May 07, 2014

A triple-entry explanation for a minimum viable Blockchain

It's an article of faith that accounting is at the core of cryptocurrencies. Here's a nice story along those lines h/t to Graeme:

Ilya Grigorik provides a ground-up technologists' description of Bitcoin called "The Minimum Viable Blockchain." He starts at bartering, goes through triple-entry and the replacement of the intermediary with the blockchain, and then on to explain how all the perverse features strengthen the blockchain. It's interesting to see how others see the nexus between triple-entry and bitcoin, and I think it is going to be one of future historian's puzzles to figure out how it all relates.

Both Bob and Alice have known each other for a while, but to ensure that both live up to their promise (well, mostly Alice), they agree to get their transaction "notarized" by their friend Chuck.

They make three copies (one for each party) of the above transaction receipt indicating that Bob gave Alice a "Red stamp". Both Bob and Alice can use their receipts to keep account of their trade(s), and Chuck stores his copy as evidence of the transaction. Simple setup but also one with a number of great properties:

  1. Chuck can authenticate both Alice and Bob to ensure that a malicious party is not attempting to fake a transaction without their knowledge.
  2. The presence of the receipt in Chuck's books is proof of the transaction. If Alice claims the transaction never took place then Bob can go to Chuck and ask for his receipt to disprove Alice's claim.
  3. The absence of the receipt in Chuck's books is proof that the transaction never took place. Neither Alice nor Bob can fake a transaction. They may be able to fake their copy of the receipt and claim that the other party is lying, but once again, they can go to Chuck and check his books.
  4. Neither Alice nor Bob can tamper with an existing transaction. If either of them does, they can go to Chuck and verify their copies against the one stored in his books.

What we have above is an implementation of "triple-entry bookkeeping", which is simple to implement and offers good protection for both participants. Except, of course you've already spotted the weakness, right? We've placed a lot of trust in an intermediary. If Chuck decides to collude with either party, then the entire system falls apart.

Grigorik then uses public key cryptography to ensure that the receipt becomes evidence that is reliable for all parties; which is how I built it, and I'm pretty sure that was what was intended by Todd Boyle.

However he walks a different path and uses the signed receipts as a way to drop the intermediary and have Alice and Bob keep separate, independent ledgers. I'd say this is more a means to an end, as Grigorik is trying to explain Bitcoin, and the central tenant of that cryptocurrency was the famous elimination of a centralised intermediary.

Moral of the story? Be (very) careful about your choice of the intermediary!

I don't have time right now to get into the rest of the article, but so far it does seem like a very good engineer's description. Well worth a read to sort your head out when it comes to all the 'extra' bits in the blockchain form of cryptocurrencies.

Posted by iang at May 7, 2014 03:09 AM | TrackBack
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