a 'hash', a code generated arithmetically from the data inside the block. Hashes are widely used to encode data such as passwords because it is very difficult to calculate the source data from its hash. By hashing a password entered by a user against the stored hash, software can authenticate or reject the user with a much lower risk of exposure in the event of the list of password hashes being stolen.

Hashes have another property: it is extremely difficult to predict any digit in a hash's result from the source data, except to compute the entire hash itself. Changing a single byte of the input information will completely alter the hash.

Hashes are consistent, however. Rehashing the transactions in a block should produce the same hashing digest that is already stored in that block. If it doesn't, the transactions have been altered.

Still, why couldn't someone preserve the deception by simply replacing the hash in a block that they wanted to alter with their own, fraudulent hash? This is prevented by a feature in the blockchain that links the blocks together.

The hashing process

To verify any block's transactions, it isn't enough to simply rehash its transactions and compare that hash to the one stored in the block. The digest stored in the preceding block must be included in the hashing process.

Because all blocks are linked together sequentially in this way, one block's hash affects the hashes of all following blocks. If any block's hash were to be altered by changing its transactions, it would alter the hash of the next block, which would, in turn, alter the hash of the next block and so on all the way through the chain.

To fraudulently alter a block, an attacker would need to rehash every block that came after it to account for its altered hash digest. As blocks age in the blockchain this becomes harder to do, making them increasingly secure.

Hashes such as those used to store passwords can be calculated very quickly. But the consensus algorithm makes miners work artificially hard for a hash that will be accepted by the network. The hash generated for each block has to have a specific format. Bitcoin demands it starts with a group of zeros. As it is impossible to predict what digit will be at any position within a hash from the source data, the computer creating the hash must run the computation repeatedly to find the digest with the required number of zeros at the beginning by adjusting a value within the block's digest known as the 'nonce', named after the concept of the nonce word ''a word used so rarely that it never enters the language proper".

To encourage people to devote computer resources to running Bitcoin's network, they are rewarded for coming up with appropriate hashes with more Bitcoins. The first producer of each successful hash receives a bonus transaction, known as a coinbase, which pays a predefined number of Bitcoins to their address. They also collect any transaction fees that people on the network have paid to ensure that their transactions are hashed in the block.

To ensure Bitcoin 'miners' do not come up with hashes too quickly by deploying more powerful computers, the network's 'proof-of-work' algorithm alters the difficulty of the task to suit the amount of available compute performance. In Bitcoin's case, this involves changing the number of leading zeros in the hash. More consecutive zeros means more work.

The structure of the Bitcoin network has made hashes so hard to calculate, the network now almost completely runs on special-purpose computers built solely to generate hashes.

Dealing with bloat

There are some complementary technologies in the works to make these enhanced uses of the blockchain more efficient and, in some cases, some competing ones.

"Notary chains are a simple and effective solution for proof of publication and metadata storage," says Ron Gross, co-founder of Mastercoin, a protocol for building and trading custom smart tokens on top of the Bitcoin blockchain.

Notary chain systems, such as the one operated by Factom, enable users to record immutable entries in a chain of their own. These entries represent anything created by a transaction, from a tweet to a video file or the deeds to a house, and they are stored with extensive metadata.

The notary chain then uses a decentralised network of servers and nodes to successively hash these entries into a single digest that is then embedded into the Bitcoin blockchain. A single digest could represent thousands of notary chain entries, which can themselves be traced back to their original sources through the notary chain.

An alternative is sidechains, which are alternative blockchains designed for specific applications. A recent white paper, with contributors including core Bitcoin developers, proposed a system in which Bitcoin's blockchain would be a 'parent' chain, from which Bitcoins could be transferred to an alternative blockchain. There could be many of these sidechains, each representing specific types of asset, the paper suggested.

Some platforms have moved away from using the Bitcoin blockchain altogether. Ethereum, led by Vitalik Buterin, uses its own blockchain to create 'smart contracts'. These are contractual agreements, written in executable code, that carry out instructions based on predefined conditions, such as an equity ownership contract that changes dynamically with the proportion of hours contributed to a project.

Projects such as Ethereum, Mastercoin and others are still embryonic. As they move forward, advocates believe that they will succeed in usurping Bitcoin, the incumbent blockchain implementation.

"Bitcoin the protocol is guaranteed to be eclipsed. It's already outdated technology," warns Buterin.

History is littered with examples of incumbent technology implementations that have been displaced by rivals, shattering the market into many alternative implementations and leaving the original trailblazers forgotten.

The Bitcoin Foundation's Andresen is predictably sanguine. "Bitcoin isn't perfect, but I think it is good enough to win and it is designed so it can evolve over time," he says.

Interoperable blockchains

As people grapple with the problems of a growing blockchain, a gaggle of alternative implementations in a relatively new space seems inevitable.

The important thing will be for these new systems to interoperate, says Charles Hoskinson. A cryptography expert and the creator of a Udemy course on Bitcoin's inner workings, Hoskinson is also the co-founder and former CEO of Ethereum.

"There has to be standardisation, not domination or assimilation," he says. "Standardisation, in terms of how blockchains will communicate with each other."

The broader benefits could be immense, Hoskinson adds, and in fields that many have barely yet thought of, such as accounting.

"With blockchains, you have transaction histories back to the beginning," he says. "If you can internalise it and merge with GAAP, then every single penny could be accounted for by this incorruptible identity."

These applications, and others such as identity management, are only beginning to emerge as concepts in the nascent world of the blockchain. As a fundamental step forward in computing, it has too much potential to fail - no matter what happens to Bitcoin as a payment network and currency.

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