Perverse Outcomes: FATF, Bitcoin and Financial Exclusion

Michael J Casey

Michael J Casey Jul 29, 2019 at 04:15 UTC

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.


In last week’s column — my third on Libra — I referred to a core dilemma confronting the cryptocurrency project’s financial inclusion goals: the impossibility of being both pro-privacy and pro-KYC.

I promise a break this week from Libra and its controversial founder, Facebook. But I want to dive deeper into that dilemma because the problem is hardly unique to that project. As “know-your-customer” rules have steadily encroached into their world, all cryptocurrency startups trying to expand financial access for the poor are hamstrung by requirements to identify and track the people they seek to serve.

This contradiction stems from tough policies contained under Anti-Money Laundering and Combating the Financing of Terrorism rules (AML-CFT), which were tightened worldwide after the September 11 attacks in 2001 and then again after the financial crisis. Since virtually every bank needs access to dollars, KYC rules everywhere tend to follow models laid down in the U.S. Bank Secrecy Act and in guidelines of the U.S. Financial Crimes Enforcement Network, or FinCEN. Further internationalizing pressure comes from the inter-governmental Financial Action Task Force, or FATF, which sets the regulatory standards by which countries pressure each other to comply.

This network of rules, which empower enforcement agencies to impose stiff fines, hold the Sword of Damocles over bankers’ heads, driving them into risk-averse positions. Bank compliance officers need only mention HSBC (fined $1.9 billion for enabling Mexican drug money laundering) or Standard Chartered (hit with a $1.1 billion fine for similar lapses with Iran) to convince their bosses of a rigorous approach to identifying and profiling customers.

Yet it’s not clear these measures are effective. The UnitedNations Office on Drugs and Crime (UNODC) estimates that a 2-5% of global GDP, or between $800 billion and $2 trillion, is still being laundered each year. Would the figures be higher without these tough rules? Maybe. But we have no counterfactual against which to measure performance.

Criminals still have a host of mechanisms to move money around and avoid sanctions. Yes, some use bitcoin – which is why the FATF this year introduced tougher rules for what it calls “virtual asset service providers” – but cryptocurrency’s role is far smaller than that played by fiat currency banknotes. And as revealed in the Panama Papers in 2015, all sorts of shady entities continue to help crooked politicians and their financiers hide identities and obscure money movements.

What we do know is that these rules hinder financial inclusion.

Caribbean governments, for example, complain that their economies have increasingly suffered “de-risking,” as tougher compliance has stanched investment flows to the islands.

The consequences are even more severe for poorer countries, where state-led IDs are either non-existent or easily forged. The heavy scrutiny that foreign banks apply to their counterparties in FATF-labeled “high-risk jurisdictions” means the bar for businesses and individuals in those countries to obtain local banking services is very high. It’s a key reason why 2 billion people worldwide are considered “unbanked.”

This, of course, has a negative impact on poverty, which in turn feeds crime and terrorism – the very problems AML-CFT is intended to fight.

Consider Somalia, a failed state whose institutions are often blacklisted by the world’s biggest banks. It’s difficult and costly for Somalian expats to send money home to family members who rely on such remittances. This perpetuates poverty, drives people into informal payment systems and fosters the disenfranchising economic conditions in which terrorist organizations such as the Somali-based Al Shabaab thrive.

Talk about a perverse effect.

Is cryptocurrency the answer?

The Cypherpunk answer is to say, screw governments. People should use bitcoin, since it enables peer-to-peer digital payments without the intermediation of a regulated entity.

The problem lies at the crypto on- and off-ramps, where government surveillance has become ever more intense. The FATF’s new “travel rule” says cryptocurrency exchanges should be required to obtain information, not only about their customers but also on their customers’ customers, forcing cross-exchange information-sharing. This suggests the only environment where cryptocurrency transactions will be free from KYC exists solely between self-custody wallets. The minute a transaction touches the custodial structure that underpins most exchanges, cryptocurrency will be subject to KYC reporting.

Decentralized exchanges, or DEXes, which provide price and matching services but take no custody of clients’ coins, might be a way around this problem. Recent FinCEN guidance excluded them from the definition of regulated money service businesses in the U.S.

