Blockchain Technology – The Next Computing Paradigm Shift. Melina K. Mutambaie University of Johannesburg Johannesburg, South Africa April 2018 melmut@live.co.za ABSTRACT Blockchain is a computing technology that has risen on the radar and is known to have the potential to disrupt entire industries. his article explores the mechanics and business cases that Blockchain provides. Additionally, it highlights how the technology goes beyond the use of cryptocurrencies (Blockchain 1.0) and smart contracts (Blockchain 2.0) and reveals themes and examples that substantiate the notion of a ith disruptive computing paradigm. CCS CONCEPTS • Blockchain technology KEYWORDS ACM proceedings, Blockchain Governance, Cryptocurrencies, ICOs, Crowd Funding, Smart Contracts, Trust, computing Paradigm shit. 1 INTRODUCTION Blockchain has become a major trending topic in the Information technology industry. The technology, popularized by the cryptocurrency Bitcoin, has been dubbed by many as the next computational paradigm shift. However, unbeknown to most, there is an important distinction between the emergence of cryptocurrencies and the foundational platform on which those currencies operate. In this article, we will highlight the differences between Bitcoin, a digital currency that uses advanced encryption techniques (Vaizey & Hancock, 2016) and Blockchain, the underlying technology that supports Bitcoin (Meijer, 2017). Blockchain is a set of distributed databases known as blocks that contain records of digital transactions (Tapscott & Tapscott, 2017). These interconnected blocks support the decentralization of systems and ensures that data is securely distributed and publicly visible. Many refer to blockchain as a public distributed ledger. In the last year alone, numerous IT innovations have been developed on the foundation of blockchain technology. Such examples include advanced supply chain systems that promote transparency and traceability in logistics (IBM, 2017), as well as crowd funding systems that make donations and transactions publicly visible (Rosic, 2017). Blockchain is also one of the biggest challenges auditors are facing in 2017 (Deloitte, 2017). The question many subject matter experts are beginning to ask is Will there one day be a need to provide assurance over the algorithms, code and smart contracts that underpin this technology? and How will these new technologies be regulated? (Deloitte, 2017). These sorts of questions have sparked the curiosity and desire to explore the possibilities that Blockchain provides in the context of our already connected world. In our quest to answer these questions, it becomes evident that a fundamental paradigm shift is occurring in the computing world. 2 A BRIEF HISTORY ON BLOCKCHAIN The roots of Blockchain technology stem back to the year 1991. It was then that the very first works of cryptographically secured chain of blocks was documented by two computer scientists by the name of Stuart Haber and W. Scott Stornetta (Springer, 1991). Haber and Stornetta co-authored the book How to time-stamp a digital document which proposed a computationally practical time stamping service to certify when a document was created or last changed. This technique made it infeasible for a user to backdate or forward date a document but ensured that the complete privacy of the documents was maintained (Haber & Stornetta, 1991). Moreover, the time-stamping service would keep no record of the timestamped documents. University of Johannesburg, South Africa A year later, Haber and Stornetta incorporated Merkle Trees, or hash trees, to their design (Figure 1.1). A Merkel tree is a structure in which every leaf node is labelled Figure 1.1 –Merkel Trees with the hash of a data block and every non-leaf node is labelled with the cryptographic hash of the labels of its child nodes (Clifton, 2017). This had improved the efficiency of the chains of blocks by allowing multiple documents to be stored into one block. In 1996, Ross J Anderson, a computer scientist at Cambridge university contributed to the Blockchain idea by producing a scientific paper titled The Eternity Service which proposed a storage system to prevent denial of service attacks. Anderson’s paper presented a problem to cryptology communities that merited further study. Specifically, suggesting limits to the resilience of distributed authentication services, and the writeonce indexing of large databases (Anderson, 1996). Anderson’s research preceded that of Nick Szabo and Stefan Konst who further developed the theory that suggested practical, real life uses of Blockchains (Agarwal, 2017). More than a decade later, on the 31st of October 2008, Blockchain was conceptualized into a fully functional system. A digital form of data structuring that enabled the sharing of public ledgers across a distributed network was