Thursday, May 11, 2017

A note about Blockchain

In order to make *any* traceable transaction between two parties, I need to have a common agreed upon record of the transaction. When the transactions are of an economic nature, this commonly agreed upon record becomes a source of great power.

An electronic ledger maintained (securely kept and automatically updated every time a transaction is carried out) would be an ideal. That is what "Blockchain" is. The Blockchain is maintained securely on several highly secure and trusted nodes and the data can be accessed at any time by anyone who seeks to verify that the nature of the transactions. As the list of records on this database is basically infinite, the tracking can go on for much longer than any currently available method. The core idea in a "blockchain distributed database" is that while new blocks of data can be added, old ones cannot be edited afterwards. The blockchain itself is stored in a distributed fashion over a vast number of servers and it uses a peculiar form of encryption that is painful to crack. This effectively disincentivizes any hacking of the records themselves.

A completely distributed blockchain database is the basis for the digital currency Bitcoin. While the actual bitcoin ID is "mined" using a computationally intensive algorithm, the ledger that keeps track of bitcoin ownership is a distributed blockchain database. Bitcoins connect up to the regular  financial system at "exchanges" which accept large payments in bitcoin and then convert them into other currencies upon request.

Interest in using blockchain is not limited to digital currencies.Naturally one of the first groups of people that are keen to see this kind of accounting used is the banking community.  They have people walking in with all sorts of money in various currencies claiming ownership of it and they end up having to move the money around between physical locations or currencies and that creates a perennial authentication problem. Blockchain offers a neat  solution to this problem.

The biggest influence on these matters in the global banking community is a group calling itself the R3 consortium. This consortium is led by the company R3 LLC.  Most of the major banks are part of this. What is unusual about this is that R3 has its own idea of a custom distributed electronic ledger called Corda, but unlike Blockchain - Corda permits transaction secrecy and limited degree of record editing. You can imagine why major banks and financial institutions would want that sort thing. However this variant of the distributed ledger is naturally less secure against hacking.

The basic idea of a transparent, permanent and continuously updated ledger can be applied to any type of transaction to create an element of authentication and trace-ability. So unsurprisingly there are a large number of other applications of blockchain distributed databases. A few of this are known in the public domain, it should not come as a surprise if there are secret implementations that are captive to certain groups of people.

A Trump Admin appointee on the Commodities and Futures Trading Commission, which regulates the trade in derivatives, had openly said that he wanted to base the derivatives on an a blockchain platform to enable ease of trading the same. However it is important to note that he never specified whether he wanted a true blockchain or a less secure "blockchainish" variant for this application and to what extent he wanted to see transparency and trace-ability.

When one looks at the recent occurrences one keeps seeing this blockchain idea popping up. There is clearly a very powerful group of people pushing the use of a less "open" version of Blockchain to users all over the globe. And people are applying the blockchain idea (without specific details on the nature of the underlying distributed database) to all manner of things.

Therein IMHO lies the true threat in all this. One is expected to take these people at the word that the changes they are proposing are somehow "better" and they won't spell out how or why this can be verified.

Does that sound familiar?


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