However, cryptocurrency advocacy group Coin Center has raised concerns that the FATF’s definition of regulated “virtual asset service providers” includes a vague reference to entities which “transfer” funds. Vagueness creates uncertainty, which as we’ve seen with bank compliance officers, is toxic to risk appetites. Many lawyers will advise their DEX clients to impose KYC to be on the safe side.

Also, with Helsinki-based LocalBitcoins announcing new KYC rules this year due to a new Finnish anti-money laundering law, it has become much harder for people to find each other in person and agree on a price for exchanging cryptocurrency for fiat without being officially surveilled.

In any case, it’s simply impractical for people in the developing world to use bitcoin as their main unit of account and medium of exchange. Perhaps Libra, with its basket-based stability mechanism, could evolve into a day-to-day payment vehicle, but as we saw from David Marcus’s testimony to Congress, that corporate-backed project will require KYC.

Bottom line: the poor need an easy-access fiat on-ramp.

Monitoring tech advances

We’re back to square one: financial inclusion goals suffer at the expense of governments’ crime-fighting objectives.

One could argue governments should decriminalize money – combat the actual crimes of drug trafficking, arms dealing, and so forth, but treat the right to exchange value as a human right. Let’s be realistic, though: that isn’t going to happen.

So, how to escape this vicious cycle? The answer may lie in blockchain technology’s own capacity to track transfers between pseudonymous accounts – though not as currently applied.

For some time, transaction-trackers such as Elliptic and Chainalysis have helped law enforcement agencies trace cryptocurrency payments to and from bad guys and provided rigorous AML monitoring audit services to companies.

Now, newcomers such as the Coral Protocol and CipherTrace are using high-tech network analyses and cryptographic protections to help businesses share cryptocurrency metadata to flag suspicious behavior without revealing their customers’ personal identifying information, or PII. These could make it easier for companies to comply with the FATF travel rule and generally create a more sophisticated, systemic analysis of risk.

Quite apart from KYC rules, there’s real value here for a cryptocurrency economy increasingly dominated by “bots.”

Still, there’s no way around the law. At the on- and off-ramps, customers must be ID’ed. And, under order from a law enforcement agency armed with these sophisticated tracking tools, a firm must crack open the black box and release the PII to the authorities.

A new mindset

What if, though, governments concede that it’s both impossible and unnecessary to formally identify poor people at the on and off-ramps? What if they accepted an AML model that treats the endpoints as unidentified nodes and, drawing on these new analytic tools, actively managed access to networks based on behavior not identity?

Here, ongoing research in machine learning and high-performance computing by the MIT-IBM Watson AI Lab in collaboration with Elliptic could be a catalyst. As described by lab researcher Mark Weber, the team uses an approach known as “graph convolutional networks” to create enhanced money flow forensics to address the challenges posed by the “complex layering and obfuscation schemes utilized by sophisticated criminal networks.”

Mapping a massive pool of bitcoin transactions, the researchers have isolated patterns that distinguish between illicit and licit behavior. In a forthcoming paper, they posit their work as a contribution to financial inclusion goals.

One day businesses might use such tools to control access points to cryptocurrency networks without applying traditional KYC, ensuring that good guys get financial services but bad guys don’t, even if neither is furnishing an official ID.

Would regulators go for it? Not, it would seem, under the current mindset. Compliance is used to identify and catch criminals, not as way to control access per se. If anything, the regulatory trend has been toward a greater dependence on state ID and ever more conservative treatment of “high-risk” poor people by financial institutions.

Cryptocurrency compliance expert Juan Llanos complains that regulators “are not open to innovation.” He adds, “As long as government ID is the standard, we are going to have this problem. Anything anonymous is controversial and not allowed. It’s very unfortunate.”

Still, the FATF’s latest round of deliberations did contain one olive branch to innovators: a willingness to explore the potential for “digital identity provided by governments or by the private sector.”

Combine that “private sector” line with a brief reference in Libra’s white paper to “portable digital identity” as a financial inclusion solution, and one can at least imagine financial and tech companies such as those the Libra Association’s members hashing out an onboarding solution for the poor that no longer depends on the outdated notion of state IDs.

