THEMABLOG: BITCOIN, BLOKCHAIN AND CRYPTOCURRENCY

 

De afgelopen maanden ben ik verschillende malen uitgenodigd om een lezing bij te wonen georganiseerd door mensen van Onecoin. Op deze uitnodigingen ben ik niet ingegaan, ik was steeds verhinderd. Maar sinds de VES Onecoin op 1 lijn stelde met de beruchte piramidespellen was het gedaan met mijn interesse voor deze variant op Bitcoin. Maar door de uitnodigingen werd ik wel getriggerd. Ik werd me er van bewust dat ik niet precies op de hoogte ben van wat cryptogeld nu eigenlijk is. Wat voor techniek zit daar nu achter? De hoogste tijd om op zoek te gaan naar informatie over dit onderwerpen deze op een rij te zetten. Daarbij probeer ik zo objectief mogelijk te blijven zodat je in deze blog vooral informatie aantreft. Over de ontstaansgeschiedenis, de technologie die toegepast wordt. Maar ook enige nieuwtjes uit de wereld van cryptogeld. Maar eerst, in deel 1, enige definities……..

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Deel 1: Enige definities

Bij de verkenning van een onderwerp is het altijd goed om eerst eens wat definities te bekijken. Zo krijg je al een goed beeld van waar het over gaat. Excuses, onderstaande tekst is nog in het Engels. Binnenkort zal ik de Nederlandstalig vertaling hier weergeven.

Cryptocurrency

 

A cryptocurrency is a medium of exchange like normal currencies such as USD, but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography. Cryptography is used to secure the transactions and to control the creation of new coins. The first cryptocurrency to be created was Bitcoin back in 2009. Today there are hundreds of other cryptocurrencies, often referred to as Altcoins.

Put another way, cryptocurrency is electricity converted into lines of code with monetary value. In the simplest of forms, cryptocurrency is digital currency.

 

Cryptography

Cryptography is closely related to the disciplines of cryptology and cryptanalysis. Cryptography includes techniques such as microdots, merging words with images, and other ways to hide information in storage or transit. However, in today’s computer-centric world, cryptography is most often associated with scrambling plaintext (ordinary text, sometimes referred to as cleartext) into ciphertext (a process called encryption), then back again (known as decryption). Individuals who practice this field are known as cryptographers.

Modern cryptography concerns itself with the following four objectives:

1) Confidentiality (the information cannot be understood by anyone for whom it was unintended)

2) Integrity (the information cannot be altered in storage or transit between sender and intended receiver without the alteration being detected)

3) Non-repudiation (the creator/sender of the information cannot deny at a later stage his or her intentions in the creation or transmission of the information)

4) Authentication (the sender and receiver can confirm each other?s identity and the origin/destination of the information)

Procedures and protocols that meet some or all of the above criteria are known as cryptosystems.

 

 

Cryptosystems

 

Cryptosystems are often thought to refer only to mathematical procedures and computer programs; however, they also include the regulation of human behavior, such as choosing hard-to-guess passwords, logging off unused systems, and not discussing sensitive procedures with outsiders. There are two different kind of cryptosystems, symmetric and asymmetric cryptosystems.

 

Definition: In cryptography, a cryptosystem is a suite of cryptographic algorithms needed to implement a particular security service, most commonly for achieving confidentiality.

 

Typically, a cryptosystem consists of three algorithms: one for key generation, one for encryption, and one for decryption. The term cipher (sometimes cypher) is often used to refer to a pair of algorithms, one for encryption and one for decryption. Therefore, the term cryptosystem is most often used when the key generation algorithm is important. For this reason, the term cryptosystem is commonly used to refer to public key techniques; however both “cipher” and “cryptosystem” are used for symmetric key techniques.

 

Symmetric cryptosystem

In a symmetric cryptosystem, the same key is employed for each of the operations in the cryptosystem (e.g., encryption and decryption), and thus that same key, typically a secret, must be shared by the parties performing the various operations.

 

Symmetric cryptosystems are widely employed in related concepts like Asymmetric CryptosystemBlock CiphersMAC AlgorithmsStream Cipher

 

Synonyms are classical cryptosystem, conventional cryptosystem, private key cryptosystem and  secret key cryptosystem.

 

Asymmetric cryptosystem

An asymmetric cryptosystem is one where different keys are employed for the operations in the cryptosystem (e.g., encryption and decryption), and where one of the keys can be made public without compromising the secrecy of the other key.

