How the Blockchain Works: Documenting Ownership
This is my first article about blockchain. I think this writing project has been delayed for a few months due to the topic’s complexity.
My approach to learning new things is by way of reading books. I think this is how I am wired.
I will try my best to make the content as simple as possible in this approach. However, if you find it dry, it is for the sake of accuracy.
My reason for starting this project is to gather a personal reference on the subject. I know that there are already a lot of materials published on Hive, but there is no replacement for understanding than writing the actual content.
My target is to build a module within a year or two from now about financial technology that will be incorporated into our academic programs or courses such as Financial Literacy, Church and Society, and Theology of Work.
Checking the web, you can see that numerous universities are already offering blockchain-related courses. Many of course in the crypto space are divided about this. Some don’t like it. Others think it is necessary for mass adoption.
In this article, I intend to share how the blockchain works in documenting ownership. As such, I want to cover the following topics:
An introduction to the relationship between blockchain and ownership
My search for a simple book
The general structure of the book and the reduction of the 25 steps into 12
The heart of this article, which is about documenting ownership will be further subdivided into three sections: a description of the transfer of ownership, the importance of maintaining the history and order of transactions, and the importance of the integrity of transaction data for the integrity of the whole system.
Introduction to the Relationship between Blockchain and Ownership
In the Hive community, many have already shared their thoughts about the connection of blockchain to ownership. However, I found the article published by @geekgirl on 25th July (the day the South Koreans pumped HBD to $3.26) very informative on the subject. I shared her article in one libertarian group on Facebook, Liberty, and Innovation through Free market Economy (LIFE).
The group got curious about Hive and asked me what is it all about. I just simply replied that if we are really aiming for our content to be free from censorship, I think there is no better platform to promote our advocacy than to use social media built for Web 3.0.
One liked my response. Later, I added, saying that the good thing with Hive is that as you invest time in creating and liking content, there is a built-in mechanism to incentivize users, called proof of brain protocol.
Returning to @geekgirl’s article, in the opening paragraph, she argued that complete ownership is the most important benefit we can receive from bitcoin. And she saw that such ownership is due to its decentralized character (others hesitate to use the term “decentralize” and prefer the word “distributed”), something that Hive shares. Moreover, this concept of ownership has been expanded in Hive including even “ownership of digital presence.”
My Search for a Simple Book
Talking about ownership will be the first topic that I want to share in this article. As I shared in my previous post, my first attempt to read a blockchain book was frustrating. I lost interest to continue reading the book after discerning that the author is a pro-regulation guy. Consequently, I tried to find another one. This time the writer claims that his book is written for non-technical people. I could relate to that.
Honestly, even after 11 months of reading articles and doing social and financial activities on the Hive blockchain, I still find both blockchain and cryptocurrency a mystery to me. I need something elementary to explain the very basics of things, something comprehensible, particularly for beginners like me.
If blockchain will remain a mystery to me, I doubt if my friends will appreciate it. They will remain in the dark about this field for I myself remain clueless about the many aspects of this breakthrough technology.
And so, I am very hopeful about this new book that somehow, I will find the things I have been looking for. Too many articles on blockchain and crypto are too technical for me. Though I understand a portion of it, I could not connect all the dots for the whole thing to make sense.
The General Structure of the Book
In this book, Blockchain Basics: A Non-Technical Introduction in 25 Steps, the author, Daniel Drescher claims that his goal in writing the book is to provide readers with a solid understanding of the basic concepts of blockchain technology. I like that! This is what I’ve been looking for – the basics!
However, deviating from his 25 steps, I just want to focus on the 12 steps that I consider the heart of the book. And so, we will have a different order as suggested in the book. We will skip steps 1 to 8 which cover topics from technical foundations to planning the blockchain. Instead, Step 1 will start with Step 9 about Documenting Ownership and we will end with Step 20 as Step 12. This last step is about Paying for Integrity.
The steps mentioned above can be simplified into seven tasks in designing a blockchain for managing ownership. These tasks are as follows (p. 58):
Storing transaction data
Preparing ledgers to be distributed in an untrustworthy environment
Distributing the ledgers
Adding new transactions to the ledgers, and
Deciding which ledgers represent the truth
In this article, we will cover task number 1, which is describing ownership. This task is further elaborated that includes three steps:
Hashing data, and
Hashing in the real world
And so, we will discuss Step 1 first, documenting ownership. The material in this step is taken from pages 63 to 68 of the book. That covers 7 pages.