This approach won’t satisfy hardline privacy advocates, who rightly view exchange as a human right.

But as a pragmatic solution, it’s perhaps the best hope that the world’s 2 billion unbanked have.

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Monero and Zcash Conferences Showcase Their Differences

Leigh Cuen

Leigh Cuen Jun 30, 2019 at 10:00 UTC

Last weekend, two privacy coin conferences heralded the future of cryptocurrency governance: the hybrid startup model versus grassroots experimentation.

Over 200 people gathered in Croatia for Zcon1, organized by the nonprofit Zcash Foundation, while roughly 75 attendees gathered in Denver for the first Monero Konferenco. These two privacy coins are fundamentally different in a variety of ways on clear display at their respective events.

Zcon1 had a gala dinner with a seaside backdrop and programming that displayed close relations between companies like Facebook and the zcash-centric startup Electronic Coin Company (ECC), as evidenced by Libra being widely discussed with team members in attendance.

The quintessential funding source that distinguishes zcash, called the founder’s reward, became the center of passionate debates during Zcon1.

This funding source is the crux of distinction between zcash and projects like monero or bitcoin.

Zcash was designed to automatically siphon off a portion of miners’ profits for creators, including ECC CEO Zooko Wilcox. So far, this funding has been donated to create the independent Zcash Foundation, and support ECC contributions to protocol development, marketing campaigns, exchange listings and corporate partnerships.

This automated distribution was scheduled to end in 2020, but Wilcox said last Sunday he would support a “community” decision to extend that funding source. He warned that otherwise ECC might be forced to seek revenue by focusing on other projects and services.

Zcash Foundation director Josh Cincinnati told CoinDesk the non-profit has enough runway to continue operations for at least another three years. However, in a forum post Cincinnati also warned the non-profit shouldn’t become a single gateway for funding distribution.

The amount of trust zcash users place in the asset’s founders and their various organizations is the primary criticism levied against zcash. Paul Shapiro, CEO of the crypto wallet startup MyMonero, told CoinDesk he’s not convinced that zcash upholds the same cypherpunk ideals as monero.

“Basically you have collective decisions instead of individual, autonomous participation,” Shapiro said. “There’s been perhaps not enough discussion about the potential conflicts of interest in the [zcash] governance model.”

While the simultaneous monero conference was much smaller and slightly more focused on code than governance, there was significant overlap. On Sunday, both conferences hosted a joint panel via webcam where speakers and moderators discussed the future of government surveillance and privacy tech.

The future of privacy coins may rely on such cross-pollination, but only if these disparate groups can learn to work together.

Shared zk-SNARKs

One of the speakers from the joint panel, Monero Research Lab contributor Sarang Noether, told CoinDesk he doesn’t see privacy coin development as a “zero-sum game.”

Indeed, the Zcash Foundation donated almost 20 percent of the funding for the Monero Konferenco. This donation, and the joint privacy tech panel, could be seen as a harbinger of cooperation between these seemingly rival projects. Cincinnati told CoinDesk he hopes to see much more collaborative programming, research, and mutual funding in the future.

“In my view, there is a lot more about what connects these communities than what divides us,” Cincinnati said.

Both projects want to use cryptography techniques for zero-knowledge proofs, in particular a variant called zk-SNARKs. However, as with any open-source project, there are always trade-offs.

Monero relies on ring signatures, which mix small groups of transactions to help obfuscate individuals. This isn’t ideal because the best way to get lost in a crowd is for the crowd to be much bigger than ring signatures can offer.

Meanwhile, zcash setup gave the founders data often called “toxic waste,” because the founding participants could theoretically exploit the software that determines what makes a zcash transaction valid. Peter Todd, an independent blockchain consultant who helped establish this system, has since been an adamant critic of this model.

In short, zcash fans prefer the hybrid startup model for these experiments and monero fans prefer a completely grassroots model as they tinker with ring signatures and research trustless zk-SNARK replacements.

“Monero researchers and the Zcash Foundation have a good working relationship. As for how the foundation began and where they’re going, I can’t really speak to that,” Noether said. “One of the written or unwritten rules of monero is you shouldn’t have to trust someone.”

