Root Causes 60: Fundamentals of Blockchain

Hosted by

Tim Callan

Chief Compliance Officer

Jason Soroko

Fellow

Original broadcast date

January 6, 2020

Widely understood to be the technology behind popular crypto currencies, blockchain has become a household word. But what is blockchain really, and how does it work? Join our hosts and returning guest Alan Grau as they explain how blockchain functions, its strengths and weaknesses, and some of the other potential applications for this technology.

Podcast Transcript

Lightly edited for flow and brevity.

Tim CallanOnce again, we are joined by our super guest, Alan Grau. Alan is VP of IoT and Embedded Solutions here at Sectigo. How you doing today, Alan?

Alan GrauI'm doing great, Tim.

Tim CallanAnd Alan, in addition to something of an IoT expert, you're actually also very conversant in the world of Blockchain. So, as the listeners may know, we routinely run into questions about Blockchain and PKI, and what are they? And what are the pros and cons and how do they interact? So, you know, we wanted to pull in one of our local experts to do a deeper dive on Blockchain. We're gonna do a few episodes where we’ll try to really sort of lay out the whole thing and how they work together. So, Alan, you're that expert. I hope you're ready.

Alan GrauAlright. I'm looking forward to it, Tim.

Tim CallanOk. So, let's just start kind of at a high-level. People think, like your average member of the public, even a fairly educated computer user is going to sort of associate Blockchain and cryptocurrency, especially Bitcoin, almost as the same thing, but they're not the same thing, Alan, so tell us, what's cryptocurrency? What's Blockchain? How they fit together.

Alan GrauAt a basic level, cryptocurrency and, as you mentioned, Bitcoin is the most well-known and the most common cryptocurrency. A cryptocurrency is a currency that's built using Blockchain technology. So, Blockchain itself is a technology that, and we'll get into the details of this as we go forward, but it's a technology that can be used for developing and deploying cryptocurrencies or for a variety of other use cases.

Tim CallanYeah, and we touched on this on one of our earlier podcasts about how it's not just for cryptocurrency, but cryptocurrency certainly is where Blockchain has gotten the most attention. So, are all Blockchains the same, Alan? I mean, we use this as kind of a homogenous word. But that’s not right? Right? I mean, like anything else, there are different implementations and?

Alan GrauRight. There are many different flavors of it. So, I mean, first, just in terms of kind of what is a Blockchain? Right? I mean, I talk to people and oftentimes, they, as you said, they think Blockchain is crypto, but you know, Blockchain gets its name, because it's a technology that is built using a series of blocks that are chained together and chained together using cryptographic and hashing techniques. And, you know, each block contains a set of information and the most common usage of that is to record transactions that are occurring within a cryptocurrency. So, the Blockchain is often described as a distributed ledger. And so, it's like, okay, so what's a ledger, right? So, a ledger is just a list of transactions in its most common form. It could be a list of other database entries as well. So, essentially, it's a distributed database, often containing a record of cryptocurrency transactions.

Tim CallanRight. And so, in the case of the crypto currency, a transaction is this Bitcoin has gone from this owner to that owner. Right?

Alan GrauExactly. Yeah. I sent Jason three Bitcoin and, you know, provided some other you know, I bought a car from him for three Bitcoin, right? The car transaction is independent of the financial Bitcoin transaction that's recorded on the ledger.

Tim CallanNow in an entirely different use case, that ledger might do an entirely different thing. So, let's just say that this was a supply chain kind of use case where you might be tracking where material goes and every step in the ledger would be now it went from this facility to that facility.

Alan GrauRight. So, there is, you know, so when you talk about the types of Blockchains, there's two different axes that we can talk about on the type of Blockchain. One is the technology used to build the Blockchain and then the other is kind of what are the use cases that are used, um, that the Blockchain is used for?