introduced to the world through the cryptocurrency Bitcoin (Lewis, 2016; Maverick, 2017). Following the global economic crisis in 2008, an individual or organization supposedly known as Satoshi Nakamoto, released a whitepaper that explains a Blockchain protocol in the form of a Peer to Peer electronic cash system. Although the words block and chain were never used as one word in the original paper, in due course the term was popularized as a single word (Bheemaiah, 2017). Since the emergence of Bitcoin, the benefits of Blockchain has since grown to be more than economic. Blockchain now extends into political, humanitarian, social and scientific domains (Lewis, 2016). The technological capacity of Blockchain has 2 Melina Mutambaie Katende already been harnessed by specific groups to address real world problems (Swan, 2015). Moving into 2014, a popular discourse began to separate Bitcoin from Blockchain as industries recognized the endless number of alternatives of the technology (Mann, 2016). This gave rise to Blockchain 2.0, a mechanism that allows programmable transactions. The Ethereum network is an example of Blockchain 2.0 as it uses a language to write scripts that implement any computable function. Vitalik Buterin, Russian Canadian programmer and writer for the Bitcoin magazine, co-founded Ethereum. Ethereum is an open source second generation public Blockchain featuring smart contracts. Soon after the rise of Ethereum, start-ups began introducing Blockchain as enterprise solutions. In 2016, 30 of the world’s largest financial institutions collaborating with the company R3, created an international distributed ledger platform known as Corda, an international public blockchain. Corda records, executes institutions financial agreements (R3, 2018). Banks like Barclays and HSBC, that form part of the group, recon the technology has the potential to make faster, more reliable payments that are easier to audit (Dalibard, 2017). This association has since been growing. In March 2018, Deutsche Börse Group and HQLAX signed a letter of intent to form a strategic partnership for the creation of an innovative securities blending solution that makes use of the R3 Corda Blockchain platform (R3, 2018). A year after the establishment of R3, the NASDAQ committed to a Blockchain trial. Which was followed by three legacy financial institutions, namely; Visa, Capital One and Fiserv backing 300,000,000 U.S. dollars for a Blockchain start-up called Chain. These big moves from the world’s biggest financial players signaled the level of corroboration for the use of Blockchains within finance. In October 2016 the world’s first Blockchain centric Health conference was held where leaders from around the world gathered to explore how Blockchain could possibly transform their industry. The conference has continued to run yearly, bringing together the brightest minds to reimagine how Blockchain will streamline everything from payments, medical records, processing and analytics (Distributed Health, 2016). In addition to finance and Health Care, Blockchain has gained popularity in the realm of digital identities. For as long as we know it identity management has been a centralized process often controlled by government. With the emergence of digital identities, Blockchain has introduced a trust model that many believe can surpass the capabilities of paper-based identity management. Online Identity Since online identity has traditionally been viewed through the lens of an organization it is not surprising that the focus has been on the organizational needs and not needs of the individual. These identity providers, or IDPs, provide individuals with identifier data, unique attributes used to access their system. The result of this is that people end up with hundreds of online identities from different organizations, and the identities are lawfully owned by University of Johannesburg, South Africa the proprietors, the organizations. This problem has consequently led to the concept of self-sovereign identities, which can be achieved on Blockchain. For the first time in history, in as much as Blockchain affords, the possibility of individuals owning their identity is achievable but can be a double-edged sword. These and other common business cases will be discussed in forthcoming sections of this article. Digital Evolution Blockchain has unlocked a new era of digital evolution (Lewis, 2016). The last few decades brought us the internet of information and we are now witnessing the rise of the internet of value (Maverick, 2017). This era will be powered by a clever combination of mathematics, cryptography, software engineering and behavioral economics (Tapscott & Tapscott, 2017). Blockchain promises to introduce new business models and disrupt industries (Swan, 2015) because it challenges how we have structured societies, rewarded participation and defined value (Tapscott & Tapscott, 2017). In the next section, we will explore the mechanics of Blockchain to better understand the significance of its technical developments. 