Cryptocurrencies – Blockchain

Blockchain’s greatest asset is its ability to create trust.

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In our modern world there is an explosion in the creation, communication, and storage of data. Eric Schmidt’s famous estimation when he was CEO at Google in 2010 - “There was 5 Exabytes of information created between the dawn of civilization through to 2003 and that much information is now created every 2 days, and the pace is increasing”. In reality, there is no way to quantify data generation prior to the computer age. Neither can a comprehensive measure of current data generation be exactly calculated. IBM estimated that every day we create 2.5 quintillion bytes of data. A quintillion has 18 zeros. The amount of data in the world was estimated to be 44 zettabytes at the start of 2020. This means that the number of bytes in the digital universe was 40 times bigger than the number of stars in the observable universe. By 2025, the amount of data generated each day is expected to reach 463 exabytes globally. One thousand zettabytes equal one exabyte. Estimates are that 90% of the data ever produced since the dawn of man has been generated in the last two years. Here are a few statistics which will catch your attention:

 

  • There were 4.66 billion active internet users in January 2021 up from 2.6 billion in 2013.
  • Google handled 1.2 trillion searches in 2020.
  • Facebook generated four petabytes of data every day in 2020.
  • 500 000 new tweets were posted every day in 2020.
  • 5 billion apps were downloaded globally in H1:2020.
  • In 2020, an estimated 306.4 billion emails were sent and received each day around the world.
  • Storage data growth statistics show that both public and private cloud infrastructure will receive 200+ zettabytes (ZB) of data by 2025.
  • Machine-generated data accounted for over 40% of internet data in 2020.
  • By 2023, there are expected to be around 1.3 billion Internet of Things (IoT) subscriptions.
  • The number of IoT devices will reach 25.44 billion in 2025.

 

This explosion in the creation and use of data is only going to accelerate. The number of internet users will continue to expand as more content is available in more languages. The Covid-19 pandemic has massively expanded the use of data and its communication as increasing numbers of people have been forced to work remotely. The development and roll-out of 5G digital communication networks will speed up data transmission speeds by up to 100 times and decrease latency from about 20 milliseconds to one millisecond. By 2030, 90% of the population older than six will be online. The Cloud is providing increasing access to data sets. The evolution of data ecosystems is accelerating. The most contemporary example would be public health systems emerging to cope with the pandemic. The IoT, wearable digital devices, autonomous vehicles and the expansion of Smart Cities will also massively expand the amount of data created, communicated and stored.

 

The era of the Fourth Industrial Revolution (4IR) is upon us. This is more of a cyber revolution than an industrial revolution. It will be characterised by the fusion of the digital, biological, and physical worlds. This will be facilitated by the growing utilisation of new technologies such as artificial intelligence, cloud computing, robotics, 3D printing, the IoT, and advanced wireless technologies.

 

Inevitably, given the duality in human thinking, as many opportunities as this expanding world of data brings so it also brings threats mainly in the form of cybercrime. Cyber-attacks and breaches haunt online activities as their sophistication and damage grows. The cyber attacks take the form of data breaches. According to Cybint, 95% of cybersecurity breaches are caused by human error. Data breaches exposed 36 billion records in the first half of 2020. About 86% of breaches were financially motivated and 10% were motivated by espionage, according to Verizon.

 

Blockchain offers a promising mitigation technology for cybercrime. Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. Further development took place over the following 17 years. In 2008, developer(s) working under the pseudonym Satoshi Nakamoto release a white paper establishing the model for a blockchain. The following year in 2009, Nakamoto implemented the first blockchain as the public ledger for transactions made using Bitcoin.

 

Cape Gemini described the blockchain concept well. Blockchain solved the “Byzantine Generals’ Problem” which is how do the generals communicate and coordinate when their several armies surround an enemy city? This is a fundamental problem in distributed computing and multi-agent systems. Blockchain was designed as a solution to the Byzantine Generals’ problem. Each ‘node’ (a computer) in a blockchain network can be thought of as a general. Each message is a separate transaction that must be verified, and its authenticity confirmed. Blockchain enables this verification through a process known as consensus. Rather than each general waiting for a single messenger to deliver its message, the generals can act in concert to verify messages broadcast to each other. Provided there are more ‘good generals’ than there are ‘traitors’, then the network should be able to distill the authentic data from the bad data. This solution is known as decentralisation and is critical to building blockchain networks.