Shapiro added:

“If certain people are dictating large aspects of the direction of the cryptocurrency project then it raises the question: What is the difference between that and fiat money?”

Different strokes

Stepping back, the long-standing beef between monero and zcash fans is the Biggie vs. Tupac divide of the cryptocurrency world.

For example, former ECC consultant Andrew Miller, current president of the Zcash Foundation, co-authored a paper in 2017 about a vulnerability in monero’s anonymity system. Subsequent Twitter feudsrevealed monero fans, like entrepreneur Riccardo “Fluffypony” Spagni, were upset by how the publication was handled.

Spagni, Noether, and Shapiro all told CoinDesk there are ample opportunities for cooperative research. Yet so far most mutually beneficial work is conducted independently, in part because the source of funding remains a point of contention.

Wilcox told CoinDesk the zcash ecosystem will continue to move toward “more decentralization, but not too far and not too fast.” After all, this hybrid structure enabled funding for fast growth compared to other blockchains, including the incumbent monero.

“I believe something not too centralized and not too decentralized is what’s best for now,” Wilcox said. “Things like education, promoting adoption worldwide, talking with regulators, that’s the stuff that I think a certain amount of centralization and decentralization are both right.”

Some fans of both projects see the benefits of that collective approach. Zaki Manian, head of research at the Cosmos-centric startup Tendermint, told CoinDesk this model has more in common with bitcoin than some critics care to admit.

“I am a big proponent of chain sovereignty, and a big point of chain sovereignty is that the stake holders in the chain should be able to act collectively in their own interests,” Manian said.

For example, Manian pointed out the wealthy benefactors behind Chaincode Labs fund a significant portion of the work that goes into Bitcoin Core. He added:

“Ultimately, I would prefer if protocol evolution was mostly funded by the consent of token holders rather than by investors.”

Researchers on all sides acknowledged their favorite crypto would require significant updates in order to deserve the title “privacy coin.” Perhaps the joint conference panel, and Zcash Foundation grants for independent research, could *inspire* such cooperation across party lines.

“They’re all moving in the same direction,” Wilcox said about zk-SNARKs. “We’re both trying to find something that has both the larger privacy set and no toxic waste.”

Above $300: Ether Price Clocks 10-Month High

Omkar Godbole

Omkar Godbole Jun 22, 2019 at 05:32 UTCMARKETS

The price of ethereum’s native cryptocurrency ether (ETH) surpassed $300 today to hit ten-month highs.

The world’s second largest cryptocurrency by market capitalization climbed above the psychological hurdle at 01:10 UTC and extended gains further to $306 – a level last seen on August 19, 2018.

As of writing, ETH is changing hands at $304, representing 9.7 percent gains on a 24-hour basis and 129 percent gains on a year-to-date basis, according to data source CoinMarketCap.

Ether has more than doubled this year with the price currently reporting more than 260 percent gains on the low of $82.00 seen in December. The price, however, is still down 78 percent from the record high of $1,431 registered in January 2018.

Further, the cryptocurrency has retraced meager 16 percent of the sell-off from $1,431 to $82. On the other hand, BTC has retraced more than 40 percent of the bear market slide and is currently trading at a 15-month high of $10,800.

Looking forward, ether looks set to extend the ongoing rally, as technical charts are biased bullish.

3-day chart

The 50- and 100-candle price averages on the three-day chart have produced a bullish crossover for the first time since in two years. It is worth noting that prices had rallied by more than 900 percent in three months following the confirmation of the bull cross in May 2017.

So, if history is a guide, then the cryptocurrency looks set to challenge the April 2018 low of $364 in the next couple of months. A break higher would expose resistance at $401 – 23.6 percent Fibonacci retracement of the bear market drop.

Supporting the bullish case is the solid rise in ether’s non-price or on-chain metrics in the last few months. For instance, ETH volumes on decentralized applications (DApps) registered record highs in April, according to crypto analytics firm Diar.

Meanwhile, network activity, as represented by daily gas usage, rose to lifetime highs in May. Gas is the fuel of the ethereum blockchain. The token is required to conduct a transaction on etherum’s network.

