Recap

Last week we explained blockchain specific attacks as below :

1. Sybil Attacks &
2. 51% or Majority attacks

Blockchains - Why should we care?

Over the last couple of weeks, we explored at a high level the different aspects of Blockchain, its structure & functioning. We started with the economics of money and then explored consensus, decentralization, mining, incentives, cryptography etc. The closest we can correlate Blockchain is to a community grassroots initiative where community members join together in a common cause and then go about their activities with specific action on how to achieve their goals. The members need to agree or come to a consensus on the goals & ways to achieve them. They have governance protocols which define the rules by which members vote on different proposals.

They also find ways to raise money to keep the movement alive & sustainable.

In a blockchain, the aim and common cause are all coded into consensus & governance protocols which are used by the nodes to agree or disagree on some action. Everything is driven by the underlying protocols with the nodes managing the infrastructure & network.

There are no centralized companies with whom we have to trust our funds or data. Also, some of these centralized companies monetize our data through ads and by selling them to third parties. In other words, we are the product.

The ultimate vision of a Blockchain based system is that we can own our data or funds which are not stored in some centralized servers but in the individual ledgers maintained by nodes & controlled through wallets. The entire infrastructure is made sustainable by incentivizing the parties involved (e.g., the miner nodes) through newly minted coins (coinbase transactions) or transaction fees.

This spirit of community involvement is what makes blockchain based systems unique. Another very important point is that the entire protocol is TRUST-LESS meaning we don’t have to trust the other nodes but we can trust the protocols to run the way it is supposed to. It’s all cryptography & mathematics. Trust the math.

And the code is open source & auditable - meaning anyone can go under the hood to inspect the code and see if it actually does what it purports to do.

But as Spider man said "With great power comes great responsibility" - which means being your own bank comes with great responsibilities. Your funds are tied to your wallet. If you forget the password or pass phrase, your funds are lost forever. There is no bank to retrieve your password. If you lose your wallet, your funds are lost forever (just like if you lose your cash wallet).

The entire financial system today is centralized around institutions solely created for the position of "trust" (Depositories, Banks, Accountants, lawyers etc) & processes which have been around for decades. But as the 2008 crisis has shown, these processes were not all that robust & was misused to generate profits benefiting a few. The payment rails around which the current payment system is based also has a lot of friction through multiple parties involved in moving funds from one location to another. This results in inefficiency & high fees paid by customers for moving their own funds.

During the 2008 crisis, government money was used to bail out banks & Financial Institutions impacted by the crisis but who were responsible for the crisis in the first place. This was highlighted in the genesis block of Bitcoin. To highlight the support received by banks using tax payers’ funds, in 2009 , Satoshi Nakamoto sneaked in a hidden message as below (you can see it in the right side) in the genesis block of Bitcoin (Source : here).

00000000   01 00 00 00 00 00 00 00  00 00 00 00 00 00 00 00   ................
00000010   00 00 00 00 00 00 00 00  00 00 00 00 00 00 00 00   ................
00000020   00 00 00 00 3B A3 ED FD  7A 7B 12 B2 7A C7 2C 3E   ....;£íýz{.²zÇ,>
00000030   67 76 8F 61 7F C8 1B C3  88 8A 51 32 3A 9F B8 AA   gv.a.È.ÈŠQ2:Ÿ¸ª
00000040   4B 1E 5E 4A 29 AB 5F 49  FF FF 00 1D 1D AC 2B 7C   K.^J)«_Iÿÿ...¬+|
00000050   01 01 00 00 00 01 00 00  00 00 00 00 00 00 00 00   ................
00000060   00 00 00 00 00 00 00 00  00 00 00 00 00 00 00 00   ................
00000070   00 00 00 00 00 00 FF FF  FF FF 4D 04 FF FF 00 1D   ......ÿÿÿÿM.ÿÿ..
00000080   01 04 45 54 68 65 20 54  69 6D 65 73 20 30 33 2F   ..EThe Times 03/
00000090   4A 61 6E 2F 32 30 30 39  20 43 68 61 6E 63 65 6C   Jan/2009 Chancel
000000A0   6C 6F 72 20 6F 6E 20 62  72 69 6E 6B 20 6F 66 20   lor on brink of 
000000B0   73 65 63 6F 6E 64 20 62  61 69 6C 6F 75 74 20 66   second bailout f
000000C0   6F 72 20 62 61 6E 6B 73  FF FF FF FF 01 00 F2 05   or banksÿÿÿÿ..ò.
000000D0   2A 01 00 00 00 43 41 04  67 8A FD B0 FE 55 48 27   *....CA.gŠý°þUH'
000000E0   19 67 F1 A6 71 30 B7 10  5C D6 A8 28 E0 39 09 A6   .gñ¦q0·.\Ö¨(à9.¦
000000F0   79 62 E0 EA 1F 61 DE B6  49 F6 BC 3F 4C EF 38 C4   ybàê.aÞ¶Iö¼?Lï8Ä
00000100   F3 55 04 E5 1E C1 12 DE  5C 38 4D F7 BA 0B 8D 57   óU.å.Á.Þ\8M÷º..W
00000110   8A 4C 70 2B 6B F1 1D 5F  AC 00 00 00 00            ŠLp+kñ._¬....

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

The tenets that we explained till now centered around moving value through the blockchain. The introduction of Bitcoin as a blockchain based internet money started what is known as Blockchain 1.0. For the first time ever, monetary transactions became completely decentralized based only on code.

The objective of the crypto movement is for someone to be his or her own bank without depending on any traditional bank to hold, move or transfer your own funds with minimal fees. How close are we to that objective or will that objective ever be achieved? We can't say now. The technology is evolving and we are still at very early stages.

Also, any project - crypto or otherwise should have a sustainable business case. Whether it is DeFi, NFTs or any other crypto projects, it cannot avoid the basic financial principle of

Revenue - Cost = Profit (which has to be sustainable)

This real world fundamental principle applies even to crypto world. If we cut out the noise that we hear every day in tech twitter or other social media, the underlying principle of decentralization, moving value online and also the advanced use cases around smart contracts and Decentralized apps (also called DApps) forming part of Blockchain 2.0 is what makes this technology promising.

The road ahead is exciting and the technology holds tremendous potential. The fact that you can transfer value online without any intermediary and trusting only the math behind the protocols or even creating value online is mind blowing & will slowly change finance & other sectors from bottom up.