What the hell is the “Blockchain” and why is everybody talking about it? (Part 1 of a 3-part series on Blockchain)

April 19, 2018 • Kathy Susca, TFC Films Manager

‘Blockchain’ is 2018’s buzziest word in regard to film distribution, so we want to make sure all of our readers are savvy to what it means, how it works, and its potential for distribution. This is the first post of 2-part blog on blockchain—in this article, we’ll define what the blockchain is, explain its technical structure, and discuss some of the possible applications for media. In part 2, we’ll discuss industry perspectives on advantages of these systems.

At its core, blockchain technology is based on a very simple concept. It is a distributed ledger system, meaning that its primary purpose is tracking transactions, like a pen-and-paper accounting ledger. ‘Distributed’ means that it is de-centralized; it is not maintained or controlled by any single authority or company. Rather, it is maintained and updated by the user base, on a peer-to-peer (P2P) basis.

The ledger is organized as a sequence of blocks (the “blockchain”), each including multiple transactions. It generally works like this:

• Any user can join the network and read all past transactions in the blockchain.
• To create a new transaction, the user signs a request and broadcasts it to the network.
• Other users can collect pending transactions, create a block and add it to the blockchain.

The special thing about blockchains is that blocks added to the chain are a permanent, verified, and public record of the history of all transactions within the system. To avoid tampering of blocks, the process of adding new blocks to the chain is made intentionally difficult: users compete to verify blocks and add them to the chain, and they are rewarded when they succeed.

In this article, we will be using Bitcoin as an example because it was the first successful large-scale implementation of a blockchain, where each block contains records of money transfers. However, blockchain technology is not limited to financial transactions—it can be used to record copyright ownership, royalty payouts, etc. It is important to understand that blockchain technology is just a method of recording data and verifying its existence at a certain point in time; different systems that we will discuss later in this article all employ their own unique implementation of these concepts.

Because of cryptocurrency’s prominence at the moment, there is a wealth of information available for further reading. The New York Times recently posted an excellent animated video with a basic explanation of cryptocurrency. Using Bitcoin as a lens, we can start to understand blockchain systems, their uses, and their limitations.

Hash functions are a key element of blockchains: they are used to “chain” blocks together and to verify their contents. A hash function generates a unique numeric ID from the data of an input block, like a fingerprint. If even one character is changed in the input data, the resulting hash can change entirely: this makes it very difficult to alter input data and get the same fingerprint. Bitcoin uses the SHA-256 hash function: you can try to enter some text here and see how the resulting hash changes if one character is altered.

Hash functions play two roles in the blockchain: linking a new block to the previous one and controlling the creation rate of new blocks.

from BraveNewCoin.com’s introduction to Blockchain technology

Linking new blocks to previous ones: Each block contains the fingerprint (hash) of the previous block. See the illustration above: when a block is added to the chain, it links itself to the chain by including the prior block’s fingerprint in addition to pending transactions. In this way, each block’s fingerprint is dependent on the chain of all blocks coming before it. Therefore, each block’s hash is a fingerprint for the history of the entire chain.

Controlling the creation rate of new blocks: In Bitcoin, blocks are added to the chain when they are “mined,” and users can earn money for mining blocks. To mine a block, miners must add a mystery number to the block, to make its hash start with a required number of zeroes. Given that hash functions are, by design, almost impossible to reverse-engineer, the only effective way to mine a block is to simply keep plugging in different values for the mystery number until it works. Once a block is mined, it is broadcast to the network and it becomes part of the blockchain, together with all of its transactions, and additional transactions rewarding the miner with new Bitcoins and transaction fees. There are server farms doing this lucrative work, all day every day.

One of the main points of a blockchain system is to do away with a potentially fallible central authority overseeing the record keeping. Thus blockchains are necessarily public – at least to the users on that system. The monetary rewards coming from mined blocks are how the Bitcoin system motivates its users to participate in processing transactions and adding them to the blockchain. But how does the system guarantee that recorded blocks are trustworthy, that a transaction won’t be removed or altered, creating an alternative history of recorded transactions?

Well, imagine that two blocks are added to the chain at exactly the same moment, creating two competing branches of the blockchain (this is called “forking”). As each chain grows, how does the network decide which one is the official record? The longer chain wins, and the transactions in the shorter fork go back into the pool of pending transactions. A transaction isn’t considered ‘confirmed’ until it is several blocks back in the chain, and therefore unlikely to be in a forked chain that will be dissolved. It currently takes about 10 minutes for a block to be mined, so transactions are considered ‘confirmed’ after about an hour (6 blocks). As the chain gets longer, the individual blocks (and the records they contain) become more and more secure.

To tamper with a block that is already in the chain, it would be necessary to do the difficult work of re-mining that block, and all the other blocks after it, in order to create a forked chain that is longer than the original chain. Meanwhile, other miners would be adding blocks to the original chain, making it longer and longer. In order to beat the rest of the network (working on the legitimate fork), a malicious user would have to implement what is known as a“51% attack”—to control 51% of the mining power in the entire network to have a statistically likely chance of mining several blocks in a row. Since having 51% of the hashrate is prohibitive both logistically and financially, and even then the success of the attack would not be guaranteed, users stand to make more profit by protecting and securing the blockchain.

Blockchain systems use a variety of methods to determine the probability of a user/node being the next one to add a block, but by far the most popular method is “Proof of Work.” In this system, a user’s hashrate (how many hashes they can compute, per second) determines their likelihood to mine the next block. Server farms, for instance, are more likely to mine a block quickly than an individual user. This is the system used by Bitcoin that we’ve been describing so far. Other systems are Proof of Stake (a lottery based on how much commodity a user owns), Leased Proof of Stake (users pool their commodities and share earnings), Delegated Proof of Stake (users elect nodes), and Proof of Importance (‘worthy’ users are selected). In each of the systems above, the users are financially motivated to maintain the integrity of the system, whether the benefit is direct, indirect, or collective.