 

Blockchains are decentralised ledgers. This means each node participating in the blockchain has an independent copy of the ledger. Satoshi Nakamoto introduced the concept of ‘proof-of-work’ as his consensus algorithm in the Bitcoin Blockchain. This ‘proof-of-work’ solution is based on complex mathematical algorithms.

 

Every block has several components: its address, timestamp, the hashvalue of the previous block (the link), a nonce (only once used number) and the data to be transferred. All of this is cryptographically transformed into a hash value for the current block. The cryptographically transformed information in this block is distributed to all the nodes in the blockchain network. This information is in the form hexadecimal alphanumeric strings which are not readable in plain text.

 

Each node then runs a mining algorithm to successfully match the nonce in the block to the block’s current hash value to effectively uncover the block. Increasingly difficult mathematical equations are used to uncover the next ‘block’ and a unique cryptographic ‘hash’ value for that block. The mathematical problem can only be solved by trial and error and the odds of solving the problem are about 1 in 5.9 trillion. It requires substantial computing power by a blockchain miner which uses considerable amounts of energy. Once the miner(s) uncovers the block, they broadcast their work to the network as ‘proof’. For discovering the next block, miners get rewarded in the form of a cryptocurrency. Blockchain mining is the process by which new blocks are entered into the distributed ledger and so is a critical component of the maintenance and development of the blockchain ledger. As a blockchain grows, more computers join to try and solve the problem, the problem gets harder and the network gets larger, theoretically distributing the chain further and making it ever more difficult to sabotage or hack.

 

The blockchain also uses a combination of a private and public digital keys, both of which are encrypted. The digital keys in a user’s wallet are completely independent of the blockchain protocol and can be generated and managed by the user’s wallet software without reference to the blockchain or access to the internet. Think of the public key as similar to a bank account number and the private key as similar to the secret PIN, or signature on a cheque, that provides control over the account. From the private key, a one-way cryptographic function is used to generate a public key. From the public key another one-way cryptographic hash function to generate a blockchain address.

 

The recipient’s public key is available to any node that wants to transact with the recipient. The private key is a hexadecimal number stored in a digital wallet and must be kept secret. The combination of a person’s private and public key enables them to commit a desired transaction, and their digital signature confirms that transaction.

 

The hash functions are complex mathematical algorithms which take messages and convert them into alphanumeric values. These functions are nearly impossible to invert, meaning fraudulent actors cannot reverse engineer blocks. These hash values are then combined in sequence to form the next block. Hashes are used for generating digital signatures and authenticating digital records.

 

Private and public keys alone are not enough to verify a transaction. Another layer of security is required, and this is where the network comes in. The network verifies the transaction or approves it.

 

The combination of a decentralised network, cryptographically coded public and private keys, and cryptographically coded information together with “proof of work” consensus algorithm offers the best solution to the current cyber security problems. Blockchain technology has been cited as the next internet of value and will redefine how we transact and engage with businesses. Participants who may not necessarily trust each other can engage with each other with confidence that a distributed network will verify and authenticate data shared between them.

 

Cryptocurrencies are just one small application of blockchain technology. Blockchain’s greatest asset is its ability to create trust. Blockchain can be utilised in any sector or industry because any kind of digital asset or transaction can be inserted in blockchain, from any industry. Key applications for blockchain technology include secured private messaging, IoT security, securing Domain Name Systems (DNS), decentralising medium storage, securing the integrity of software downloads, verification of status of a Cyber-physical system, protecting data transmission and maintaining the integrity of autonomous systems – transport and weapons. The top five prominent industries that will be disrupted by blockchain technology in the near future are: Banking, Cyber Security, Supply Chain Management, Healthcare and Government. It will not be long before we see blockchains being implemented across multiple industries including finance, healthcare, education, logistics, real estate and many others.

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About the Author
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Mike Haworth

Investment Strategist, Sasfin Wealth

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