3 THE CATEGORIES OF BLOCKCHAIN Already at its infancy, we have seen Blockchain technology begin to make economic, political, legal and humanitarian impact. The disruptive technology can be grouped into three categories (Swan, 2015). In the book Blockchain -A Blueprint for a new Economy , Swan (2015) identifies Blockchain in parts; 1.0, 2.0 and 3.0. An example of Blockchain 1.0 is currency, applications that leverage off blockchain in relation to cash, the transfer or currency, remittances and payment systems. Blockchain 2.0 is the establishment of contracts, the entire slate of financial, economic applications using blockchain for extensive transactions, such as stocks, bonds, loans, mortgages, titles, property. Blockchain 3.0 refers to applications in the areas of government, health, science, culture and art. he Connected World and Blockchain: he Fith Disruptive Computing Paradigm The history of computing Paradigms consists of innovations such as main frame, personal computing, the internet, mobile, social networking and cloud computing. These paradigm shifts have ultimately led us to the connected world we live in today. Computing that relies on blockchain cryptography can be considered as the most current emerging paradigm because, like the internet, it has changed the way individuals and organizations approach problems. From selecting appropriate I.T infrastructures, to establishing distributed networks, understanding cost implications and regulation of data transferred on blockchains. Yes, Blockchain conveniently fits into the connected world of multidevice computing, but it brings with it possibilities. Possibilities that motivate diverse approaches to Melina Mutambaie Katende problem solving. Given the widespread global network effect, blockchain could be adopted much quicker than the internet was. Blockchain 1.0 Essentially Blockchain 1.0 is currency, originally it began as Bitcoin. This initial version of Blockchain encompasses the deployment of cryptocurrencies in applications related to cash, such as money transfer, remittance, and digital payment systems (Swan, 2015). The terms Bitcoin and Blockchain are often used to refer to the same thing. That is because Bitcoin simultaneously represents three different things (Swan, 2015). Firstly, Bitcoin can be understood as the underlying blockchain platform. Second, Bitcoin can refer to the protocol that runs on top of the blockchain platform. Third, Bitcoin means the digital currency itself denoted as BTC, the first cryptocurrency created. These three layers of Bitcoin are the general structure for modern cryptocurrencies: Blockchain, protocol and the currency. Figure 1.2 shows the layers of Bitcoin in relation to the Internet Protocol. Application Layer Application Protocol Layer General Protocol Layer Gmail Bitcoin (BTC) digital currency SMTP (Simple Mail Transfer Protocol) Bitcoin Protocol TCP/IP (Transmission Control Protocol/ Internet Protocol) Bitcoin Blockchain (The Cryptographic Ledger) Figure 1.2 –Layers of Bitcoin Each coin is characteristically a currency and a protocol, and it may run off its own blockchain or from the Bitcoin blockchain. An Example of this is Counterparty (XCP), a currency whose transactions are registered on the Bitcoin blockchain. Blockchain 1.0 has helped to solve the double spend problem. Traditionally, an exchange of digital money would require that a trusted third party keep a ledger containing all transactions and ensure that transactions had occurred only once. By combining BitTorrent peer-to-peer filesharing with public key cryptography, blockchain prevents digital money from being spent more than once. The ownership of a coin is confirmed by cryptographic protocols and the mining community. Bitcoin Cryptographic Protocols One of the cryptographic technologies that make up Bitcoin is public key cryptography. Each Bitcoin contains a public key that is linked to its current owner using the Elliptic Curve Digital Signature Algorithm (ECSDA). When a transaction takes place, (Diagram 1.3) the receiver’s public key is attached to the transaction and the transaction is signed with the sender’s private key. When this transaction is broadcasted on the bitcoin 3 University of Johannesburg, South Africa blockchain, the network is informed that the new owner has become the owner of the public key. The sender’s signature on the transaction verifies that the message is authentic. A complete history of all transactions is kept on the blockchain. Melina Mutambaie Katende gave the approval to Impak Coin which becomes the first Canadian approved cryptocurrency (Bloomberg, 2017). On the other end of