This necessarily-public nature of the blockchain carries with it some privacy concerns for the users. All transactions a user engages in are publicly available, and therefore traceable. Anybody with access to the blockchain records is able to reconstruct a user’s entire history of transactions (and therefore discover their account balance). If that user is successfully identified as a specific person or entity, their privacy has now been compromised.

With Bitcoin, this problem has been tackled through the use of addresses – unique alpha-numeric identifiers linked to a user’s account. Each user can have multiple addresses, and it is standard practice to create a new one for each transaction in order to ensure privacy of both parties. When used properly, addresses can anonymize transactions.

Copyright Management: A blockchain system would be ideal for verifying who owns the copyright on a piece of intellectual property at any given point in time. Any sale of rights could potentially be recorded and accessible to the public. Furthermore, quoted in Information Week, Tiffany Li of the Yale Law School’s Information Society Project says, “Technically, one could imagine generating a hash for every piece of intellectual property you would like to identify as your creation and using a public blockchain-based registry to authenticate ownership of IP.” Other experts point out that integrating the new blockchain copyright management systems to work seamlessly with ‘legacy systems’ would be a complex, costly, and years-long process. However, some companies have already begun this work, like Po.et.

Royalty tracking and payouts: In a system in which media is created by more than just a single artist and distributed across a variety of platforms worldwide, royalty payments can become very complex. Blockchain Royalty Corp is one company doing this type of work in the music industry, and their system integrates smart contracts to automate the process and ensure that payouts are done accurately. The Open Music Initiative takes the idea of royalty tracking to the next level, by designing a system that also helps fans discover other works the artists are credited on.

Crowdfunding: iProdoos will allow the users of the platform to “decide what content is made and available on the iProdoos platform and how long that content lives”—essentially they’re crowdsourcing programming via crowdfunding on the blockchain. Initial Coin Offerings (ICOs) are a way to raise funds for a startup by pre-selling your cryptocurrency to investors. This type of model could be applied to fundraising for a film project, and facilitating paying back the investors using the blockchain records.

Direct Distribution: Creators could potentially use blockchain technology to track transactions. However, the content itself would likely have to be stored and distributed using a different platform, as the blockchain is not intended to store large amounts of data like a video file. One potential path would be to integrate blockchain verification with BitTorrent P2P technology, in which media is shared directly between users and the dissemination of the files is crowd-based. Like blockchain technologies, BitTorrent negates the need for a central company or figure to maintain records or even be involved in transactions beyond providing the platform. IPFS seeks to replace the current HTTP web with a decentralized P2P system (that employs hash functions to identify information in nodes)—ideal for saving bandwidth when sharing large files. Decent, Lightstreams, Treeti, White Rabbit, Cinezen, SingularDTV, Stream Space, and Vevue for example, are just a few of the companies already focusing on this type of distribution.

Some hurdles to consider: We’ve spent a lot of time discussing how users in Bitcoin are motivated to participate in the upkeep of the system. In decentralized systems, users must be incentivized, and a non-cryptocurrency-based system (that cannot necessarily offer financial incentives) complicates that issue. The public vs. private tension must be resolved as well—if a copyright attribution is anonymous, what good does it do? We have also discussed data storage concerns for large media files. Furthermore, while the blockchain may in itself be a secure ledger system, the peripheral systems that make it practical for use (data storage, cryptocurrency wallets, file encryption, smart contracts, etc.) are not necessarily as invulnerable as the blockchain itself. Finally, cryptocurrencies using blockchain technology aren’t necessarily well-suited to microtransactions due to transaction fees, so setting up royalty payouts on individual consumer purchases as they happen would be cost-prohibitive.

Kai Stinchcombe, a prominent critic of blockchain technology points out that “ten years in, nobody has come up with a use for blockchain,” and goes on to detail the lack of recourse if you are defrauded in these systems, as well as the overall clunkiness of the technology in comparison to centralized systems. In a subsequent article, the same author writes, not without reason, “Blockchain systems do not magically make the data in them accurate or the people entering the data trustworthy, they merely enable you to audit whether it has been tampered with.” We are just scratching the surface here, but these are conversations that must be had if artists are going to monetize their work using these new technologies.

Of course it is not possible to know what the future will bring, but let’s imagine these hurdles are all surmountable, that you could integrate the above technologies (Cosmos for example facilitates interoperability between blockchain systems). Then, you could develop a system that brings together copyright management, royalty payouts, direct-to-consumer-sales, distributed storage of media, and smart contract functionality; a system with completely decentralized, direct distribution and rights management that is functional across all cryptocurrencies. That would be a real media revolution—and it may not be too far off.

Keep an eye out for the second part of our series on the blockchain, in which we explore some entertainment industry perspectives on the advantages that blockchain technology can bring to some of the more challenging pieces of film distribution that we currently have.

How Bitcoin Mining Works
Bitcoin Wiki
Blockchain: What Business Leaders Need to Know About This Disruptive Technology
Blockchain Technology Moving Into Cable, Advertising Sectors
Can Blockchain Technology Solve Copyright Attribution Challenges of Digital Work?
Film Slate To Be Financed by Digital Currency and Distributed Via Blockchain
What is Blockchain and How Will It Change the World?
How Blockchain Could Start To Make Waves in Media and Entertainment in 2018
Betting on the Bitcoin Blockchain

Kathy Susca April 19th, 2018

Posted In: blockchain, Blockchain, Digital Distribution, Distribution, privacy, technology