Disclosure: The author holds no cryptocurrency at the time of writing

Ether via Shutterstock; charts by TradingView

Bitcoin Automated Trading System

So what is exactly that Bitcoin Auto-trading system everybody is talking about?

Making money from trading is why we are all here. But being online and trading for hours on either your PC or mobile app can also be time consuming. Traders spending hours online and trying not to miss any market opportunity that can help them earn money can sometimes be an overwhelming situation … Not to mention the amount of financial market knowledge you need to have to place the right trades at the right time that will eventually earn your money…

What if I were to tell you that trading online doesn’t necessarily have to be a confusing and overwhelming experience? That you can say goodbye to endless financial analyses and can enjoy trading using a safe and easy-to-use automatic statistical method? How about feeling like your own personal Broker as you will be in total control of your own trading experience?

The Auto-trading system!

What is it?

Auto-trading system gives you the ability, to place trades automatically on any financial assets and in the trading volumes you choose, when you are not next to your PC or mobile phone. Not only that, the BATS offers you full risk management with the “Take Profit” and “Stop Loss” features. These features let you set your desired daily profit and loss, and once the BATS reaches that amount, it will pause itself for the rest of that day and resume the day after.
 
 A known fact is that 95% of successful deals in the financial markets globally are made by Auto-trading systems/trading algorithms.

What is the success rate of the Auto-trading system?

Ah, that is the million-dollar question, isn’t it? 
Can this Auto-trading system make me money?

First, there is NO such thing as a “magic robot” that earns money consistently, as there are no free gifts in life. If there were, everybody would be using it already. Any company or salesman that promises you that their “robot” will earn big money consistently is basically lying to you.

Now that we have established that, we can move on.
Success rate changes on a daily basis and based on market conditions.

Bitcoin Automated Trading System

How can I get a high success rate on my BATS? 
 
The combination of the trading strategy that you choose and your attention to the volatility of the asset you are trading on. Volatility means the frequency of the movement in the price of the asset.

“The trend is your friend” . This is the rule of law for many traders. Following the trend is one way traders attempt to predict the future direction of an asset’s price. The Auto-trading system is using the trend as a signal indicator.

“Trend” strategy goes better with less volatile assets.

Less volatile assets go well with a “Trend” strategy because it exploits the MILD movements in the asset’s price. If the asset is less volatile, it means that statistically there is a higher chance that the price of the asset will continue in the same trend. The “Trend” strategy will automatically buy the asset if it reaches a new high point.

“Reversal” strategy goes better with more volatile assets.

More volatile assets go well with a “Reversal” strategy because it exploits the SHARP movements in the asset’s price. If the asset is more volatile, statistically there is a higher chance that the price of the asset will reverse its trend. The “Reversal” strategy will automatically buy when the asset reaches a new high point.

Let’s take an example of a two-week period to understand.

In the first week the Bitcoin is more volatile, so the “Reversal” strategy is more successful than the trend (above 80%), because the Bitcoin is volatile and the “Reversal” strategy is able to exploit it. The following week the Bitcoin is much less volatile, so the “Trend” strategy is much more profitable (above 85%!). But one needs to understand that it doesn’t say that this is a guarantee, and although it is an Auto-trading system (NOT A “MAGIC ROBOT”) you need to be alert to market conditions and asset volatility and react to it. if you follow these guidelines you can significantly increase your chance of earning money.

The beauty about the BATS is that it’s 100% automated treading system and you don’t need to have previews knowledge in trading.

Why Private Blockchain is the Future of Cryptocurrency?

Why Private Blockchain is the Future of Cryptocurrency?

If you’re reading this, you probably already know what’s Blockchain. The term, that became one of the most popular ones in recent years, beholds a whole new world of options and opportunities. Alongside all the good things, it holds a big misconception — Not all Blockchains are the same, and there are many different technologies based on the idea. The same applies to Crypto, where we can assume that all the various digital coins share the same security system, but by going deeper, we can see not only that the situation is totally different, but there’s also two major groups with a vast difference: Private and Public Blockchains. So, what’s all the fuss about?