 

Cipher

A cipher (pronounced SAI-fuhr) is any method of encrypting text (concealing its readability and meaning). It is also sometimes used to refer to the encrypted text message itself although here the term ciphertext is preferred. Its origin is the Arabic sifr, meaning empty or zero. In addition to the cryptographic meaning, cipher also means (1) someone insignificant, and (2) a combination of symbolic letters as in an entwined weaving of letters for a monogram.

 

Some ciphers work by simply realigning the alphabet (for example, A is represented by F, B is represented by G, and so forth) or otherwise manipulating the text in some consistent pattern. However, almost all serious ciphers use both a key (a variable that is combined in some way with the unencrypted text) and an algorithm (a formula for combining the key with the text). A block cipher is one that breaks a message up into chunks and combines a key with each chunk (for example, 64-bits of text). A stream cipher is one that applies a key to each bit, one at a time. Most modern ciphers are block ciphers.

 

 Key

A Vigenére table (“tabula recta”)

key is an element from an alphabet (the key alphabet) that selects and defines a particular encryption step. A keytext is a sequence of key elements from a key alphabet that select and define a sequence of particular encryption steps.

polyalphabetic encryption, which is also called a polyalphabetic substitution cipher, is a substitution (substitutions and permutations) with more than one alphabet, each one designated by a key element.

double key is a polyalphabetic encryption with shifted mixed alphabets (Alberti encryption). It is cryptologically equivalent to a polyalphabetic encryption with a Vigenére table (“tabula recta”) whose plaintext standard alphabet is replaced by a mixed alphabet—the mixed alphabet being the “second key”.

Moreover, a treble key is a double key with the additional proviso that the standard alphabet for the keys of a Vigenère table is replaced by a mixed alphabet – this mixed alphabet being the ‘third key’.

 

Blockchain

 

Blockchains defined, and how definitions vary

Blockchains are primary enablers of smart contracts. This section compares and contrasts both general and banking-industry-specific blockchains and describes banking industry viewpoints on the issue.

A blockchain—the technology underlying bitcoin and other cryptocurrencies—is a shared digital ledger, or a continually updated list of all transactions. This decentralized ledger keeps a record of each transaction that occurs across a fully distributed or peer-to-peer network, either public or private. A blockchain’s integrity hinges on strong cryptography that validates and chains together blocks of transactions, making it nearly impossible to tamper with any individual transaction record without being detected.

Some of the most useful elements of a blockchain such as bitcoin’s include these:

  1. Digital signatures:
    1. Verify possession of a private key
    2. Verify that messages came from the right person
    3. Verify that messages haven’t been changed or tampered with
    4. Allow fine-grained version control of documents and contracts
  2. Signed blocks of transactions:
    1. Preserve the sequences of transactions
    2. Allow fine-grained access control at the level of a transaction
    3. Create continually updated audit trails
  3. Distributed, shared ledgers:
    1. Establish a single version of transaction truth
    2. Reduce or eliminate the need for centralized third parties
    3. Open the door to the autonomous agents, processes, and organizations implied by smart contract technology

Cryptocurrencies have their own momentum and utility, of course. Among other factors, transactions involving bitcoin or other digital currencies can serve as the core of a smart contract capability. In the simplest case, a smart contract would make it possible to lock out a driver whose authorization to drive a rental car had expired. In more complex scenarios, rental car companies could automate the operation of entire facilities.1

The definition of a blockchain is open to various interpretations. Some of these eliminate or reduce the role of cryptocurrency and focus on the use of these chains by themselves for process improvement purposes. Smart contract vendors such as Eris Industries, for example, don’t overly concern themselves with currency issues. “The real challenges within an enterprise context are around the processes of potentially changing ownership rather than just the representation of the ownership transfer,” says Eris Industries CEO Casey Kuhlman. Securities origination and trading is a prime example.

Of necessity, the banking industry has developed its own definition of a blockchain, one that’s also suitable for enterprises generally. This definition speaks volumes about what banks plan to do with the core blockchain technology that’s behind immutable, shared, encrypted transaction ledgers. Smart contracts are central to the banking industry’s long-term plan. Smart contracts are computable agreements stored in the shared ledgers that dramatically reduce the need for human validators in the transaction loop.

“Can you define blockchain in one or two sentences?” a member of the audience asked the Blockchain for Enterprise Panel at Fintech Week in London in September 2015. Panelist Lee Braine, a computer science PhD in the CTO’s office at Barclays, responded: “It’s a way of chunking transactions into a batch, called a block, and then a way of hashing them with the previous block to ensure immutability.”

