The Blockchain – laying the groundwork for a decentralization revolution
In recent years, the term “Bitcoin” has entered the popular lexicon and is already seen as many things. It is considered a currency, a cryptocurrency, an alternative currency, and even a social movement. But above all, bitcoin has been a vehicle for a technology that demonstrates how technological invention mirrors cultural change. Although finance, wealth, and commerce sit on the surface of the discussion, the more powerful subtext is the notion of thedecentralization of everything. The underlying technology system known as the “blockchain”, has the potential to disrupt the middlemen, authorities, owners, and arbiters of judgment (bankers, judges, attorneys) who make the business and economic world tick. This chapter explores the nuts and bolts of blockchain technology and discusses its potential impacts for society, business and economies.
An uneven distribution of awareness
While some technologists, journalists, financiers, business people, and governments around the world are exploring and embracing the future potential of the blockchain, others remain blissfully unaware of its existence or potential. According to Forbes, the blockchain and Bitcoin were the subject of hundreds of new books in 2014, each promising to make a complex topic understandable and profitable. Yet a recent survey found that a majority (65 percent) of Americans has no idea what Bitcoin is, and of 500 U.S. retailers surveyed, none accept Bitcoin payment. Bad PR has not helped. As a currency, Bitcoin has been linked to underworld players like ISIS and organized crime rings, tainting the reputation of digital currency.
There is a growing understanding that the really valuable part of the story is not the digital currency but the underlying blockchain technology. Blockchain is regarded as important—very important—because it could bring about a similar scale of change as the internet itself. Blockchain’s potential extends beyond currency, money, accounting or anything financial. At its core, blockchain provides a public ledger maintained by the collective activity of its users – with no central servers or clearing authorities required. Advocates are convinced that applying blockchain to a wide range of transactions and non-financial activities could lead to the formation of an entirely new economic system. They argue that the blockchain offers an incorruptible technology that serves truth and transparency while discarding oppressive centralized authority.
Defining the core components
To clarify, Bitcoin (capital B) can be considered as a communications protocol, while bitcoin (small b) is the unit of account. The blockchain is the general ledger of transactions. Despite the growing excitement and hype, the level of understanding of the basics of the blockchain, bitcoin and cryptocurrencies in general is limited. There are several key terms that need to be clarified before we go deeper in the discussion on the future of blockchain and its potential applications and implications:
Bitcoin (capital B) refers to overall system of digital currency exchange and the mobile apps and computer program that provide the wallet through which users buy and receive bitcoin.
bitcoin (small b) is the actual currency which people exchange when buying and selling goods and services with bitcoins.
The Blockchain is a shared public ledger which maintains the record of all confirmed transactions. It enables user wallets to calculate their bitcoin balances and verifies that the purchaser in a transaction owns the bitcoins they are spending. The integrity and the chronological order of the blockchain are enforced with cryptography. Transactions are packed (encoded) in a block formatted to very strict cryptographic rules that are then verified by the network. These rules prevent modification of previous blocks (for example transactions), which would invalidate all subsequent blocks. The general ledger or blockchain is updated constantly with each new block of transactions and this list is shared with everyone who participates – giving very high levels of transparency.
Mining – The miner’s role is to ensure that blocks are not tampered with and the blockchain stays intact. Miners use a hashtag process that applies a mathematical formula to the information in each new block of transactions. This process creates a hash – a much shorter, seemingly random sequence of letters and numbers that is stored along with the block at the end of the blockchain. Each hash is unique and changing even one character in a bitcoin block will change the hash completely. Hence, it should be almost impossible to work out the underlying data from just looking at the hash. Each new hash also includes the hash of the previous block on the blockchain.
The hashtag process should also make it impossible to alter a block as that would change the block’s hash and every subsequent hash further down the chain. This would be visible to a miner who tried to run a hashtag verification on the altered block or those that follow it. The hash would be different to the stored one and instantly spotted as a fake. There is competition between miners to create the hash and effectively “seal off” a block. They earn 25 bitcoins each time they do so. This competition effectively keeps the network operating efficiently. The bitcoin network introduces additional steps in the hash verification process to prevent all of the bitcoins being mined almost instantaneously by the miners.