Public Blockchains are pretty much straightforward: They are using one of the strongest encryptions today, but not in an exclusive way. A lot of Cryptocurrencies use Ethereum’s Blockchain system, which has proven to be a solid and secure way to deal with digital currencies. The pros are obvious: You can save quite a lot of time in using a “template” instead of investing more time and money in creating your own Blockchain technology, thus allowing you to focus on other elements.

But when it comes to private Blockchains, we get a different picture. Why? Because the effort that was given in, created extra advantages, for example:

Faster Transactions: The shared foundation between all cryptocurrencies that use the same Blockchain can be overloaded sometimes. The more coins used, and actions done, the more traffic it needs to host successfully. A private network will only need to monitor its exclusive content, thus ensuring faster rates.

Safer Process: Sure, Blockchain is safe, but if you manage to somehow hack through a private network, chances are all of the cryptocurrencies hosted on it are in grave danger. When there’s a private system, you need to analyze a whole different set if you want to hack it. A similar factor is that open-code systems are usually safer than closed one, due to the various alterations that can be done on it.

Full Customization: Let’s face it, no public system can fully interact with the individual concerns, will and demand. A private Blockchain allows you to fully integrate your ideas and goals with every aspect, thus fulfilling your full potential.

Not losing edge: When there are many players in the field, there needs to be some sort of consolation between all of them. When they’ll demand changes in the masses, you may be one of those who need them, or maybe be the one to lose from them instead. With a private Blockchain, you’re the boss — And you do whatever you need to keep YOUR product at the best state possible. Democracy is nice, but in this case — Being a single ruler is way better.

As we can see, the two groups might seem almost identical at first, but in the end — It’s apples and oranges, hardcore mode. Know your differences before you dive in, not only as an ICO entrepreneur, but as an investor or even someone who just checks the surface. Either public or private — Go for the right cause!

Bitcoin (BTC) Price Rally Reaches Inflection Point: $6.1K and $6.8K Hold Key

  • Bitcoin price rallied another 4% and climbed above $5,850 against the US Dollar.
  • The price is surging higher, but there are many hurdles near $6,000, $6,070 and $6,100.
  • There was a break above a crucial bearish trend line at $4,730 on the daily chart of the BTC/USD pair (data feed from Kraken).
  • The pair could spike above $6,000 or even towards $6,800 before correcting lower sharply.

Bitcoin price is surging higher towards $6,000 against the US Dollar. BTC could extend gains, but it is facing two important hurdles near $6,100 and $6,800 on the daily chart.

Bitcoin Price Analysis

In the past few days, there was a steady rise in bitcoin price from the $4,000 swing low against the US Dollar. The BTC/USD pair broke the $4,400 and $4,700 resistance levels to start a strong upward move. There was even a close above the $4,200 resistance and the 100-day simple moving average. The bulls pushed the price above the 50% Fib retracement level of the last major decline from the $6,562 high to $3,115 low.

More importantly, there was a break above a crucial bearish trend line at $4,730 on the daily chart of the BTC/USD pair. Recently, the pair broke the $5,250 and $5,500 resistance levels to extend gains. It is now trading well above the 76.4% Fib retracement level of the last major decline from the $6,562 high to $3,115 low. These all are positive signs, suggesting more gains above the $5,900 level. However, there are many hurdles on the upside near the $6,000, $6,070 and $6,100 levels. The $6,070 level was the previous breakdown support and it may now prevent gains.

If there is an upside break above $6,100, there could be an upside extension towards the $6,532 swing high. The main resistance above $6,500 is near the $6,800 level, the main pivot zone of Oct 2018. Therefore, there are chances of a strong bearish reaction from $6,100, $6,500 or $6,800 in the coming days.

Looking at the chart, bitcoin price seems to be gaining pace above the $5,500 and $5,600 levels. Having said that, the bulls are likely to face a strong offer zone near $6,000, $6,070 and $6,100. If there is a successful close above $6,100, the price may climb higher towards $6,500 or even $6,800 before starting a substantial downside correction. On the downside, there are many supports near $5,540, $5,450 and $5,250. Below these, the price may revisit $5,000.

