The word “blockchain” is becoming ubiquitous and it is now rare that a week goes by without us seeing something blockchain-ish in the technology pages. Yet, along with that ubiquity, many of us are guilty of being rather blasé about the whole concept. It’s like Einstein. We are all aware that he developed the Theory of Relativity but how many of us can actually conceive of what that really means? We dutifully accept relativity without much interrogation and blockchain is treated similarly by the majority of the population.
Q. What is blockchain?
A. Oh, it’s that thing that regulates Bitcoin.
And that’s enough for most of us.
But maybe it’s high time that we lift the lid and take a closer look to try and to understand what blockchain really is and really can do. Beyond that it can also be useful to look at those governments and institutions which are embracing blockchain as a key component of their digital futures.
So where to start? I have taken the following quote from Open Blockchain, a project of the Knowledge Media Institute which is part of The Open University in the UK as my jumping-off point.
“Blockchain is most commonly known as the technology underpinning the Bitcoin cryptocurrency. But in recent years the open source code of the Bitcoin blockchain has been taken and extended by many groups to expand its capabilities. Blockchain technology, which can be thought of as a public distributed ledger, promises to revolutionise the financial world. A World Economic Forum survey in 2015 found that those polled believe that there will be a tipping point for the government use of blockchain by 2023. Governments, large banks, software vendors and companies involved in stock exchanges (especially the Nasdaq stock exchange) are investing heavily in the area. For example, the UK Government recently announced that it is investing £10M into blockchain research and Santander have identified 20-25 internal use cases for the technology and predict a reduction of banks’ infrastructure costs by up to £12.8 billion a year.”
That’s quite a promising start but it doesn’t really get down to the elemental structure so let’s dig further.
So what is a blockchain? At its most simple level it is a chain of blocks. That’s not difficult is it? These “blocks” are each a timestamped record of a transaction, a receipt, which is permanently linked to the previous block and the next block in sequence. It is a distributed audit chain in the respect that the records are allocated across a network – typically peer to peer – and that the blocks are unalterable. It is fundamentally a linear progression of tamperproof transactions that are distributed across a shared database.
Is the blockchain the business itself? No, the blockchain is the route along which a business, such as Bitcoin, functions. Imagine a blockchain as a highway. Different vehicles can join the highway as a means to go from one point to the next. A blockchain is a transportation system for transactions.
Now that we have established the basis of the concept we can expand. I quite like the statement by Marco Iansiti and Karim R. Lakhani from the Harvard Business Review earlier this year, “With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of blockchain.”
That is a very clear statement of potential but with massive implications to existing conventional structures. Let’s take a closer look.
Firstly, on a national level there are several governments and central banks which have taken a close interest in blockchain. What do the central banks or monetary authorities of Japan, Australia, the UK, Russia, Kazakhstan, China, Hong Kong, Cambodia and South Korea to name but a few have in common? These are just some of the countries which have officially declared themselves to be eager and active to participate in blockchain technology.
It has been the case in recent years that commercial banks have jumped on blockchain and sought to leverage the technology themselves. As blockchain writer and lecturer Noelle Acheson points out, “Central banks are understandably more conservative – they are public institutions, charged with maintaining the integrity of monetary policy and the banking system, neither of which allows for risk that is difficult to quantify. However, as the murmur of blockchain interest from the banking sector became a roar, central banks had no choice but to take note. As part of the oversight of their respective banking sectors, they need to know what constituents are up to, and they need to ensure that no systemic risk can jeopardize the system. In other words, to remain relevant, they need to become familiar with the tech that banks are experimenting with.”
Acheson gives us a timely reminder that plus ça change, plus c’est la même chose (the more things change, the more they remain the same) by quoting the 19th century French revolutionary Alexandre Auguste Ledru-Rollin, “There go my people. I must find out where they are going so I can lead them,” and that is the case for the central banks. Curiously, and apropos of nothing, those two pearls of French wisdom were first uttered only a year apart in 1848-49. But I digress.
Swiss bank UBS is leading a team of four of the world’s biggest banks developing a system to enable financial markets to make payments and settle transactions quickly using blockchain technology. As Reuters reported in August 2016, “UBS has developed a “Utility Settlement Coin” (USC), which is a digital cash equivalent of each of the major currencies backed by central banks, such as the dollar or euro, rather than a decentralized new digital currency such as bitcoin. The USC would be convertible at parity with a bank deposit in the corresponding currency, making it fully backed by cash assets at a central bank. Spending a USC would be the same as spending the real currency it is paired with.”
So the central banks have taken an “if you can’t beat them, join them” attitude in some respects but by doing so they are remaining open and available to innovation which is a huge step in itself as these establishments are so very well known for their intrinsic and institutional inertia. By getting on the blockchain train those central banks named above have indicated that their jurisdictions are ready, willing and able to embrace the very latest transactional technology.
Key to that they are making the unequivocal statement that they are ready to tolerate and support decentralized, distributed ledger systems within the area of their authority. That appears to be truly radical and potentially counter-intuitive in an age when we anticipate greater state control of our activity, and especially so online. However, if we consider that state control may have the opportunity to help define the use and proliferation of blockchain then this turn of events may not be so profound after all and might even be seen as fundamentally logical or even, dare I say it, entirely essential. At least from the point of view of the state.