the spectrum nations like China, Bangladesh and Bolivia have placed complete bans on cryptocurrencies. Bangladesh threatens punitive sanctions on individuals caught with them (Thomson Reuters, 2017). China outlawed the use of cryptocurrencies in 2017, which resulted in the crypto market losing almost 50% of its value. In South Africa, the South African Revenue Service (SARS) has deemed all cryptocurrencies taxable and will be regarded as assets of an intangible nature (SARS, 2018). Blockchain 2.0 Diagram 1.3 –Process low of a Bitcoin Transaction Each block in the series of blocks contains a group of transactions that took place after the last transaction in the previous block. To preserve the integrity of the chain, each block validates the integrity of the previous block, this goes back as far as the genesis block (The original block). The process involves a lot more detail of the functions used to authenticate transactions. The above explanation is only a brief overview of the transaction process. Bitcoin and Altcoins1, which form Blockchain 1.0 consists of public blockchains that are always open, distributed. The protocol requires proof of work as a consensus for transactions. However, Blockchain 1.0 is being extended to Blockchain 2.0, which features a more robust functionality of programmable transactions. Regulatory Status of Blockchain 1.0 (Cryptocurrencies) Government regulation is perhaps one of the most substantial factors that determines whether Blockchain 1.0 will advance into an established financial services industry. We have witnessed entire populations and governments amid economic crisis adopt cryptocurrencies as an attempt to combat hyperinflation. Some of these nations affected by the cryptocurrency movements include Zimbabwe, Greece, Venezuela (Otis, et al., 2016). Moreover, economically stable countries like Canada and the US have advocated for Blockchain 1.0 and taken steps to promote cryptocurrencies to create parity for virtual currencies (Thomson Reuters, 2017). In 2017, Canada 1 4 Alternative cryptocurrencies launched after the success of Bitcoin. Blockchain 2.0 is the next big tier in the development of the blockchain industry (Swan, 2015). There are many different categories and considerations of Blockchain 2.0, but standards and definitions are continuing to emerge. Whereas Blockchain 1.0 is for the transfer of cryptocurrencies, Blockchain 2.0 is for the transfer of assets beyond currency, from the creation of a unit value. Much of what is transferred on Blockchain includes smart contracts, smart property. This leads to the decentralization of markets. The most prominent form of Blockchain 2.0 is Ethereum. Ethereum introduced the concept of Smart contracts, or decentralized autonomous organizations (DAOs), which has become a leading topic of discussion in the blockchain industry. Essentially, smart contracts are autonomous programs that are automatically executed when pre-defined conditions are met. The great advantage of smart contracts on Blockchain 2.0 is that they are impossible to hack, thereby reducing the costs of verifications, arbitration and fraud. In the same way that Blockchain 1.0 solved the double spend problem, Blockchain 2.0 solves the moral hazard2 problem that is ever so common in financial markets. How do smart contracts work? In 1994, a cryptographer and legal theorist by the name of Nick Szabo came up with the concept of self-executing contracts on a decentralized ledger (Rosic, 2016). In this format, contracts could be converted to code and stored on the blockchain. However, Szabo’s notion of smart contracts did not find usage until cryptocurrencies came into play in 2008. Now that blockchain and smart contracts can be used in conjunction, it is conceivable to trigger payments when a predefined condition of a contract agreement has been reached. This also results in automatic feedback on the ledger that includes confirmation of goods received or services rendered. More so, smart contracts not only define the rules and penalties around an agreement but also automatically enforce those obligations (Rosic, 2016). Ethereum and Codius are platforms that have successfully enabled smart contracts on blockchain (Crosby, et al., 2015). Ethereum is a Turing-complete virtual machine that can run any cryptocurrency, coin or script. Rather than a universal development platform, Ethereum is an underlying infrastructure 2 A situation that arises when an individual takes risks knowing that they are protected against the risk and the cost will be transferred to another party. University of Johannesburg, South Africa that can run all blockchains and protocols. Each node on the Ethereum network runs the Ethereum virtual machine for the execution of smart contracts. The Ethereum ecosystem consists of three components namely; Swarm, Whisper and