Description of the Transfer of Ownership
As already mentioned in the early part of this article, the first sub-topic that we will cover about documenting ownership is the description of the transfer of ownership.
Before Drescher describes the transfer of ownership, he first introduced the topic by mentioning some preliminary matters that include the goal, the challenge, and the idea of documenting ownership.
The goal of documenting ownership is to do it in a way that is transparent and understandable. This would mean that the documentation is visible to anyone and that the nature of the relationship of the digital good to its owner can be easily understood.
The challenge has something to do with providing the evidence or the proof that someone is the real owner of that particular good.
To appreciate the idea of documenting ownership, one has to understand first the two primary ways of doing it, which are “inventory data” and “transaction data” (p. 64). “Inventory data describe the current state of ownership” and is compared “to a bank account statement” (ibid.) Transaction data, on the other hand, “describe transfers of ownership” and is compared “to a bank account statement that lists every withdrawal, deposit, and transfer of money” (pp. 64-65).
Given all the foregoing considerations, when we talk about the transfer of ownership, we don’t mean the inventory but the transaction history.
Drescher describes the transfer of ownership by using bank transfer as an analogy. In a bank transfer, the form plays a significant role for it contains all the necessary information to execute the money transfer.
Likewise, in transferring ownership, the blockchain needs all the indispensable data for such a transaction to be valid. This information includes the precise account owner doing the transfer, the receiver of the transfer, the total of the digital good to be transferred, the exact time, a fee, and proof that the original owner really agrees with the transaction.
At this point, Drescher made one distinction in the analogy regarding the fees due to the difference in the nature of control between the banks and the blockchain. For him, the blockchain has no schedule for a central fee because it is a distributed system.
The Importance of Maintaining the History and Order of Transactions
Maintaining the history of transactions is very important to clarify ownership. That makes blockchain a very powerful technology that is badly needed in our time to avoid manipulation and forgery in financial transactions. The blockchain maintains the total history of all transactions including the previous ones and the newly added data to a digital ledger. Any transaction not found in a ledger is considered as if it never happened. Blockchain works because the transaction data containing all the necessary information identified above are sufficient to identify the current owner of a digital good.
In identifying the current owner of a digital good, it is important to preserve the proper order of the transactions as they occurred to come up with a similar outcome every time the data are gathered together. Altering the order will change the outcome of the gathered data. Here, Drescher returns to the bank transfer analogy to emphasize the importance of preserving such order.
The Importance of the Integrity of Transaction Data
For Drescher, “the history of transaction data is the heart of any blockchain that manages ownership because it is the basis for reconstructing the state of ownership” (p. 67). Due to its importance, “it is necessary to keep that history of data safe, complete, correct, and consistent to maintain the integrity of the whole system. . .” (ibid.). To achieve such integrity, Drescher identifies three aspects to determine the validity of the transaction, and they are as follows:
Semantic correctness, and
Drescher explains in detail the meaning of each of these aspects:
“Formal correctness means that the description of a transaction contains all required data and that the data are provided in the correct format” (ibid.).
In defining semantic correctness, Drescher enumerates the following rules to follow in order to determine its validity (ibid.):
Ensuring that an account does not hand off more than it currently owns.
Preventing double spending
Limiting the number of items that can be transferred in a single transaction
Limiting the number of transactions per user
Limiting the total amount of items spent in a given period, and
Enforcing that an account keeps an item for a minimum period before it can be transferred further
Finally, Drescher describes authorization as the exclusive right of the original owner to inform “the blockchain to execute a transaction on his or her behalf” (p. 68).
In this article, we introduced the idea of the relationship between blockchain and ownership, my quest for a comprehensible book, and the 12 steps to follow to understand the basic character of the blockchain with a specific focus on documenting ownership. This central topic is further elaborated by describing the transfer of ownership, the importance of maintaining the history and order of transactions, and the importance of the integrity of the history of the transaction data. To attain such integrity, that data is validated on the basis of its formal correctness, semantic correctness, and authorization.
Reaching the end of the first step and the first task in our goal to have a basic understanding of blockchain technology, you will see that despite the claim of the author that his book is for non-technical people, still I find some areas very challenging and difficult to follow. I now realize why blockchain remains a mystery to many. If a book claiming to be simple is difficult to understand, how much more are those books written for technical people? Anyhow, as I mentioned in the introduction though I tried my best to make the content as simple as possible, still if you find it dry and academic, that’s for the sake of accuracy.
Grace and peace!
Daniel Drescher. 2017. Blockchain Basics: A Non-Technical Introduction in 25 Steps. Frankfurt, am Main, Germany: Apress.