Carbonized Crypto, Part 1: Blockchain Basics
It can be easy to assume that blockchain is bitcoin, and bitcoin is blockchain. After all, bitcoin dominates the crypto airwaves; it makes a certain amount of sense to assume that blockchain begins and ends there.
The reality is far different. Bitcoin is important, to be sure, but only as a symbol of far greater things to come. Like Ford with the early automobile industry; even if Ford Motors had failed in the 1930s, or after WWII, or even in 2008 – the broader automobile and manufacturing industry would have been largely unaffected.
Blockchain powers Bitcoin, and it’s the success or failure of blockchain technology that will ultimately have a far greater impact than any one cryptocurrency.
What is a blockchain?
A blockchain is a digital ledger of transactions that can’t be tampered with by any one entity because of its decentralized design. A blockchain is made up of blocks, which are chained together cryptographically. Each block contains a hash pointer (a number) linking it to a previous block, a timestamp, transaction data, and transaction fees.
The combination of these components – the hash pointer, timestamps, and transactions – make up a record or block.
These records are linked like pearls on a string, forming a chain. This chain gets longer every time a new block is added, making the blockchain bigger over time.
Publicity and security
The prospect of a seemingly-endless stack of blocks towering into the digital heavens might be a bit intimidating, but there’s an immense amount of real-world value in it.
Because new block are inextricably linked to the old ones, old data can’t be changed. Previous entries into the ledger are therefore immutable. In addition, the total blockchain functions as an authentic record of all transactions on the chain. The actions of individual wallets, or the sale of individual items, can be easily traced through the blockchain.
Users access the blockchain through wallets. Each crypto wallet has a public address and a private key. The address receives cryptocurrency and other digital assets, sends them on, and can store them, and it’s the address that’s identified in the distributed ledger.
At the same time, private keys secure each individual wallet.
Users can hold assets securely in a wallet while the wallet’s address is publicly visible. The idea is similar to a postal system. Your postman knows where you live and how to pick up and deliver mail, but he doesn’t know what you do at that address.
Decentralized control
Blockchain structure raises a couple of important questions. With everything publicly visible, how are blockchains secured? What guarantees trust in the network?
One way in which blockchains can guarantee security and ledger accuracy is by limiting access. Blockchains can be permissioned or permissionless. Permissioned blockchains require users to obtain special permissions before they can use them. Blockchains designed to be used by one institution are a good example – trust is guaranteed by controlling who has access.
On the other hand, public blockchains face the very real problem of guaranteeing security and trust with a huge number of distributed users, including at some potential bad actors. That’s where cryptography comes in. The cryptographic hash – an algorithmically-generated number – secures each new block on the chain. Change the block, and you change the hash. And if you change the hash, you invalidate the chain, and the change is instantly viewable.
Cryptography guarantees security despite (and perhaps due to) being publicly visible. The longest-running blockchain in the world illustrates this point clearly. It isn’t Bitcoin, or even some private Ivy-League pet project; it’s a simple cryptographic hash published every week in the classifieds of The New York Times. Every week since 1993. Participants in that particular blockchain use that information to validate transactions over the previous week (in this case, security seals issued by a particular company).
The use of cryptography solves one trust-related problem, but it raises another: who, exactly, is allowed to make changes to the chain?
Nodes, mines, and stakes
Nodes are the control points of the blockchain. With a decentralized structure, someone has to validate the chain of transactions, add new transactions to a block, and add the block to the chain. If only one person or entity controls that process, the blockchain isn’t decentralized at all. But if too many entities control it, then there’s little chance for transactions to be processed quickly or efficiently.
In the case of the NYT blockchain, there’s one node – the classified ad itself. Transactions are processed weekly – fast enough for that company’s purposes, but not fast enough for anything like a high-performance digital blockchain.
Using a handful of select nodes solves part of that problem. Everyone can participate in the chain itself (permissionless), but some kind of entry point is set for nodes. Usually this involves requiring nodes to have certain assets, whether technical (hardware or technical know-how) or in the form of digital assets (typically the token for that particular blockchain).
Nodes govern the chain. The exact method they use is known as the consensus mechanism. Currently, there are two primary consensus mechanisms in widespread use: Proof-of-Work (PoW, aka mining ), and Proof-of-Stake (PoS, or simply staking).
Proof-of-Work requires the use of real-world hardware in order to solve an algorithmic equation and win the right to create the next block on the chain. These chains tend to be energy-intensive, often requiring mass amounts of hardware, and are competitive – miners are essentially fighting each other over the solution. The most notable PoW chain is, without a doubt, Bitcoin. Ethereum is another well-established PoW chain.
Proof-of-Stake selects Validators who amass a stake of digital currency or tokens. The greater the stake, the more likely the Validator will be to win the block. PoW is less a fight, and more of a race. But it’s not a fair race; the greater the stake, the farther down the track you get to start. Having said that, there’s always an element of chance, and even smaller stakes might occasionally win the block. Most new blockchains are PoW, as it lends itself to being more easily scalable than the PoW consensus mechansim. Notable examples include Cardano, NEAR, and Ethereum again. The Ethereum network is a mixed bag; it’s a current PoW chain, that nevertheless still has staking options as it prepares to transition to a PoS mechanism in the near future.
Use-cases: blockchain in real life
Enough technical details. What does the blockchain have to do with the real-world? What makes it more than just an unusually technical thought experiment?
Most importantly, what does it have to do with carbon credits?
Blockchains provide two crucial benefits with widespread real-world uses.
Blockchains allow the coordination of large groups of disparate users.
And, perhaps even more importantly,
Blockchains can guarantee ownership.
The whole idea of a distributed ledger is to tie public addresses, and by extension, shared assets, to individual accounts without sacrificing privacy to a central authority. In theory, this can be done with almost any asset imaginable. Digital currencies are the obvious starting point, but blockchains can also be used with data. That’s all a transaction is, of course, so the entries in a distributed ledger don’t need to be simple sales. They can be data points, non-fungible (unique) tokens tied to real-world or digital assets, or virtually anything else.
The application to carbon credits is especially promising. In a global carbon market beset by problems of quality assurance, the blockchain offers the potential to tie one credit inextricably to one project. And that’s just a starting point.
Read Part 2 of our Carbon Crypto Series HERE
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