Some central banks are taking things more seriously than others. The Russian Central Bank has gone as far as to develop a “fork” or version of the Ethereum blockchain named Masterchain with the target of offering a stable and universal platform tailored to Russian cryptographic norms.
Noelle Acheson continues, “What central banks need to do, however, is form their own consortium. While each bears a unique combination of structural, economic and geographic considerations, their goals are similar. Much of the central bank work currently being done is repeated behind gilded doors elsewhere.
“Collaborating on research and testing, with each other and even including private components of the ecosystem, will advance the work much faster.
“It would also mark a turning point in history.
“Central banks are always implicitly cooperating to keep the global economy ticking along with relatively stable currencies and trade flows (to paraphrase the band 10cc: ‘You need a yen to make a dollar’). However, with the exception of regional initiatives, they have not yet formed an association aimed at furthering the development of their own role.
“A central bank blockchain consortium would need to do more than test applications. It would need to exchange ideas on the future of the institution itself. Will new tech allow it to consolidate influence over sprawling economies, reinstating monetary influence and changing the way we see banking? Or will its role end up being usurped by smart contracts and fragmented payment methods that devolve financial independence to end users?
“Such debate is inevitable, especially given technological developments underway. Better, then, to engage in a cooperative fashion, applying a range of experiences and seeking shared solutions. The resulting lessons learned, not to mention successful innovations, will help the central banks jointly bring their respective economies into a new phase of development.”
Whatever the end result might be the central banks have realised, country by country, that to have any meaningful input they have to be a willing participant. “You gotta be in it to win it!” as popular youth culture notes.
Secondly, there are manifest opportunities for applications beyond the banking world with blockchain. By itself it is a distributed ledger, a transactional archive offering previously unknown levels of security and encryption. That new financial products have adopted blockchain is not surprising as there is no genuine value in a cryptocurrency if its transactional security is flawed from the outset. Bitcoin has been the first point of contact for the vast majority of us with a blockchain and, as I mentioned at the outset, we accept it much like Einstein. The Bitcoin publicity is useful but only to a certain extent as this paints a picture of a limited niche tool when the broader view is really that of a technology that will most likely come to play a very major part in many varied aspects of our lives. In fact, anywhere that we interact with computers, smartphones, the internet of things, smartcards, ATMs, whatever, the blockchain will be there.
What are the potential uses of blockchain beyond cryptocurrencies?
Nasdaq is already there as reported in Forbes on May 22, “Investors in private company securities on Nasdaq can use Citi’s cross-border payments facility and blockchain to buy, sell and settle transactions. Nasdaq and City Treasury and Trade Solutions announced today they have developed a new integrated payment solution that enables straight through payment processing and automates reconciliation by using a distributed ledger to record and transmit payment instructions.”
Just consider that. This has implications for any electronic payment environment in any industry at all. The scope is endless. The very fact that Nasdaq is an early adopter can only enhance the prospects of acceptance.
In Estonia, a go-ahead tech nation, the national eHealth Authority has this year signed a deal to secure its medical records via blockchain. In March PWC noted the following about the powerful applications offered by blockchain in healthcare bearing in mind that when changes are made in one copy of a distributed ledger then each other copy held in every other location is simultaneously updated.
“First, health records can be stored securely in a ledger on which all participants (health professionals, patients, insurers) can rely. Doctors, surgeons, pharmacists and other medical professionals all have instant access to an agreed set of data about a patient. This means better data for better care in acute, life-threatening situations, and for the treatment of chronic longer-term conditions.
“Second, a ledger of secure, validated data has the potential to be shared, subject to strict privacy limitations, with insurers and state agencies to facilitate fast and efficient transactions across government and with the private sector. Imagine, for example, if the relevant part of your validated medical record could be accessed instantly by your nation’s driver licensing agency to ensure your fitness to drive. Or imagine the possibilities for sharing medical data across borders if you’re taken ill and require treatment abroad.”
Forward-thinking countries like Estonia are already turning these ideas into reality. In 2015, over 80,000 medical certificates were forwarded electronically to its Road Administration Agency to facilitate driving licence renewals. And in 2016 the country signed a joint declaration with Finland looking at automatic cross-border data exchange for social insurance benefits and digital prescriptions.
But perhaps the most transformative effect of this kind of technology is on the patient, who is, after all, rightly at the centre of any healthcare system. Blockchain technologies can offer individual citizens for the first time a fully transparent and accurate view of their medical data. No state agency, private sector organisation, or indeed any malicious hacker, can change the record without being visible to the whole network, including the patient, in real time.
The effect on individual empowerment, on medical transparency, and on the healthcare profession’s duty of candour with its patients, is potentially revolutionary. Here, too, Estonia is ahead of the game. Its Patient Portal gives citizens access to medical documents, referral responses, prescriptions, and insurance information. Individuals can also use the Portal to declare their intentions regarding blood transfusions and organ donation.
