Can you hold my bitcoins whilst I pick up the blockchain?: A critique of an awful blockchain explanation

A few months ago I started to read Jacques Peretti’s ‘The Deals That Made the World’ and was struck just 26 pages in by his explanation of blockchain technology. It was, quite simply, the most incorrect explanation I have ever read. So incorrect in fact, that I decided to contact his agent in order to offer a potential re-write for the section.

Unfortunately I never heard back, so the incorrect explanation remains. However to ensure no-one is miseducated about blockchain from his book, here’s the section and my critique….

“Blockchain — The Nuclear Key”

In April 2014, the SSL encryptption protocol providing watertight security for millions of online transactions carried out every second, and used by millions of businesses across the globe, was hacked. SSL was generally regarded by security experts to be the most secure payment system yet devised.

So how does it work? SSL is a new generation of ‘blockchain’ payment. Blockchain was originally developed as a way of allowing huge corporations to do billion-dollar deal securely. It now works for everyday transactions carried out by you and me. and is based on the principle of the nuclear key.

In a nuclear submarine, with missile capability to destroy an entire continent, control does not lie with one person but with a number of individuals, each of whom has a separate key. These keys need to be inserted in the control panel in the right order and at the right time for the missile to go off. The crew do not know who has the keys, and thus there is theoretically no way of overriding the system.

With a financial transaction carried out using blockchain, computers take the role of crew members. Each algorithm is primed to play its role in inserting a password at the correct moment. No one party can override the system. It is an interlocking process with layer upon layer of security. It appears impregnable. Blockchain is so trusted that the Pentagon are researching the use of it to encrypt nuclear weapons.”

Just take a moment to take it in with all its glory.

It is incorrect on so many levels that a line by line critique is necessary…

“SSL is a new generation of ‘blockchain’ payment.”

Whilst SSL and blockchain technology do both employ public-private key cryptography, SSL is not a new generation of blockchain. Blockchain technology is a form of distributed ledger technology, created in 2008 as the distribution and creation mechanisms for bitcoins. It was created as an alternative payment architecture post the 2008/09 banking crisis and intended as a peer-to-peer electronic cash system. SSL on the other hand was developed in 1994 and is a method of securely transferring information across the internet. SSL therefore pre-dated blockchain technology and is not a payment mechanisms … so far not so good for Mr Peretti.

“Blockchain was originally developed as a way of allowing huge corporations to do billion-dollar deals securely.”

Unfortunately this is not in any way correct. As outlined above, blockchain technology was created specifically for peer-to-peer transactions and not for huge corporations to transact. More so, it was created in response to the financial crisis brought about by huge multinational banks as a way for individuals to regain financial control and remove the dependence on intermediaries — the antithesis of being for huge corporations!

This is also evidenced not only in the initial use cases of the technology (and the principal use cases for the last 8 years) but also in the infrastructure whereby blocks of transactions are limited at 1MB (c1,500 transactions). Therefore whilst some corporations are now exploring the use of blockchain technology many are exploring enterprise solutions in private networks whereby they can pick n’ mix components to enable faster and cheaper alternatives to the original bitcoin protocol.

It is also notable that the bulk of transactions up to 2017 were less than $5k in value and now, even after the Dec17 highs, are still only around $30k (c5BTC). It is also worth noting that this figure will be inflated by exchanges who batch process and thus one transaction could include a number of different user’s transactions, each of a significantly lower value than $5k.

“It now works for every day transactions carried out by you and me, and is based on the principal of a nuclear key.”

Sadly whilst I would love for this statement to be true, it is not. Blockchain technology is still nascent and in its infancy and has certainly not been delayed by the likes of Visa or MasterCard to power their core payment systems. As such, it would not be correct to state that blockchain technology powers real world transactions for the average consumer.

The reference to a nuclear key is unfortunately also completely incorrect. This is the crux of this paragraph and is 100% incorrect. I assume Peretti has confused SSL with SSSS (Shamir’s Secret Sharing Scheme) — an encryption method whereby a private key is split into parts and stored independently rather as one entity.

“With a financial transaction carried out using blockchain, computers take the role of crew members. Each algorithm is primed to play its role in inserting a password at the correct moment.”

This is very …. very … wrong…

Computers within a blockchain network are referred to as nodes and can either store a full history of the entire blockchain (full nodes) or partial records (thin nodes). They run a version of the protocol and can also help to secure the network by validating transactions and/or mining on the network. The validator role is a volunteer role and helps decentralise the network since it stores and broadcasts a full history of the blockchain — currently over 180GB (07/09/2018) for the bitcoin blockchain. As such, many validators are also miners since this can be an income generating role.

The miners’ role is to build the blocks and solve a cryptographic puzzle in order to add it to the chain of blocks. If they are the first to solve the puzzle then they are rewarded with newly mined bitcoins — this is the block reward and halves ever 210,000 blocks. As such, the current block reward is 12.5BTC. To mine a block, the miner must first group together transactions into a block, which is capped at 1MB (roughly 1,500 transactions) and validate the transactions. They then take a hash of all these transactions (referred to as the merkle root hash), a hash of the previous block header (taking information from the previous block chains the blocks together), a timestamp of the block, the protocol version number they are supporting, the target difficulty and compute this against a nonce (an incrementing value). The aim is that the result of this computation matches a required format, however a large number of nonce value will need to be tried in order to reach this target format.

You can think of this as trying to find the correct combination of a padlock with each miner checking through possible combinations and hoping to unlock the padlock first. If they do, then they tell the network the combination and their block of transactions gets added to the chain of blocks.

The puzzle which they’re solving uses the SHA-256 algorithm and is an improvement on SHA-1 (which coincidentally was broken alongside the SSL encryption method ). However there are no passwords which must be inserted at a correct time and no nuclear key. Instead it is a race to find the answer to a cryptographic puzzle with all miners competing against each other. This is referred to as reaching consensus and you can read more about this here.

“No one party can override the system.”

They potentially could if they gained over 51% of the mining power, however the decentralised nature of the network aims to make this very unlikely and as more nodes join the network, the bar to achieve over 51% gets higher.

As such, it is not an impossibility but incredibly unlikely.

“It is an interlocking process with layer upon layer of security”

Whilst it is an interlocking process, owning to some information from the previously confirmed block being included in any new block — hence the term ‘block’ ‘chain’ — it is not layer upon layer of security and in fact the security within blockchain technology is beautifully simple.

“Blockchain is so trusted that the Pentagon are researching the use of it to encrypt nuclear weapons.”

Whilst DARPA did release information that they were researching the use of blockchain technology, this was focussed around creating a secure messaging service rather than to ‘encrypt nuclear weapons’. Furthermore, they also appeared to have some misunderstandings about the technology’s potential …

“Smart documents and contracts’ can be instantly and securely sent and received, thereby reducing exposure to hackers and reducing needless delays in DoD back-office correspondence.”

a) blockchain technology is not instantaneous b) on public blockchain’s, such as bitcoin, all transactions are visible to the network. Therefore whilst there is pseudo-anonymity from using addresses, the transaction history for each address is publicly visible. If the Pentagon therefore wished to use blockchain for securely transferring secrets, they would need a private blockchain with trusted parties, and thus a secure database would be just as effective.

It is unfortunate that such explanations of blockchain technology exist, as they misinform and miseducate. Therefore whilst I support authors entering the blockchain discussion and learning about the technology, all I ask is that they at least Google the topic before writing about it! Had Peretti done so then it would have been immediately obvious to him that his understanding of SSL and blockchain was completely incorrect.

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