Smart Contracts – These are effectively computer programs which can automatically execute the terms of a contract. They eliminate the need for contractual clauses or people to get involved in their execution. Contracts could be made partially or fully self-executing and self-enforcing – giving higher levels of security to the parties involved than traditional contract law and potentially reducing the transaction costs. Smart contracts effectively monitor that the terms of a contract have been upheld and then process the payment. The can offer a range of other benefits such as identity and asset verification – proving who an asset belongs too and eliminating many potential legal disputes.
Decentralized Autonomous Organizations (DAOs) / Decentralized Autonomous Corporations (DACs) / Corporations as Technology / Fully Automated Business Entity – These are effectively completely automated organizations which are governed by a tight set of business rules laying out exactly how things should be done, whether by humans or software programs. Decentralized autonomous agents (weak AI) would perform the core tasks of the organization – coordinating with each other in hierarchy-free manner. “Instead of a hierarchical structure managed by a set of humans interacting in person and controlling property via the legal system, a decentralized organization involves a set of humans interacting with each other according to a protocol specified in code, and enforced on the blockchain.”
A DAC’s ruleset would typically be publicly auditable, written in open-source software and distributed across the stakeholders’ computers. Individuals or other DAC’s could becomes stakeholders by buying shares in the DAC or being paid in the company’s shares in return for providing services. Share ownership might entitle stakeholders to a profit share and further work opportunities. Ownership might also give you a say in how the DAC is run and the design of the operating rules.
Ethereum - This is a community-driven start-up project that uses the blockchain as platform for building decentralized applications and enabling the exchange of binding smart contracts – eliminating the requirements for trust and a central controlling authority. It aims to decentralize and democratize the internet. It could be considered a platform for DAOs.
Bitcoin: an origins story
Although the blockchain and bitcoin are promoted as transparent, there is also an enticingly concealed, secretive side to the story. Significant controversy surrounds the existence and identity of the actual bitcoin “inventor,” Satoshi Nakamoto. Argentine researcher Sergio Demian Lerner estimates that Nakamoto owns nearly one million bitcoins – an asset worth between US$150-300 billion depending on the prevailing price. Nakamoto has apparently not been seen or heard from in years. In 2014, there was a Newsweek scoop that claimed he was an unemployed Los Angeles-based engineer in his 60’s – but this was widely regarded as inaccurate.
Several rumors and theories have been floated including the idea that Nakamoto is a pseudonym for a group of people, another person, or a conspiracy of the illuminati. A university study using analysis of Nakamoto’s writing concluded that the real bitcoin inventor was actually Nick Szabo, who developed bit gold – a predecessor cryptocurrency. A May 2015 New York Times article reports that many of those most deeply involved with Bitcoin still believe Szabo to be the key man. Without conclusive proof or a credible claimant, his identity may remain anonymous.
The rise of a social movement
As Vigna and Casey, the authors of The Age of Cryptocurrency, so aptly put it: “Nakamoto gave bitcoin its creation myth.” This myth, enhanced by the cult-like bitcoiner saying “we are all Satoshi,” allows bitcoin to be expressed as not just a technology, but a social movement that favors the deconstruction of Big Brother’s critical institutions of control—banks and governments. A Chinese pop economist and conspiracy theorist argues bitcoin is a means to prevent greed. In fact, bitcoin is programmed to stop generating new coins around 2140. The Bitcoin site explains, “The last block that will generate coins will be block #6,929,999 which should be generated at or near the year 2140. The total number of coins in circulation will then remain static at 20,999,999.9769 BTC (bitcoins). Total BTC in circulation will always be slightly below 21 million.” However, this is somewhat of a misconception since it is predicted that the profit created from transaction fees leading to this 21 million will drive a push to create new blocks that will become more valuable than the new coins being created. There may actually be no practical limit to the number of blocks that could be mined.
Blockchain’s rules-driven structure makes it particularly good at if-this-then-that scenarios. For example, it is deployed within the central nervous system of ADEPT, an IBM-Samsung venture for the Internet of Things (IoT). This is designed to enable scenarios where smart devices such as shelves can monitor stock levels, requisition goods from the stock room, and then notify staff to collect them. Through scenarios like this the blockchain has the potential to power a revolution of interactions between humans and things.