Tim CallanYeah. We should probably explain both of those. Shall we start with technology used to build the Blockchain

Alan GrauYeah. I think that makes sense. You know, there are, you know, there's a concept of a public versus a private Blockchain. So, the Bitcoin Blockchain is a public Blockchain, anybody can attach to that, versus, you know, I could go implement, you know, a private Blockchain that I have access to, and a select group of other people perhaps have access to that we use for our own purposes. So, you have different use cases that way.

Tim CallanAnd this is analogous to certificates in a lot of ways, right? I could have my own walled garden, and I do what I want with my certificates inside my walled garden and it’s for me, or we have public certificates that are kind of for everybody and I use them for applications that are out there in the wide world, right? Bitcoin is out there in the wide world but something else like my supply chain example, maybe isn't.

Alan GrauExactly. Yep. And then you have, you know, when we talk about how you build the Blockchain, and that each block is cryptographically connected to the previous and that's done in a manner where each time you build a new block, the data in the block, in the previous block, is used to create a signature for the subsequent block. So, they're chained together and the method of computing that signature is typically a pretty computationally and expensive process and in doing that, the value of that is you can't make changes to the Blockchain without recomputing all the signatures all the way along the way, which is, you know, computationally prohibitive. So, you've got an ability, kind of a built-in mechanism to protect the Blockchain from being tampered with.

Tim CallanRight. And so that's a big part of it, right, is immutability and irrefutable.

Alan GrauRight. And now, there are different ways of achieving that. There are things called proof of work, which is what is done with Bitcoin, where there's a mining operation where miners compute this value that's the proof of work, but if it's a private Blockchain, I might use a proof of authority mechanism where certain nodes on the network are allowed to actually do that computation and there they may have something like a certificate or public private key pair that's used to prove that certain nodes have the authority to do that. So, you have a different mechanism that way that can be used. And there's another one called proof of stake, which basically means that in a cryptocurrency, if you own a certain amount of the cryptocurrency, then you have the ability to manage that process or to be a node that controls that process, or participates in controlling that.

Tim CallanGotcha. And so, proof of authority, like that would make no sense in let's say, a cryptocurrency world. Right? So, in that case, that would be a use case where that strategy didn't work. Right?

Alan GrauI would say that it's a scenario that is used where you have more of a centralized mechanism. So, for your use case of the supply chain, the proof of authority makes a lot of sense but there are other cases where there are more centralized types of cryptocurrencies that would or could really rely on proof of authority. So, there are public financial institutions, you know, Wall Street banking companies, that are developing cryptocurrencies because of some of their other values. So, in those scenarios it would be used. When you look at some of the very, you know, the Blockchain or the cryptocurrency users that, you know, originally developed some of this technology with a goal of creating a currency that was independent from any central banking authority or government regulation, in that case, you definitely would not want a proof of authority solution.

Tim CallanYeah, right. Absolutely. But I mean, I get you - - in that sense, it makes sense right, because the bank itself you know, that is the authority under those circumstances and so you can comfortably have that built into the whole system.

Alan GrauExactly.

Tim CallanAlright. So, what about what about - - you talked - - you said - - what about use cases, right? So, we kind of hinted at that but, you know, you said we could divide these by use cases. What do you see as the main use cases or maybe main categories of use case?

Alan GrauYeah. Well, you know, there's a number of different types of Blockchains. Right? And the reason there are different types and even different implementations of the same type of Blockchains and even cryptocurrencies is because there are different goals or use cases even within cryptocurrency itself. So, when we look at the use cases just for cryptocurrency, you know, the original goal of Bitcoin was to create a currency that couldn't be controlled by governments and central banks.

Tim CallanRight.

Alan GrauAnd then there are some other cryptocurrencies that have been developed, that were designed for higher levels of privacy, right, so that you can't - - with Bitcoin, you can track back to a wallet to who's using the wallet much more easily than you can with a currency like Monero that's designed as a privacy coin. And so, with Monero, it's designed to be impossible to track the transactions occurring with that cryptocurrency and there's others that are designed for speed. Blockchain transactions aren't particularly fast, at least from a computing point of view. So, if I want to send you some Bitcoin, it's probably going to take an hour for you to be able to, for the Bitcoin transaction to actually post and to be able to be validated, which, you know, for certain transactions is fine but if we look at like credit card payments, that type of processing speed simply isn't workable. So, there are others that are designed for fast transaction processing speeds. So, the different kind of cryptocurrency use cases has resulted in some other use cases, and types of Blockchains.

