Distributed Ledger Technologies (part III)

Distributed Ledger Technologies

The Blockchain and the Bitcoin have already been live for a decade.

We are reviewing in this set of articles the caracteristics of the Blockchain, the changes made to the Blockchain, the alternative distributed ledgers to the Blockchain, the difficulties to run financial services on a distributed ledger without a legal tender.

This third part presnts some of the alternative distributed ledgers that are being introduced.

Changes to the initial Blockchain technology

Innovation to circumvent the limitations of the Blockchain is intense and many other Distributed Ledger Technologies are being built.

First axis of innovation

The first axis is to change the proof methodology. Blockchain uses proof-of-work which uses more and more computing power and as a consequence electricity.

Some alternative are

  • the Proof-of-Stake (PoS) which is a random way to designate the participant that is authorised to validate the next block of transactions. The coin ‘Peercoin’ is based on PoS. Its drawback is that there is no direct incentive for the participants to acknowldge the validation and this could result in some form of chaos ;
  • the Proof-of-Authority (PoA) which is authorizing only some designated participants to validate blocks of transactions. The coin ‘Ripple’ is based on PoA. As the validation is concentrated in few participants, it is a nice a functional multi-participants system which is quite far from an headless blockchain.
  • or Zero-Knowledge-Proof (ZKP) which is a statistical method to validate a block of transactions without actually knowing the content of the transactions. To take a comparaison, it is just like a color-blind person can understand that red and green are different colors without being capable to differentiate them. The coin ‘Zcash’ is based on ZKP. Being a statistical method, the protocol needs to be replayed many times before the ‘good’ level of certainty is reached, and this has a negative effect on performance.

Many other proof systems are being introduced and tested. The three illustrations that are mentioned above have clear flaws for a completed open distributed ledger. The Proof-of-Authority may bring sound solutions for evolving associations of members where a core group is considered more trustable than a newcomer who would need to proove his thrustworthyness.

A second axis of innovation

We need to dive into more details of the Blockchain fundamentals to understand the second innovation axis.

The Blockchain is based on a mechanism based on cryptography to guaranty integrity. The Blockchain guarantees that a group of data, called a block, has not been altered.

Basically, a function called a hash function is used to compute a number, called hash value or simply hash, from the group of data. If there is a very small change in the data, the hash will be completely different. In short, the hash is a unique signature of a block. And it is completely impossible to retrieve the original data from the hash.

Illustration: there are many publisehd hash functions. The MD5 hash function, which is not considered as secure, is used below to show that just adding a dot changes completetly the output.

“the brown fox jumps over the lazy dog” gives “f8af20d3ced0bbb0feaea6f02cd87405“
“the brown fox jumps over the lazy dog.” gives “1d393a5cdc52bdf0f2c54cd0cfb44a3f“

(MD5 hash function

Because the hash function is public, anyone is then capable to compute a hash and publish this hash, and in turn, anyone can check the integrity of a block by re-computing the hash of the block and comparing it with the published hash.

The very simple and brilliant idea of the Blockchain is to create a sequence, called a chain, of blocks by simply inserting the hash of the previous block as if it were a data of the next block.
Anyone having only the last block and its hash can make sure that the complete chain of block is integer.

The idea is to change this hash function, that is the encryption technique. Blockchain uses the Secure Hash Algorithm 2 (SHA-2) which has been designed by the American National Security Agency (NSA). They are questions on the neutrality of the US in security matters, as disclosed by Edward Snowden when he revealed global surveillance programs. Basically, coins are using various hash functions.

Of course, it is also possible to combine these first two axis changing both the encryption technique and the proof methodology.

A more radical axis of innovation

A more radical way is to switch away from this unique sequence of blocks of the Blockchain.

The idea is that multiple chains are allowed from the initial chain. An alternate chain can be validated only if it re-unites with an other chain.

The whole system is based on a branch of mathematics called Graph Theory and specifically on a specfic type graph,the Directed Acyclic Graph (DAG).

The ‘Hashgraph’ framework , or the ‘Tangle’ framework with the IOTA coin, are two implementations of this idea. It would be inaccurate to describe them as Blockchains. Distributed Ledger Technology (DLT) is the right expression to use as Blockchain is not relevant anymore.

Other axis of innovation

As explained in the first part, a key feature of the initial Blockchain is the transparency of all transactions. There are many initiatives to make amendments to the Blockchain to restore some privacy.

In the initial Blockchain, all transactions replicated at every node operating the Blockchain. Privacy can be increased if transactions are only copied at the nodes that are participating to a transaction. This implies that participants to a transaction are running nodes, which is not required in the original Blockchain. Rather than being copied at all nodes, a transaction are only copied at the two parties of the trasaction, and possibly some others who can be trusted to preserve the secrecy of the transaction, a regulator for instance. This principle is the basis of ‘Corda’, the DLT edited by R3, a consortium gathering tens of major banks.

Most so-called Blockchain projects are just posting a hash of their own classic database from time to time into the original Bitcoin Blockchain or into the Ethereum platform. This is a way to both timestamp and guarantee the integrity of their data.
This is a clever way to leverage classic database technology with a minimum investment while benefiting from the Blockchain buzz effect.

.. to be continued…

<go back to part II>

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