Images of the blockchain future
There are clearly several obvious practical present day applications, and the inevitable range of future possibilities, being posited ranging from the apocalyptic to utopian. We will have to learn to co-exist with tomorrow’s DAO’s – which will be populated by distributed networks of intelligent agents or what some refer to as “Blockchain Thinkers”. These agents will execute their rules in much the same way as program trading systems do today. Clearly there are inherent risks of such systems continuing to execute a fixed rule set irrespective of how the situation around them is changing. The more sophisticated AI and robot technology become, the wider the range of scenarios these agents could handle – and the greater the risk that they might reprogram themselves in unintended and potentially undesirable ways.
Blockchain brings to life the concept of the DAO / DAC as featured in Daniel Suarez’s 2006 novel Daemon. In the book, Daemon is a program which covertly gains control of hundreds of companies’ computers and “provides financial and computing resources for recruiting real world agents. . . ” Clearly the Decentralized Autonomous notion could be broadened out to encompass Applications (DAPPs), Societies (DASs), Government Agencies (DAAs), and Governments at the City (DACGs) and National (DANGs) level.
One concern today is that automation of current and future industries could render many jobs obsolete over the next two decades and lead to technological unemployment. But how will we be able to afford to buy the goods and services being produced by these DACs populated by robots and intelligent agents? One view is that governments and citizens might become automatic shareholders in these firms and receive profit shares. Governments might in turn use the dividend income and / or higher taxes on DAC profits to fund some form of universal basic income. More broadly, it is already being acknowledged that the DAO / DAC concept will pose huge social, ethical, legal, and regulatory challenges as we try to adjust to a world in which companies are becoming technology platforms.
The greatest impact on day-to-day life is most likely to happen in combination with other “smart” technologies such as AI, machine learning systems, robotics, and driverless vehicles. This would enable the intelligent automated end-to-end execution of decentralized commerce transactions and smart, dynamic management of public records and information in general. It would also enable the machine-to-machine (M2M) communication that will characterize the Internet of Things – covering the cycle from stock checking, through to ordering, picking, packing, and delivery.
Envisage the “smart” washing machines that orders more detergent, pays for it, organizes delivery and accepts the replenishment without any human intervention. There is a growing consensus amongst the blockchain innovators and analysts that this metamorphosis will become the norm in highly personal ways, with, “….Bitcoin/blockchain technology as the economic overlay to what is increasingly becoming a seamlessly connected world of multi-device computing including wearables, Internet of Things (IoT) sensors, smartphones, tablets, laptops, Quantified Self-Tracking devices (i.e.; Fitbit), smarthome, smartcar, and smartcity.”
This could revolutionize how human beings interact with objects in the future. Like electricity and telecommunications, blockchain’s role as a “backbone” for smart data transfer will be subtle, but essential. Should they succeed in their ambitions, platforms like Ethereum – and those that will inevitably follow it – could truly revolutionize the functioning of many systems in society from healthcare and aviation to commerce and banking. Indeed, they may even lead to the emergence of an alternative, more transparent and democratic internet.
The emergence of blockchain and the platforms that enable it will also raise a series of fundamental questions, for example:
What will replace the current models of governance that control commerce and the internet? Will we need them in a totally transparent environment?
Where might new sources of unexpected risk emerge in a “blockchain world” that is still in its infancy and so poorly understood by all but a small group of pioneers and enthusiasts?
What are the implications for the way in which systems are developed and the approaches to educating and training tomorrow’s software engineers?
How might these technologies reshape our relationship to reality?
How is privacy defined within these applications and in an M2M environment?
What are the incentives for participants within such an ecosystem?”
Ethereum and smart contracts
Ethereum’s founder Vitalik Buterin believes the technology challenges our old notions of control, arguing that “blockchains are not about bringing to the world any one particular ruleset … rather; they’re about creating the freedom to create a new mechanism with a new ruleset extremely quickly and pushing it out.” Ethereum combines both a form of currency and a platform for programming new types of transactional contracts. Ethereum’s cryptocurrency is called Ether and is considered a medium of exchange rather than a form of investment like Bitcoin.
While Bitcoin allows the sending and receipt of money outside the formal banking system, the goal of the platform is go further by “. . . making it possible to set up binding contracts outside of the legal system.” Essentially, Ethereum provides a backbone network similar to Bitcoin, with a programming language that enables users to create their own tools. These tools can interact, create self-executing contracts and conduct the resulting transactions using Ether. Unlike Bitcoin, there is no limit to the growth of Ether as a currency. The currency was sold to raise funds for the platform and could be mined in a similar manner to Bitcoin. Already, companies are beginning to integrate Ether into their systems. For example, IBM’s ADEPT smart washing machine program uses Ethereum. Views differ as to whether Ethereum could replace Bitcoin – it is far too early in its development to assess its full potential.