Tim CallanRight. And so like, you used your example earlier of if you were buying a car from somebody, the fact that it takes an hour to resolve maybe isn't a big deal but there could be another sort of maybe a micro transactional environment or, you know, if I want to place a bet on a sporting event, and it's going to start in five minutes, right, I want to get in on the next horse race, then, you know, it can't be something that requires three hours to resolve, because the horse race is gonna be over seven minutes from now. Yeah.

Alan GrauRight? Or if I want to buy coffee, right?

Tim CallanRight.

Alan GrauI want to be able to pay and go and there are people that are starting to create payment terminals where they can use cryptocurrencies, or at least designing towards that goal. So, yeah, so there are definitely some very different use cases that way.

Tim CallanAnd then I remember seeing an article not too long ago about people who are trying to reduce the computational overhead on some of these Blockchain because, of course, it's incredibly expensive in terms of compute time and power, you know, it's using huge amounts of electricity. You know, people are building botnets just to mine Bitcoins. So, is that an example of the use case too is trying to make cryptocurrencies or make Blockchains that are just more computationally efficient?

Alan GrauYeah. Absolutely. And you know, there are, there's another concept called a fork or a hard fork of a cryptocurrency. So, we have Bitcoin. And there's also something called Bitcoin cash and some other flavors of Bitcoin, because these are open-source communities and the developers had some disagreements on how to manage the protocol, because these are really complex protocols underneath.

Tim CallanSure.

Alan GrauAnd the stakes are high. So, they didn't agree. So, they created a hard fork or a different version of it and there's all sorts of different considerations around what can cause that, but those are some of the considerations and there are other, you know, cryptocurrencies that were created just to make mining easier. As you said. So, yes, there's, you know, one of the interesting things is, you know, there are hundreds of different - - there's actually over 1000 different cryptocurrencies that are, you know, that have been developed by people. So, there's a large number of different use cases, not all of which have any traction or will go anywhere but there are a lot of people who, you know, we're trying to apply this technology to different use cases.

Tim CallanSo, how many? You say there's over 1000 different cryptocurrencies, which is kind of a shockingly high number, if you think about it. How many of those matter?

Alan GrauNow, that’s a great question. You know, it really depends on who you talk to, right? I mean, probably the top 20 have by far the vast majority of the market cap out there. You know, it's like saying, there's 1000 different startups, trying to chase a specific IoT security problem, right? So, if you are in the top you are going to gain the majority of the market share and some of them in the middle will find niche use cases and some sustainability and then the rest of them, you know, either will just trickle along as, you know, little, you know, very obscure coins or will disappear.

Tim CallanRight? Yeah, to your point, probably, some of that will be determined by these different properties, right, as they're trying to find a specific niche. You know, if you can't really use a Bitcoin to buy coffee, then that suggests that there's room for a different cryptocurrency in the ecosystem that can solve that need. Right?

Alan GrauExactly. Yes.

Tim CallanAnd so, what have we not covered on this topic?

Alan GrauI guess the other thing that we haven't covered is the concept of a Blockchain as a platform. So, one of the leading Blockchains, I don't know where it ranks in market camp, it's not number one, but certainly the top five is Ethereum.

Tim CallanYeah. That's one of the ones you hear about a lot.

Alan GrauYeah. And Ethereum is designed to support what are called smart contracts, and it’s a platform on which you can build distributed applications. And so, the people developing Ethereum, while they created a cryptocurrency, they created the cryptocurrency with the end goal of being able to use it to create these new distributed applications. And so, those are useful for things like, you know, I've seen an application where people are building a website for artists to be able to distribute music and accept payment for that and do that on top of Ethereum. So, they’ve got a distributed application on top of Ethereum that allows me to pay, you know, two cents to listen or five cents to listen to a song and some portion of that goes back to, you know, some upcoming artist and create that type of a platform.

