Learning to Fly with the Internet of Value

The Internet of Value (or the Internet of Money) is a new kind of Internet where it’s possible to exchange value in the form of crypto currencies, contracts, stocks, shares, intellectual property and ownership of valuable things in general.

Valuable things are already exchanged in the Internet using payment systems like PayPal. However, there’s a significant difference between paying for something using PayPal and paying for something using for example, Bitcoin. Using PayPal requires the payment to go through a number of private networks such as credit cards and banks while a payment using Bitcoin has no intermediaries. It goes directly from the buyer to the seller.

In this aspect, the Internet of Value is a powerful idea because it promises a future where everyone has access to free disintermediated universal transfers of value.

Disintermediation could have a huge impact in the efficiency of the financial transactions. Intermediaries add cost and time to transaction processing. Time is not an issue, one could argue, because an Internet payment feels pretty quick but in reality, settlement between the parties takes time and the seller can receive chargebacks many months after the payment was made. So, in a sense, an internet payment takes months to be final, whereas a Bitcoin payment is final with astronomical probability after some minutes.

Having a universal public network also promises to eliminate banking exclusion because it would bring to the economy parties not profitable enough to justify the IT costs of current banking systems. It would also increase the global amount of value exchanged thanks to the network effects of having one universal value network.

Amazing inventions will make the IoV possible. Public-key cryptography, public blockchains that allow consensus between competing parties and smarts contracts make it possible to exchange value in a disintermediated way.

However, they still present some technological challenges like speed and confidentiality that we haven’t solved. We know our technology can transfer value but it’s not yet ready to go mainstream.

Public-key cryptography is the most basic enabler of the IoV. This development from the 70’s allows a user to sign a message with a private key in a way that anyone knowing this user’s public key can verify the authenticity of this signature. This applied to transactions means that a number of parties can sign an online document representing a transaction and thus commit to the consequences of said transaction. If this transaction represents a payment, then we can get the equivalent of an online cheque by using digital signatures. We wouldn’t, however, know where to cash this cheque unless we specify a bank and a currency. In the IoV the bank to cash the cheque is a blockchain such as Bitcoin.

Blockchains are a kind of ledger that consist in grouping blocks of transactions and adding a pointer to the previous block. This pointer is special. It is called a hash pointer and it includes a hash of the previous block. A hash is a string derived from a block of information using a hashing function. What makes hashing functions special is that it’s impossible to find another block of information that would have the same hash. The result of this is that it’s impossible to alter the information of any transaction in the ledger without having to alter all the blocks occurring afterwards. This makes it tamper resistant.

An additional feature of these blocks is that data is organised in such a way that it’s quick to verify its contents are correct. The structure of data inside blocks is called a Merkle Tree.

However, tamper resistant ledgers wouldn’t be useful if there wasn’t a public consensus about the transactions included in the ledger and the order of these transactions. In order to have the same version of the ledger shared in a large number of places we need a way to achieve consensus between these places. The way to achieve this consensus is called mining and can be implemented in different ways. Bitcoin was the first cryptocurrency to achieve this consensus successfully by having each node solve a puzzle which changes depending on the transactions included in each block.

The node that successfully solves a puzzle gets to add a block to the chain and also gets rewarded by being assigned a certain amount of crypto currency. Afterwards, other nodes start to mine blocks on top of this block. If two nodes mine a block it results in a fork in the chain. These kinds of forks don’t last long because nodes quickly pick the longest chain out of fear of wasting their mining efforts in a short non-winning chain.

Mining is the key invention that makes the IoV possiblebecause it achieves an equilibrium where all players have an incentive to play by the rules. Many will disagree with this statement since there are many blockchain initiatives that don’t include mining or tokens. That’s why I’m going to discuss the consequences of mining a little bit more in detail.

Mining is seen as a way of achieving a distributed consensus in the sense of distributed data systems and because of this it has been analysed many times as a computer engineering problem. In my opinion, this is the wrong approach. Mining allows for a consensus in a computer environment which is different from distributed database applications where all nodes in a cluster are cooperative. In blockchain networks, nodes are competitors. The common approach to consensus assimilated this to a Byzantine fault toleranceproblem where some nodes collaborate and others are adversarial is n0t applicable here because in a public blockchain network there are not two armies, there are as many armies as nodes.

Nodes in a public blockchain network don’t collaborate, they compete and for that it’s more useful to see blockchain networks under the light of Game Theory rather than computer science. The technological breakthrough of mining is that it gives incentives to players to reach a Nash equilibrium. It is in the interest of all nodes to continue playing by the rules unless it convinces a majority of other nodes to subvert the rules.

Blockchain Mining Games from Kiayias et al. -> when the computational power of each miner is relatively small, their best response matches the expected behavior of the bitcoin designer. However, when the computational power of a miner is large, he deviates from the expected behavior, and other Nash equilibria arise.

Smart Contracts are the final missing piece. They extend blockchains so that more complex rules than just validating a transaction can be executed. This is extremely powerful because it actually creates a world distributed computer that can handle value but also run arbitrary code and create all sorts of decentralised organisations ranging from democracies to autonomous organisations, or decentralised finance.

Ethereum is the best example of this and I encourage anyone not familiar with it to visit its page and check all the amazing decentralised applications possible.

However, there are still important obstacles to the adoption of IoV technologies. Regulation is an important one but from a technical perspective, scalability is the most important.

Achieving consensus through mining is expensive and currently the throughput of a whole blockchain network is the same as that of one node. This currently stands at a maximum of 7 transactions per second in Bitcoin and 15 transactions p.s in Ethereum. This is clearly not enough to allow the world economy to transition given the throughput necessary for some applications which ranges from tens of thousands of transactions per second in banking or millions of operations per second in Internet of Things.

In summary:

• The Internet of Value will lead a fairer, disintermediated society.
• The technology underpinning this revolution is revolutionary because it allows adversarial nodes to cooperate as opposed to Internet previous collaborative environments.
• We’re still at the beginning and the technology can’t still be applied massively.

In my next two posts, I’m going to explain what solutions could allow us to scale the IoV to the required capacity and the possible applications of blockchain including the grey area of consortiums.