What is blockchain?
A blockchain is a decentralized “digital ledger” system intended to provide transparency and trust between parties engaging in some kind of transaction. Multiple transaction records are packaged together then represented by a “block”, and each block is linked via cryptographic algorithm to the previous one.
Blockchains are considered secure and transparent because the entire system is distributed, usually via peer-to-peer network, and each transaction is verified by multiple parties via complex mathematical computations. The verification, known as “mining” is incentivized with transaction fees or the chance to earn cryptocurrency. It is also computationally intense and expensive in terms of energy consumption.
This technology is best known for its cryptocurrency applications, but because blockchain transactions are potentially inexpensive, fast, highly secure and publicly visible, there are a variety of other applications to which it is very well suited. Some of the more notable uses include digital voting and so-called “smart” contracts.
What is the promise of blockchain and is it overstated?
The early hype around blockchain technologies promised an end to centralized banking and government corruption. It was touted as a solution to middlemen in almost every industry, a great leveling tool for the common man. It promised transparent elections where voting could be done securely form a smartphone app. Remittances would be sent across international borders without onerous fees. And it promised anonymous digital currency decoupled from nations and central banks.
Probably the most well known application of blockchain technology is Cryptocurrency. And the most well known of these is probably Bitcoin (BTC). Bitcoin came to most people’s attention after its value compared to the USD exploded around 2013. Prior to that it had mostly been the province of enthusiasts and researchers. Also criminals. Unfortunately for most cryptocurrencies, the anonymity built into their systems made them ideal for many illicit activities, and gave them a bad reputation early on. Decried by law enforcement and targeted by government regulation, cryptocurrencies had a difficult infancy. However, it did seem that Bitcoin had the potential to disrupt banking on a global scale with its fast, cheap transactions that could be performed person to person via smartphone. As time went on, the transactions slowed down and became significantly more costly. Moreover, the “mining” processes to verify transactions require immense computing power, and consequently, consume enormous amounts of electricity. This is especially true for ‘proof of work” coins like Bitcoin and Ethereum (ETH). The annual energy consumption for these mining operations in 2018 was on a par with that of a small country. There are measures being taken to address this in some cases. In 2019 the Ethereum Foundation announced an overhaul to its code that would reduce energy consumption by 99%.
The mining process for these coins is also highly inefficient since the verification system and subsequent rewards are essentially a winner take all proposition. Only one miner is rewarded for the verification and the other miner’s efforts and the expended electricity are wasted.
Cryptocurrency has an additional problem relating to trust with investors and speculators. There have been multiple “pump and dump” scams perpetrated with “alt-coins”, scams involving “Initial Coin Offerings” and high profile hacks of cryptocurrency exchanges. And even disregarding those growing pains, cryptocurrency is widely considered to be a risky investment due to its volatility and the threat of Government regulation that could potentially render it worthless or illegal overnight.
There are now many specialized cryptocurrencies that aim to fulfill some part of Bitcoin’s initial promise. Ethereum’s blockchain enables smart contracts. Ripple’s (XRP) blockchain facilitates fast and transparent international banking transactions. And Monero (XMR) was created to fill the anonymity gap that was created when researchers found ways to trace Bitcoin transactions back to their origins.
The future of cryptocurrency remains uncertain, but it has become a focus of speculation and investment, and there are constantly new currencies in development.
Trust and verification: Smart Contracts
Smart contracts are another example of blockchain’s ability to obviate middlemen and their associated costs. A smart contract is a self-executing contract that relies on computer code to determine if the conditions of the contract have been fulfilled. When the agreed upon conditions are met, the smart contract can automatically complete the transaction. Since the contracts are written into the decentralized public ledger of the blockchain, the transactions can be tracked by the two parties without the need for a third to mediate and verify. And thanks to blockchain’s resilience, the records of the contracts are almost impossible to alter. This use of blockchain technology can allow two complete strangers to confidently and securely enter into a complex business dealing that might otherwise involve brokers, lawyers, banks and other costly services. At the time of writing this post, probably the most prominent blockchain for creating smart contracts is Ethereum, but there are others, and it is still a nascent technology.
Some of the applications of smart contracts include transfer of ownerships like automobile and real estate tiles, where the title would automatically transfer from seller to buyer but only once the smart contract verified the seller received the agreed upon payment. Certain insurance claims can be verified electronically, for example flight cancellation insurance can already be executed by smart contracts.
The scope of usefulness of smart contracts is currently limited since they are fairly inflexible. The example of a house sale is probably overly optimistic, and it might be wise to restrict their use to transactions that are unlikely to be disputed.
One of the more promising proposed uses for smart contracts is voting. By leveraging the blockchain distributed ledger model, and giving each voter a record of their ballot, “blockchain enabled voting” (BEV) could potentially shift the authority around elections away from centralized organizations and put it in the hands of the voters. It could also potentially eliminate fraud, as any change to the decentralized ledger would be immediately noticed by everyone else who has a copy of it.
Blockchain enabled voting doesn’t need to be limited to national political elections. In fact, in its current form, BEV might be best suited to smaller organizations. It has already been employed for shareholder voting and inter-party elections in Europe. Probably the biggest impediment to its adoption for national elections is getting the whole electorate to understand and trust the technology behind it. This may require a generational shift in thinking.
The consensus seems to be that while blockchain takes some control away from centralized institutions and provides a greater degree of transparency, the promised revolution is not coming with any haste. In fact, the governments and industries that were supposed to be disrupted by blockchain technology have already begun to leverage it to improve their products and services. That, however, doesn’t mean it will not be extremely impactful in limited applications.