The implications beyond healthcare are simply too many, too wide and too varied to calculate. Any technological ecosystem which requires robust database handling can be revolutionised by blockchain technology. The flexibility of complex databases will potentially evolve unimaginably.
Think electoral systems, think voting, think referendums. This can easily be supported on blockchain as long as front-end security (ID cards, passports etc.) is fit for purpose.
Blockchain has the potential to propel census data to a completely new level and that can be linked to passport and ID issuing authorities. Consider the value of blockchain to Europol and Interpol. Imagine the potential for immigration controls and visa policies.
This is all becoming very George Orwell, 1984 or so it seems. But the reality is that we are already heading in that direction somewhat so why not utilise the best and most efficient tools which will involve the least amount of overt interference in our daily lives?
Consider the EU or Schengen. It can be imaginable that the EU adopts one common blockchain standard for citizen and resident records. Then there can be an element of interoperability between the member states. A French citizen becomes ill in Hungary and is admitted to hospital in Budapest. The medical team in Budapest can access the medical record of the Frenchman, but ONLY the medical record. Similarly, police might be able to access criminal records but not medical data. And if that same Frenchman would decide to settle in Hungary for a prolonged period then he could exchange his French driving licence for a Hungarian one. Interoperability of any system is one thing but by using blockchain the possibilities simply become stellar.
Currently cloud storage is centralised so we are putting our faith in one provider to keep all of our key data safe. However, consider decentralised blockchain storage. This future model of data storage is already being beta-tested and there can be opportunities on the way to offer our excess storage to the blockchain storage network in an Airbnb type arrangement. This is a data storage revolution and can potentially be the tip of the iceberg in terms of internet use. There are other visionaries out there who foresee a completely decentralised internet with blockchain as the basis.
The world of smart contracts is fast approaching, but what are they? For example, if two people want to exchange €100 at a specific time in future when a set of preconditions are met, the conditions, pay-out, and parties’ details would be programmed into a smart contract. Once the defined conditions are met, funds would be released via blockchain and sent to the appropriate party as per terms. By giving computers control over contracts, we can make business more efficient and make the legal system more equitable.
As Ethereum founder Vitalik Buterin describes things, “Smart contracts solve the problem of intermediary trust between parties to an agreement, whether that is between people transferring assets like gold, or executing decisions between two parties in a betting contract.”
That reference to betting contracts leads into the scope of any variable financial contract which depends for its execution upon a sequence of what ifs lining up. This system could be leveraged by financial markets, by Forex professionals and even day traders to highlight only a very few possibilities.
From a sporting point of view smart contracts could stand the transfer market on its head. For example, football clubs could conduct their transfer and contractual business by blockchain. Player contracts stored on a central database (with UEFA for instance) offering access to accredited agents and club officials. An interested club would be able to ascertain if a certain player has a “minimum release fee” clause on his contract for instance so that they can consider if they can afford to buy that player. I am not suggesting that this is in the planning stage but it just occurred to me as I write this article. This is the football transfer season after all!
The timestamp feature of blockchain is something which lends itself towards the concept of the decentralised notary. The whole network essentially validates the state of wrapped piece of data (called a hash) at a certain particular time. As a trustless decentralised network, it essentially confirms the existence of something at a stated time that is further provable in a court of law. Until now, only centralised notary services could serve this purpose. Proof of Existence is an online service described as a decentralised method of verification, a cryptographic notary service as such It was developed by Buenos Aries based Manuel Aráoz. He explains, “As the blockchain is a public database, it is a distributed sort of consensus; your document becomes certified in a distributed sort of way.” Proof of Existence allows users to upload a file and pay a transaction fee to have a cryptographic proof of it included on the bitcoin blockchain. The actual data is not stored online and therefore does not risk unwanted publication of the user’s material. Aráoz continues, “Basically, by inserting the cryptographic hash of the document in a transaction, when that transaction is mined into a block, the block timestamp becomes the record’s timestamp.”
Taking up the Proof of Existence cause the Huffington Post offers the following, “Just imagine never having to pay for notarization ever again: The world is evolving towards a value-based economy. Where, if you are not adding value to the whole, you are no longer needed. And it’s about time. Too many old systems exist today that only leech off you instead of adding value in your life.”
Let’s consider that last sentence in a wider context to push the value of blockchain further. Old systems. Leeching off you. No added value. Blockchain offers the prospect of peeling away embedded layers of administrative red tape which fundamentally exist because we implicitly do not trust others to treat us fairly. Blockchain has no opinion. Blockchain is utterly neutral.
There really are far too many potential uses for blockchain to go into them all here but our world will change immensely through this technology in the next half dozen years or so. We have seen so many changes in the way that data is held and processed in our own lifetimes already but blockchain is almost certainly going to be that quantum leap which will redefine our digital lives and, critically, decant old systems which may now be no longer fit for purpose irreversibly into the 21st century.
Many of the new applications are still relatively underdeveloped. The future potential of blockchain applications is still unravelling. The next few years will be all about experimenting and applying to all aspects of society. Regardless of which applications come first on a global scale the bottom line is this, blockchain is here to stay and is transforming how our society functions.