Before diving into the discussion of the importance of blockchain, I want to first introduce two ubiquitous models to demonstrate the prevalence of the problem and, therefore, the power of blockchain.
Centralized Model
Centralized models are a type of organizational structure that has been prevalent in our society for thousands of years. The pure version of a centralized model features a centralized entity that serves as the central point of communication for all individuals in the system. While such a pure form of the centralized model is rarely seen in reality, variations of centralized models are prevalent and often share similar characteristics with the centralized model to varying degrees. Centralized models are commonly found in traditional businesses, governments, financial institutions, and other organizations where decision-making authority is centralized in a single body or individual.
P2P Model
The distributed model is the “antonym” of the centralized model.
Instead of having one central point that processes and controls all transactions, in a distributed system, control and decision-making are distributed among multiple nodes in the network.
The Peer-to-peer (P2P) model is a type of distributed system, where each participant, or node, can communicate directly with each other.
In a P2P network, there is no central authority, not even an intermediary, and each node acts as both a producer and a consumer, allowing for the sharing of data and resources directly between nodes.
Below is a comparison of two models:
The problems of peer-to-peer distributed system
Many benefits can be achieved by replacing intermediaries with peer-to-peer interactions.
Removing intermediaries saves a significant amount of money, increases flexibility by allowing for customized agreements, and enhances transparency and freedom from censorship as there is no central entity that has the power to control or manipulate interactions.
However, despite these advantages, peer-to-peer systems are not as prevalent as centralized systems. People may wonder why this is the case, despite the fact that some areas of our lives, such as texting and file sharing, have adopted peer-to-peer systems. Although these systems make these activities easier, they also reveal many lethal issues.
- Low Security and Integrity Level:
P2P systems face potential technical failures and malicious attacks that can severely compromise the security and integrity (completeness and accuracy) of the data. There is limited means of authenticating the security of the data and preventing changes from the original data, which is why internet fraud is so prevalent. This is a deal-breaker when it comes to social institutions. People have to find and adhere to a trustworthy entity to protect themselves from being deceived and harmed, giving birth to financial, governmental, and other intermediaries’ “trustworthy” institutions. - Hard to Regulate and Cooperate:
One can affirmatively say that a well-organized group of people working toward the same goal has a greater chance of survival when compared to a group of individuals without assigned roles or cooperation, like a bunch of floating atoms.
The first group of people is a manifestation of a centralized system, where there is a central authority uniting all individuals and sending out clear orders. However, in a P2P system, there is no “leader” to organize all members or to “adjust” and regulate their behavior, which decreases the likelihood of cooperation. Additionally, some groups may cooperate in a way that contradicts what other groups do. - Hard to Make Decisions:
In a P2P system, there is no central entity to integrate all diverse opinions into a clear decision. In most circumstances, when making a decision that regards group interests, members will negotiate until they reach a deal that they both agree with. Although this may sound like a democratic process, the reality isn’t as promising. It may take a lot of effort to get multiple parties to agree on one matter if they can reach an agreement at all. Moreover, it is common for one party to dominate over the others.
Therefore, it is reasonable to conclude that without any “technological intervention,” there are many significant drawbacks that prevent the emergence and prevalence of P2P systems in our society
The Emergence of Blockchain
Blockchain is the technology that has given peer-to-peer (P2P) systems a new lease on life. Blockchain helps to achieve and maintain integrity and security in a purely distributed P2P system, which consists of an unknown number of peers with unknown reliability and trustworthiness.
It also provides a compelling decision-making mechanism and a programmable tool that can regulate and organize people automatically.
Hash Function, Digital Fingerprint, Asymmetric Cryptography
Hash function, digital fingerprint, and asymmetric cryptography form the three cornerstones of the integrity and security of blockchain.
Hash functions, along with digital fingerprints, create a one-way unique identifier for each block of information. Any changes to the original data will be immediately detected, as even the smallest edition can cause irreversible changes to the hash value, not only of the current block but all subsequent blocks as well.
Asymmetric cryptography uses a public key to encrypt data and a private key to decrypt it. This ensures that only the owner can access the information, preventing any attempts at the masquerade.
Trust is the firm belief of humans in the reliability, truth, or ability of someone or something without evidence, proof, or investigation.
Hash functions, digital fingerprints, and asymmetric cryptography solve the trust problem not by blindly believing in the good nature of humans, but by imposing a tremendous risk of exposure on every node and punishment by the system.
Smart Contract
Smart contracts are self-executing agreements between parties, with the terms of the agreement being written directly into lines of code.
The contracts are automatically executed when certain conditions are met, eliminating the need for intermediaries. Smart contracts significantly reduce the workload of management and regulation, as they automatically enforce the programmed rules and regulations.
It serves as the technological foundation for distributed apps (Dapps), distributed autonomous organizations (DAOs), and even distributed autonomous societies (DAS).
This means that, compared to centralized models, a peer-to-peer system built on smart contracts segments society into many overlapping autonomous and “lawful” communities.
The traditional centralized approach of enforcing one unified command, regardless of varying situations, is replaced by a more localized and programmable approach. Smart contracts solve the problem of lack of cooperation through the power of self-execution and simplify complexity with automation.
Distributed Ledger
A distributed ledger serves as a database for all transaction records. Every node stores the transaction history in a standardized format and updates are made simultaneously with each transaction, ensuring the security and transparency of each transaction.
The standardization of data storage and sharing across a network of users also decreases the complexity of the system dramatically.
Consensus Mechanism
In the blockchain, nodes use consensus mechanisms to determine the state of the distributed ledger. Some of the most commonly used consensus mechanisms include Proof of Work and Proof of Stake. This allows the system to reach a collective decision through the rule of the majority. However, the application of consensus mechanisms in decision-making outside the scope of the ledger only holds theoretically.
In conclusion, blockchain has immeasurable value to humanity, as it provides a sophisticated solution to the problem of peer-to-peer distributed systems.
In my next article, “How Blockchain Works,” I will delve into the mechanisms in detail