Technical indicators:

Daily MACD – The MACD is gaining bullish momentum with many positive signs.

Daily RSI (Relative Strength Index) – The RSI for BTC/USD climbed above the 70 level and it seems to be heading towards the 80 level.

Monthly Support Levels – $5,450 followed by $5,250.

Monthly Resistance Levels – $6,070, $6,500 and $6,800.

What is Blockchain Technology?

Posted by CoinDesk

“The practical consequence […is…] for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”

– Marc Andreessen

From a cruising altitude, a blockchain might not look that different from things you’re familiar with, say Wikipedia.

With a blockchain, many people can write entries into a record of information, and a community of users can control how the record of information is amended and updated. Likewise, Wikipedia entries are not the product of a single publisher. No one person controls the information.

Descending to ground level, however, the differences that make blockchain technology unique become more clear. While both run on distributed networks (the internet), Wikipedia is built into the World Wide Web (WWW) using a client-server network model.

A user (client) with permissions associated with its account is able to change Wikipedia entries stored on a centralized server.

Whenever a user accesses the Wikipedia page, they will get the updated version of the ‘master copy’ of the Wikipedia entry. Control of the database remains with Wikipedia administrators allowing for access and permissions to be maintained by a central authority.

Wikipedia’s digital backbone is similar to the highly protected and centralized databases that governments or banks or insurance companies keep today. Control of centralized databases rests with their owners, including the management of updates, access and protecting against cyber-threats.

The distributed database created by blockchain technology has a fundamentally different digital backbone. This is also the most distinct and important feature of blockchain technology.

Wikipedia’s ‘master copy’ is edited on a server and all users see the new version. In the case of a blockchain, every node in the network is coming to the same conclusion, each updating the record independently, with the most popular record becoming the de-facto official record in lieu of there being a master copy.

Transactions are broadcast, and every node is creating their own updated version of events.

It is this difference that makes blockchain technology so useful – It represents an innovation in information registration and distribution that eliminates the need for a trusted party to facilitate digital relationships.

Yet, blockchain technology, for all its merits, is not a new technology.

Rather, it is a combination of proven technologies applied in a new way. It was the particular orchestration of three technologies (the Internet, private key cryptography and a protocol governing incentivization) that made bitcoin creator Satoshi Nakamoto’s idea so useful.

The result is a system for digital interactions that does not need a trusted third party. The work of securing digital relationships is implicit — supplied by the elegant, simple, yet robust network architecture of blockchain technology itself.

Defining digital trust

Trust is a risk judgement between different parties, and in the digital world, determining trust often boils down to proving identity (authentication) and proving permissions (authorization).

Put more simply, we want to know, ‘Are you who you say you are?’ and ‘Should you be able to do what you are trying to do?’

In the case of blockchain technology, private key cryptography provides a powerful ownership tool that fulfills authentication requirements. Possession of a private key is ownership. It also spares a person from having to share more personal information than they would need to for an exchange, leaving them exposed to hackers.

Authentication is not enough. Authorization – having enough money, broadcasting the correct transaction type, etc – needs a distributed, peer-to-peer network as a starting point. A distributed network reduces the risk of centralized corruption or failure.

This distributed network must also be committed to the transaction network’s recordkeeping and security. Authorizing transactions is a result of the entire network applying the rules upon which it was designed (the blockchain’s protocol).

Authentication and authorization supplied in this way allow for interactions in the digital world without relying on (expensive) trust. Today, entrepreneurs in industries around the world have woken up to the implications of this development – unimagined, new and powerful digital relationshionships are possible. Blockchain technology is often described as the backbone for a transaction layer for the Internet, the foundation of the Internet of Value.

In fact, the idea that cryptographic keys and shared ledgers can incentivize users to secure and formalize digital relationships has imaginations running wild. Everyone from governments to IT firms to banks is seeking to build this transaction layer.

Authentication and authorization, vital to digital transactions, are established as a result of the configuration of blockchain technology.

The idea can be applied to any need for a trustworthy system of record.

Authored by Nolan Bauerle; images by Maria Kuznetsov

 

https://www.coindesk.com/information/what-is-blockchain-technology