(A hash is something like a unique digital fingerprint. It is a representation of a file as a fixed-length string of bits, a representation that can be used to ensure that nothing tampers with the file. Hashing a block together with the previous block—thus the reference to a blockchain—makes it even harder to tamper with any part of the chain.)

Panelist Richard Brown, head of technology for R3, a private company funded by a consortium of banks focused on blockchain standards, added a bit more to the definition. The term blockchain, he noted, doesn’t just refer to the public shared, anonymous ledger that bitcoin uses. The bitcoin blockchain architecture could be decomposed, and the useful parts could become “building blocks from which you can build new things. You don’t need to have the bitcoin problem statement.”

With their definition, Braine and Brown captured the sentiment of the banking industry. Banks see the emerging blockchain phenomenon as the catalyst for an unprecedented process reengineering opportunity, not as something necessarily tied to any digital currency. To their minds, most of the bitcoin media buzz misses the point, or at least doesn’t anticipate the full benefits to established financial institutions. Blockchain technology on its own has pointed the way to removing inefficiencies from the financial institutions’ administrative processes permanently. In a period of rising costs, intense regulatory scrutiny, and increasing competition, the opportunity couldn’t have come at a better time.

A Blockchain Business Model

Why are blockchains important?

Shared digital ledgers—when judged by just the technical definition—might not sound like a big deal to those not immersed in cryptocurrencies or financial process reengineering. The shared ledger itself is certainly significant, but what it enables matters most: immutable, shared ledgers encrypted at the record level provide a way to validate transactions through little or no human intervention.

Instead of involving lots of humans in the transaction pipeline and paper processes that take days, weeks, or months to complete, huge volumes of transactions could be validated automatically. Other more complicated transactions that still require humans could at least be simplified with the help of mathematical validation.

This evolution could not have happened at a better time for the financial services market, which has become increasingly more dynamic during the past decade. The last wave of disruption, for instance, included innovations such as marketplace or peer-to-peer lending, where a web intermediary creates a platform for individual borrowers and lenders. In 2015, PwC forecast the US market for this type of peer-to-peer lending (currently unrelated to blockchain technology) to grow from $5.5 billion in 2014 to $150 billion in 2025, a compound annual growth rate of 35 percent.1

For banks and other financial institutions, the symptoms of process inefficiencies are increasingly problematic. For example, the lack of transaction liquidity is a growing concern in most financial markets, including corporate bonds and mutual funds. In response, banks and other financial institutions that have invested in blockchain R&D anticipate that during the next decade, they will lower their cost bases and create greater process efficiencies through various forms of digitization.

Blockchain technology can alleviate liquidity challenges by providing a way to reduce friction through the mathematical validation of transactions. Once the transaction is validated, a single shared, distributed ledger provides unified, tamperproof visibility into the transaction record—a single, immutable version of transaction truth. Low friction and better visibility improve the performance of all transaction types, not only bond and other securities trading.

As Gideon Greenspan of Coin Sciences points out, deep cryptographic control of each element of a transaction now makes unified, immutable, and validated transactions visible and functional at a global scale. Creating a historic record that can’t be tampered with is an important consequence of that control. Once you have that control, the networked yet singularly authoritative ledger can reside anywhere on any network.

Math alone can protect and validate lots of transactions. The right cryptography and algorithms can make it possible to validate transactions quite well, in some ways superior to human validation methods. The right cryptography can also protect a shared ledger and keep it from being tampered with. The bitcoin blockchain has proven this approach.

Similarly, the mathematical validation of events, the steps taken in a process, or a list of compliance measures taken can also substantially benefit the audit function, points out Jeremy Drane, PwC’s US blockchain and smart contract leader.

Blockchain-based transaction validation won’t be sufficient in all circumstances. Complex transactions will require more humans in the loop. But the reality of blockchains and how they’re being used points to a future in which human third-party transaction validation and recordkeeping could be the exception rather than the rule. In its place, machine-centric validation is emerging. From a legal standpoint, the system becomes a “person,” a virtual third-party enforcer that never sleeps. From a computing perspective, that “person” is actually a software agent. The use of agents will be essential to scaling recordkeeping and providing visibility to the historical record.