The decentralization agenda
We are effectively seeing the birth of a completely new technology industry and one forecast predicts exponential growth in blockchain developers, rising from 40 in 2015, to 400 in 2016, and 4,000 by 2017. The decentralization revolution has been labeled with different names: “Cryptocurrency 2.0,” “Bitcoin 2.0,” “a Web 3.0 platform”. In addition to Ethereum, there are already multiple players with differing agendas pursuing decentralized solutions including:
BitTorrent – offering decentralized file sharing
BitShares – enabling decentralized currency exchange
Blockstream – creating “sidechains”—i.e. smaller secondary blockchains
Truthcoin – a form of blockchain for prediction markets
Telehash – a decentralized encryption tool
Maidsafe – providing distributed data management, including self-encrypting data
Perhaps the most disruptive impact will come if Ethereum delivers its goal to “. . . allow multiple organizations to build side blockchains with their own cryptocurrency and feed back into the main Ethereum chain”. This would effectively create a decentralized network of monetary systems all falling outside the control of central banking and legal frameworks – a concept that may be hard to imagine and a truly game changing moment in the information age.
Blockchain applications – goodbye middlemen?
A range of potential uses of the blockchain have been identified including health care apps, medical records management and the retention of personal memories. The laundry list of ideas for blockchain includes crop insurance, gambling, reputation systems, decentralized social networks — and even an all-seeing, all knowing Skynet. In the next few years, blockchain technology could disrupt and eliminate a range of parties involved in almost every type of commercial transaction. From contract attorneys to retailers charging credit card transaction fees – the game could soon be up. A range of historically necessary business functions could cease to exist, while others will evolve into new roles entirely. Sectors affected could include:
Banks – Major financial institutions could be the players facing the biggest disruptions. The sector is already wrestling with the unsettling arrival of Bitcoin and a range of over 500 alternative currencies. At the same time Ecuador has launched its own digital currency and some suggest cybercurrency could eliminate paper cash within a decade. A range of blockchain-based FinTech (financial technology) ventures are now emerging which seek to remove banks from a range of financial transactions – speeding up the process and reducing the cost for the parties involved. In many cases these start-ups are receiving funding from the very banks they are seeking to disrupt.
Records Management – Anyone whose job revolves around checking and maintaining records is at risk of being replaced by a blockchain ledger that could do the work cheaper, faster, and error free. For example, blockchain could be used to coordinate public land databases, which would cut red tape when local governments are involved with real estate transactions. As we move towards the DAO model, blockchain could perform a range of administrative tasks. How big a threat could blockchain pose to human workers whose roles can be automated away as excess “middle men”?
Supply Chain, Inventory and Warehouse Management – Blockchain would enable the automation of transactions across the supply chain from ordering to delivery. The counterfeiting and theft of goods would also be much less feasible, and property ownership transactions would become more transparent and incorruptible. Blockchain is a technology that offers the potential to make fraud impossible. It would also provide accurate management of inventory records and reduce the spread of black market goods.
Lawyers, Mediators, Arbitrators – Third-party objectivity could lose its edge as a service or product. In the legal system, “smart” contracts would reduce the caseload, while law practices would bill for fewer wills and legal agreements in general. Evidence-gathering may be seriously impacted by the decentralization and encryption of data that goes hand-in-hand with blockchain. Future blockchain-related categories of crime might include tampering with transactions, theft of cybercurrency and hash fraud.
Judges – The judiciary and other legal professionals will no longer be needed for a number of situations such as property and payment disputes, the execution of contracts, and the determination of measurable outcomes (like bets/wagers). One of the startups experimenting with applying blockchain to legal property issues deals with counterfeiting. Couple this with data from the Internet of Things – where the objects in a room could give evidence, and we are laying the foundations for a fundamental reworking of the legal system.
Notaries – Documents and contracts, deeds, and other formal paperwork would no longer need to be notarized, since the blockchain could be used to authenticate them. A blockchain app called Proof of Existence is already certifying documents.