Reputation. These components serve for file serving, messages and vouching of reputation. Over time, contracts that are executed on platforms like Ethereum could become extremely complex and autonomous (Swan, 2015). Although many experimental projects have risen from Blockchain 2.0, it may take some years for Blockchain 2.0 and 3.0 to create real economic impacts (Zhao, et al., 2016). Table 2.1 depicts the differences between Blockchain 1.0 and Blockchain 2.0. Melina Mutambaie Katende services (Kane, 2017). Blockchain 3.0 moves into fields of justice, the arts, health and education. Diagram 2.2 exposes findings conducted by a survey on 200 contemporary blockchain applications at RMIT university. This reveals the number of applications that fall into the different categories of blockchain (Kane, 2017). We are still seeing the majority of applications focused on Blockchain 2.0, but in the future, we expect to see a rise of different applications for Blockchain 3.0. Diagram 2.2 – Research on use of blockchain types. Table 2.1 Summary of Blockchain 1.0 and 2.0 Blockchain 1.0 Bitcoin Blockchain Simple Transactions One Blockchain Public chains Proof of Work only Always Open and Distributed Blockchain 2.0 Ethereum, Corda, Hyperledger Generic Contracts Multiple Linked Blockchains Public, Private, Consortium, Domain specific. Proof of stake, identity etc. User choice Beneits Not locked into one vendor Can lever more complex requests Can partition information to suit needs Solves privacy and regulatory requirements Overcomes speed issues and computational costs. Can tailor solutions around business needs. Blockchain 3.0 As demonstrated by Ethereum and Bitcoin, Blockchain technology affords us a universal scope and scale that was previously impossible. This is particularly evident in resource allocation. It encourages automated resource allocation for tangible and intangible assets. It also facilitates manners of human interaction and paves the way for the interaction between humans and machines. Blockchain 3.0 is expected to improve the capabilities of platforms like Ethereum and Bitcoin while overcoming their observed limitations (Narayanan, 2015). At the time of writing this, Blockchain 3.0 is mostly a theoretical concept and has not been extensively adopted in the global I.T infrastructure. However, scientist and researchers (Kane, 2017; Swan, 2016; Crosby, et al., 2015) believe it to be a complete diffusion of the technology throughout society, potentially disrupting systems of identification and government Folding@Home Project A Notable project that exhibits the concept of Blockchain 3.0 is the Folding@Home Project. This Stanford University project is aimed at using computing cycles to simulate protein folding for computational drug designs and molecular dynamic problems. This project provides a counterparty token, Folding Coin, that runs on the platform, and is exchangeable to cryptocurrencies like Bitcoin and regular fiat currencies. The Folding Project has turned into a vibrant community of miners that mine for medical research rather than to crack algorithmic hashes. The efforts of miners can contribute to finding cures for cancer and other diseases. Without Blockchain technology, researchers have to spend hefty amounts on supercomputers to execute molecular simulations. This project allows anyone to download the FoldingCoin framework and run the program on their computer. Thereby distributing the work load to a trusted network of individuals on the blockchain. A more essential use of Blockchain 3.0 would be to address the excessive energy consumption resulting from the mining of coins. Instead of using computing power to crunch arbitrary numbers, perhaps the processing power of mining could be applied to solve more practical tasks (Swan, 2015) and real-world problems. Name Coin Project Namecoin is one of the first non-currency uses of Blockchain. It exhibits the concept of Blockchain 3.0 in the form of preventing internet censorship. This coin was created to verify domain name registrations. It provides an alternative for the traditional Domain Name Servers (DNS) that are central to the internet. The advantages of a decentralized DNS is that it is transnational and 5 University of Johannesburg, South Africa not be controlled by any single entity, thereby making it possible for individuals around the world to publish information freely. Namecoin was the first blockchain solution to solve the longstanding problem of producing a naming system that is secure, decentralized and meaningful. This problem known as the Zooko’s Triangle, a trilemma of three desirable naming properties for participants on a network. Namecoin is an example of Blockchain 3.0 that highlights the issue of the appropriate administration of transnational public assets and presented a solution for managing it. Namecoin provides a free speech mechanism for domains that might be censored, for instance in countries with limited political freedom. 