In the public and business-to-consumer (B2C) sphere, virtual third parties already serve more and more needs of buyers and sellers. No wonder the banks are focused, looking at the piece parts incorporated into shared, private ledgers offered by dozens of startups and exploring processes that could begin to rely on them. They’re focused on near-term, less complex use cases to leverage these shared ledgers and make the efficiency opportunities real.

(Bron: http://www.pwc.com/us/en/technology-forecast/blockchain/importance.html)

 

Private blockchains, public, or both?

Just as the dawn of the public Internet era saw the adoption of TCP/IP-based secure, private intranets within corporate firewalls, the public blockchain era is spawning private versions. Just as there is a place for the public Internet and private intranets, PwC believes there is a place for both private and public blockchains, including combinations of the two.

For banks and other financial institutions under enormous pressures to change quickly, 2015 was a year of forecasting and planning next steps for private blockchains of all kinds. Using blockchain technology to reengineer transactions, contracting, and other digital business flows is a huge challenge that will take years. By the 2020s, many enterprises outside banking and financial services may well have adopted private blockchains for various digital business flows. (But see the list of obstacles to adoption here.)

“Every company will have its own version of a blockchain, probably hundreds within a company, one for each application it has,” Hu Liang, senior managing director for the emerging technologies center at State Street, says in an interview with PwC. “We think there will be hundreds if not thousands of blockchains.”

Outside the established banking industry, legions of developers are focused on public blockchains. They’re lined up on the border between land that has already been parceled out and unexplored territory, awaiting the signal for a financial services land rush. To their minds, public infrastructure that is open to worldwide scrutiny will win the day for the same reason that cryptographic algorithms that were open to public inspection won instead of secret protocols years ago—more scrutiny by as many experts as possible results in stronger technology.1 They assume that the evolution of bitcoin’s public blockchain will usher in resilient, ubiquitous online marketplaces that won’t need intermediaries at all.

These developers are betting on nothing less than the financial transaction equivalent of the public Internet to emerge. That’s the vision of OpenBazaar, an open peer-to-peer marketplace launched in December 2015. “Instead of visiting a website,” OpenBazaar says in its FAQ, “you download and install a program on your computer that directly connects you to other people looking to buy and sell goods and services with you. This peer-to-peer network isn’t controlled by any company or organization—it’s a community of people who want to engage in trade directly with each other.”

OpenBazaar is just one example of dozens of initiatives that seek to leapfrog already disruptive peer-to-peer marketplace services that have existed for nearly a decade now. Some observers are looking beyond individual open-source efforts, such as OpenBazaar or the Ethereum protocol, to a dynamic open marketplace that could have its own momentum and outpace any bank reengineering efforts. On the face of it, decentralized networks and decentralized developer communities would seem to be symbiotic.

Commenting on OpenBazaar’s launch, entrepreneur and blockchain influencer William Mougayar said, “Who owns the network now? Everybody and nobody. The network is in the wild.” Many, including PwC, foresee a blending of public and private blockchains.

Blockchain technology is embeddable and can be subsumed by larger systems, and it’s best to think of blockchains in terms of what will eventually surround them. They will not stand alone, but will function within the core of multiple, increasingly distributed ecosystems.

 

How smart contracts automate digital business

Somewhere among the distributed peer-to-peer marketplace enthusiasts, the bitcoin blockchain maximalists, and the banks fighting for their own place in the emerging digitized transaction environment, a class of crypto-lawyers is gaining prominence. In some cases, they’ve worked for decades on legally binding, computable code. Now they’re becoming the key influencers of new, blockchain-based smart contracts.

A smart contract is a digitally signed, computable agreement between two or more parties. A virtual third party—a software agent—can execute and enforce at least some of the terms of such agreements.

Nick Szabo, a computer scientist, legal scholar, and cryptographer, is a prime example. Szabo coined the term smart contract in 1993 and has been working since then on digital currency and computable contract language. His work has been foundational to what smart contracts are becoming in the blockchain era. Among Szabo’s many contributions to smart contracting is his 2002 “drafting language” for contract analysis that focused on reducing ambiguities and bolstering the logic in the terms of written agreements. That language built a bridge between legal terminology and procedural code. By doing so, Szabo managed to leverage the power of computation without abandoning the nuances of human language.1

The scripting language used today in smart contracts echoes Szabo’s early efforts, but has taken a more graphical tack with protocols such as Ethereum, now available as part of Microsoft’s blockchain-as-a-service offering. The language of that protocol, called EtherScript, appears in modular, color-coded form to make it more human readable and intuitive, as in the following sales contract.