Policing – There are several Dapps (“decentralized apps”) in development which will see blockchain serve the citizen. For example, Sidekik is a mobile Dapp designed to end abuse of police power by gathering information during a brush with the law (for example GPS, audio, video) and preserving the evidence securely on a decentralized platform (Maidsafe). Even if the officer confiscates the suspect’s phone, the data would already be in safe storage that only the app user can access even if the device is destroyed. The advantage of Dapps might well be to “liberate us from the tyranny of large online operators,” but it could also serve a greater good of protecting citizens from unjust treatment by law enforcement with a form of undeniable proof safeguarded in the blockchain.
Electoral Governance – If public issues around trust of such new technology can be overcome, blockchain could pave the road for more effective and transparent democracy. Voting and consensus monitoring could become simpler and more dependable using blockchains – giving greater power to the citizen. It would also bring down the cost and complexity of running an election. In the words of one commenter, “the blockchain does not lie, cannot lie and will never lie” – this sounds like the perfect election monitor. One of the major “losers” in the blockchain technology future is anyone who wants to rig an election.
To suggest the extinction of the “authenticating” occupations like attorneys and bankers assumes a huge leap of faith by the public is possible. How likely is society to hand over entrusted roles to machines? One of blockchain’s biggest selling points is that it serves the greater good and higher purpose, “The blockchain turns the entire network into its source of truth. It’s a mechanism for us to collectively confer legitimacy on one another.” This, perhaps, is why Ethereum’s Stephan Tual calls blockchain’s potential a “decentralization singularity.” Truth is possible when no individual lays claim to it exclusively.
One of the few constants in 21st century life is rapid technological change. Nevertheless, the World Wide Web has been the dominant model of connectivity for twenty years. Now, the decentralized blockchain is upending that old “truth” with a new one—that centralized control authorities and their servers are not necessary for the next generation information society to function. In fact, Ethereum and their peers view blockchain as “the key to fixing deep-rooted problems that have plagued our online lives for decades,” one of which is the problem of authenticity and verification; another is that all information is centralized.
The anticipated potential for blockchain to revolutionize almost everything seems unlikely in the short term given the facts stated at the introduction to this chapter – including that most people don’t know what bitcoin is, nor have ever used it. It seems highly unlikely that a society with no understanding of the most popular cryptocurrency would suddenly be ready to allow all its banking, legal, and political systems begin to run on the same protocol. Yet futurists, developers, and blockchain converts the world over are betting big on the future of Ethereum and the other blockchain players to change the world – soon.
The fact that investment interest has spread from Silicon Valley to Wall Street suggests that we could see a growth in experimentation and uptake. However, turkeys rarely lobby for an early Christmas. Change is likely to be resisted in a variety of ways by those in power, those who run the threatened middlemen functions, and those who simply fear handing control to a technology they don’t understand.
The blockchain, the underlying thinking and the technologies that support it, are all in their infancy and the industry is taking its first tentative steps. Inevitably – as with any development with such wide ranging potential impact – there are a number of issues to be resolved before blockchain can prove itself to the mainstream. One concern is the increasing fracturing within the upper echelon of blockchain decision makers over the question of whether the solution is one currency or many smaller, competing currencies. Some suggest this should be among the key topics for an independent research center devoted to blockchain. As with many emerging technologies, we may find that the entrance of bigger well-funded technology players will drive the development of standards and a solution that best fits their view of the world. However this would run counter to the democratic and decentralized ethos of the blockchain.
The success of blockchain depends on the ability to move and store large amounts of data. There are concerns here over the creation of a potentially massive blockchain. Every participant is effectively operating off the same blockchain central ledger – populated with thousands of addresses, this represents a lot of data. The key issue centers on the capability of the technology to manage large blockchains efficiently and process transactions quickly.
The risks coexist with hopes for a range of positive applications as discussed earlier. One analyst smartly observed, “Bitcoin’s blockchain was designed to handle the exchange of money, and retrofitting it to other uses requires some programming jujitsu and has inherent technical limitations.” This retrofitting will be a key indicator to watch as players such as Ethereum and others, seek to deploy blockchain to redesign the information age. Ultimately, there is no question that blockchain will push the commercial and political boundaries of the World Wide Web.
What are the potential applications of blockchain technology in your industry?
How could blockchain disrupt or transform your partner/competitor/supplier/customer operations?
What might push blockchain and cryptocurrencies in general, into the mainstream? What’s the “tipping point”?
by Rohit Talwar and Alexandra Whittington