The blockchain must evolve to be competitive. Here is the technological trace of a major player in the sector

Many industrial, economic or social sectors, such as banking, logistics, agri-food or healthcare, consider blockchain an important innovation to protect and simplify their digital transactions.

Sometimes described as revolutionary, this technology, initiated by Bitcoin in 2008, often remains misunderstood and subject to justified doubts about its mastery, especially its economic and environmental impacts. On September 15, 2022, the Ethereum blockchain, one of the main players in the sector, carried out an important evolution, called “The Merge”, by modifying its internal validation mechanism, going from “proof of work” to “proof of challenges” . Far from being a technical anecdote, this development removes a major obstacle that will enable more efficient, reliable and durable solutions to be produced on an industrial scale.

The goal is to certify transactions, protect information systems and help establish true digital trust in a world where the digital mode of individual interactions has become essential and predominant. For example, the world of logistics and international transport in large port areas awaits the deployment of truly effective solutions which, combined with the digitization of the tracking of goods and containers, will make it possible to make transit through the port safe and significantly streamline a context of smart port – a topic on which we are working a lot in collaboration with the port of Le Havre.

But at present the blockchain does not allow for high transaction rates (compared to, for example, credit card payment networks), because it requires long calculations… which are also very energy-intensive.

But what exactly is a “blockchain”?

A blockchain, or “chain of blocks,” is a decentralized digital ledger where transactions are authenticated. A network of validators acts as a digital notary: each of them keeps a copy of the transaction register, thus preventing one of them from modifying it without the consent of the others. New transactions are aggregated into concatenated blocks (see figure below).

Creating a new block.
Cyrille Bertelle and Claude Duvallet, Provided by the author

Each new block to be chained contains a “fingerprint” of the previous one, thus preventing any attempt to change a block: changing the fingerprint would break the chain.

diagram explaining how blockchains work
Added a new block.
Cyrille Bertelle and Claude Duvallet, Provided by the author

The blockchain qualifies as tamper-proof thanks to the two mechanisms previously described: the chaining technique and the duplication on the validator network.

Two questions then arise: first of all, how does registering a new block in the chain work so that it is accepted by all validators? So, how to encourage these validators to work for the proper functioning of the blockchain?

The first question is based on a “consensus mechanism” among all validators – the recent mutation of Ethereum is about this mechanism. The second question leads to remunerating the selected validator to register a new block with a cryptocurrency associated with the blockchain.

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The never-ending growth of resources needed for “proof-of-work” consensus.

The first blockchain is Bitcoin, created in 2008 by Satoshi Nakamoto. Its design is based on a consensus mechanism among the validators of the network, called “proof of work”, which allows to collectively validate each new block to be registered and to remunerate the selected validator for doing so. This is selected because it is the first to solve a cryptographic problem that requires significant computational resources (computer, time, energy) that increase with the development of cryptocurrency.

In the early days of Bitcoin, this “proof-of-work” mechanism was accomplished by the work of a few dozen validators using microcomputers. Today it mobilizes several tens of thousands of validators working simultaneously (performing the same calculations to solve the same problem) on powerful computing resources called mining farms. The energy cost of these mines worldwide is estimated in 2022 at an energy consumption close to 75% of that of French households.

However, the use of Bitcoin is still relatively confidential compared to the regulations set by a banking network such as Visa or Mastercard. Its extension would lead to an ecological catastrophe before being depleted and then dying naturally, unless it remained at an anecdotal level of use. Also, in relation to the cost of computation, the transaction rates are very low (several minutes to execute and validate each transaction) compared to those of banking networks such as Visa (thousands of transactions per second).

Ethereum, launched in 2015 on the basis of a new concept, that of “smart contract”, aims to secure and automate more sophisticated operations than simple exchanges of monetary values. This new concept therefore aims to revolutionize transaction management for all the above-mentioned industrial, economic and social actors. In its early days, Ethereum used Bitcoin’s proven consensus mechanism (the “proof of work”) while heralding a transition to other more energetically virtuous validation mechanisms.

Alternatives to “Proof of Work”

Consensus mechanisms were the subject of significant research before the emergence of the blockchain. Indeed, peer-to-peer networks that store and share data cannot function without these mechanisms, which validate the shared information.

There are many conceptual models of consensus: proof of work (that of Bitcoin), proof of stake (at the origin of “The Merge” evolution of Ethereum), proof of capacity, proof of delegate stake, proof of service, proof of authority , proof of trust to name a few. These consents are characterized in particular by the validator selection method and by the validation mechanism itself.

Proof of stake, used for the evolution of Ethereum, is not based on the selection of a validator, following an expensive calculation performed simultaneously by all validators (as in Bitcoin). The selection will take place through a random drawing proportional to his “bet”, which corresponds to a quantity of tokens representative of the quality of his activity. Only the selected validator will build the new block, without solving expensive cryptographic problems, and will submit it for approval by all the others. Thus, the cost of the operation becomes almost negligible compared to proof-of-work.

One limitation is that the choice of consensus technique used must not lead to situations of monopoly of certain validators (possibly supported by organizations or states) in an open and public system, thanks to their computational or contesting capacity. At the scale of a global network spanning many industries, Ethereum had to make sure it maintained the trust of the system when introducing its new consensus. While the “proof of stake” mechanism has been extensively studied, it had never been implemented on such a large scale as that targeted by Ethereum.

To conclude, public proof-of-work blockchains are doomed to failure for real sustainable implementation on an industrial scale. Bitcoin is one example.

Migration to proof of stake (or another more virtuous mechanism in terms of energy costs) is essential for the blockchain to respond to the great economic, industrial and social challenges it faces.

But its deployment remains subordinated to the need to remunerate validators on a public blockchain with a cryptocurrency inevitably linked to speculative appetites. It is necessary to know how to control this “edge effect” in the engineering of new blockchain-based information systems.

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