4 WHY IS BLOCKCHAIN A COMPUTING PARADIGM SHIFT? Exploring blockchain in theory only paints half of the bigger picture. It is only in connecting the dots that we will begin to understand how much of a global impact it has. Below is list of three conventional human and computing activities that are transforming due to Blockchain. The Trust Problem All human societies have a trust problem (Danaher, 2015). It is widely understood that all human activities, such as running a business, maintaining a relationship or making a living requires co-ordination and cooperation with others. However, there is and always has been the potential to mislead and abuse the trust of cooperating parties in any agreement. To address this trust problem, a lot of societies have invented intermediaries such as central banks, government, rituals and laws. The distributed consensus method that Blockchain provides eradicates the need for intermediaries entirely. This means that societies could ultimately become reliant on the technology as a trust mechanism. For example, in the future we could see marriage contracts, employment contracts or bond agreements only deemed legal if recorded on a public blockchain. Such examples reveal how the technology has the potential reshape our idea of trust. Melina Mutambaie Katende tremendous effect on the power dynamics and competition in the I.T industry. Dispersed Collaborative computing As demonstrated in the example of Folding@Home, there has never been a better time for humans to enjoy frictionless collaboration for a greater cause. Blockchain makes it possible for the average person to take part in a global initiative. Not long ago, making a charitable impact in society meant investing a considerable amount of time and energy to organize an event, get people together, or donate funds in the hopes that it was directed to the right place or person. Crowdfunding on Blockchain, ICO’s 4 and collaborative computing are drawing immense attention as they provide transparent and secure ways of collective contribution. 5 CONCLUSION In summary, we have touched the surface on the possibilities of Blockchain. Various themes of Blockchain 1.0, 2.0 and 3.0 have been identified and continue to emerge in the industry. Due to the fact that this industry is relatively new, further research and developments will inevitably emerge. We have seen how Blockchain 1.0, the emergence of cryptocurrencies has swept the world of tech, finance and banking in an unprecedented wave. The rise of Blockchain 2.0 has introduced the world to smart contracts, which has proven to be pivotal in reshaping our understanding of trust and exchange. Blockchain 3.0, the latest version of the technology, takes things to the next level, providing justice applications that go beyond currency, economics and markets. The concept of organizing any form of activity through a distributed network has the potential to reinvent every category of human endeavors, be it in politics, economy, health-care or science. Blockchain is proving to be the fifth disruptive computing paradigm shift. REFERENCES Product to Platforms 6 Decentralised Applications Anderson, R. J., 1996. he Eternity Service, s.l.: Cambridge University. [2] Bheemaiah, K., 2017. he Blockchain Alternative: Rethinking Macroeconomic Policy and Economic heory. Paris: Apress. Cliton, M., 2017. Understanding Merkle Trees - Why use them, who uses them, and how to use them. [Online] Available at: htps://www.codeproject.com/Articles/1176140/Understanding-MerkleTrees-Why-use-them-who-uses-t. Crosby, M. et al., 2015. BlockChain Technology, California: Berkely. Haber, S. & Stornetta, W. S., 1991. How to time-stamp a digital document. Journal of Cryptology, p. 1 Kane, E., 2017. Is Blockchain a General Purpose Technology?, Melbourne: SSRN Marais, A., Windley, P. & Smolenski, N., 2018. Blockchain Africa Conference. s.l.:s.n. Narayanan, V., 2015. A brief history in the evolution of blockchain technology platforms, s.l.: Hackernoon [3] It used to be that firms looked to launch hit products (Satell, 2016). Now we see applications of Blockchain 2.0, such as Ethereum, as full-fledged platforms on which third party applications can run. So, the emphasis is moving from developing new applications to developing platforms, or protocols that can be adopted as needed. There are already over one thousand DApps3 running on the Ethereum network. The notion of Platforms as a Service (PaaS) used to be associated with large enterprises such as Google, Microsoft or Amazon. Now the availability of Blockchain makes possible for any individual to develop his or her own PaaS. This has a 3 [1] [4] [5] [6] [7] [8] [9] 4 R3, 2018. 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