I've also seen it applied in distributed energy systems, where you have, you create a trading platform for energy systems based upon cryptocurrency in a distributed ledger and the idea behind that is to be able to connect small users and consumers and producers of electricity outside of the traditional grid. So, I've got a cellular solar panel on my house, and my neighbor wants to use little extra air conditioning, so you can create a mechanism for transferring and payment of energy for that type of an application. You know, time will tell whether those prove to be successful or not but those are some of the applications. Some of the other applications for smart contracts that I've seen are things like, basically doing trading of cryptocurrency. So, it's a digital asset. You can create smart contracts to automate trading of digital currencies.

Tim CallanSome of these examples you use seem to be sort of getting into the micro payments world. Is that one of the important, you know, I remember, like I remember back in the original Napster days, where everybody said, oh, well, what we ought to be able to do is we ought to be able to, you know, charge, charge a penny for a listen. Right? And that never really came together. Is this going to help with that promise of sort of micro payments, that never really blossomed?

Alan GrauI think it certainly provides the technology to enable that. So, I do think that it can be used for that and I think those are some of the applications that certain cryptocurrencies have been developed with that as part of their vision. You know, finding applications where that makes a lot of sense, is going to be the key.

Tim CallanRight.

Alan GrauBut if you, you know, if you get back into our world, and you think about IoT devices, you know, if you want to have an IoT device that you know, can kind of pay for, you know, its own usage of bandwidth, where it's using very, very limited amounts of bandwidth, or its own energy usage or something of that nature where it can interact with other devices and pay its own way, then the concept of a micro currency makes a lot of sense. I've seen proposals for people to do this to do basically crowdsource, you know, reviewing of, well, not so much reviewing of information, but as, one example, I guess, was a web browser that was designed to completely eliminate advertisements, but then you can choose to do surveys or choose to watch ads and get paid for those with a cryptocurrency and kind of a micro payment model. So, there a lot of people out there trying to try to find solutions where this makes sense and, you know, it'll be interesting to see over time which of those really gain traction and which don't.

Tim CallanYeah.

Jason SorokoSorry, Alan, just a quick question. So, with regards to things, especially, like the energy use case you spoke about earlier is this where something like proof of work concept plays in Blockchain.

Alan GrauIn something like that, that's probably one where more of a proof of stake or proof of authority would make sense because you've got a centralized user that's going to be controlling and authorizing the network. And I say user, really it would be some centralized nodes on the network, and you'd want control over who is doing that authentication, as opposed to the cryptocurrency ones where you have a much more distributed set of users that are doing the proof of work to enable the validation.

Jason SorokoThat completely makes sense. So, this, Tim, goes a long way into explaining a lot of the subtleness of differences between private and public Blockchains.

Tim CallanYeah. So, wow. Yeah. So, I feel like we have just scratched the surface on this Blockchain conversation, but maybe also like, this is a good overview. Alan, is there anything here that we've missed that we need in this overview?

Alan GrauNo. I think that's a good start. I mean, as you said, you know, cryptocurrencies and Blockchain are a big topic. There's a lot there. You know, the protocols underneath on how, you know, if you're doing proof of work or proof of authority, how that happens are really pretty sophisticated topics but I think we've covered a lot of the fundamentals and I think yeah, this is probably a good place to wrap it up.

Tim CallanAlright. Well, thank you, Alan, and that's just a great sort of explanation of the space and what happens and as I have mentioned, we are going to do a series of these. So, stay tuned listeners for future episodes with super guest, Alan Grau, where we're going to get into more details on Blockchain. So, thank you very much, Alan.

Alan GrauAlright. Thanks, Tim.

Tim CallanThanks, Jason.

Jason SorokoHey, thanks, Tim. Can't wait to find out how we get rich on Blockchain.

Tim CallanAnd of course, this has been Root Causes.

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