In a previous article on crypto-currency, we weighed the pros and cons of the adoption of Bitcoin. One of the recurring, key terms mentioned was “block-chain”. Here, we’ll delve a bit deeper into what block chain really is, and the potential it holds beyond its use in Bitcoin.
Think about the present banking system we have in place. With this system, we process our daily transactions, transfer money and so on. But, do we have a guarantee on whether these actions are conducted in the most efficient, and more importantly, transparent way possible. With a system built up purely on a model of mutual trust between the bank and their clients, this is just not possible.
The element of trust isn’t something that could be physically manifested to be seen to believe in it, which in turn, has created instances of animosity not only between banks and their clients, but also among banks themselves. This is where block-chain technology comes in, a technology that holds the keys to a new set of paradigms that could very well, re-define, not only the banking sector, but a multitude of industries.
To recap, block chain technology is fundamentally a kind of massive, decentralized, distributed database. It could be visualized as, well, a long, linear chain of connected “blocks”. Let’s simplify its functionality using Bitcoin as an example. In this case, it acts as a sort of “public ledger” , i.e each time you make any sort of transaction, it gets recorded on the ledger and, since the ledger is public, anyone on the network can view the transactions that occurred(with anonymity guaranteed to all parties). Due to this, if someone tries to commit any sort of malpractice, it would be brought to the attention of the entire network, in an instant. Thus, the system removes the need for any sort of “trust” among transactors, since every transaction done can be traced back, right to the beginning of the block-chain.
Now, let’s take Bitcoin out of the equation. But, before that what exactly is Bitcoin, at the end of the day? One way of defining it would be something of value, something that has desirability. What if it could be used to track transactions pertaining to anything of value? This is precisely what Derek White, chief design and digital officer at Barclays Bank reported.
“…Its also the ability to transfer value, in ways that we haven’t seen before, that extend well beyond financial services. It can go into, for example, a retailer that wants to be able to verify that the goods that they’re marketing as organic in their grocery store….The block-chain allows the ability to track the actual creation of those goods, through the supply chain, verify that they’re organic and then when they are marketing it to their end customers, they’re confident that they are indeed organic. And, that’s just one simple case”.
Experts from various fields are bursting with ideas of how to integrate block-chain into the systems of their fields. The entertainment and software industry sees it as an answer to combat piracy, while insurance companies are looking into ways how it could be used to combat fraud.
Lianne Kemp, CEO of Everledger, took the concept to heart and came up with a novel idea for one of the most disputed yet expensive businesses : diamonds. The block-chain allows a global, public ledger of each individual diamond’s custody chain, its attributes, its legitimacy and whether or not it’s a blood diamond, a highly controversial trade today. Of course, all these checks are being done without the block-chain, but once again, it is based on a model of trust and is subject to dubious claims due to bureaucracy and the possibility of corruption. The immutable block-chain removes all of this, allowing for complete and absolute transparency, from the time it comes out of a mine, up until it finds itself seated in a jewelery set.
Thus, it’s not surprising that big-time players such as Barclays and the technological behemoth, IBM, are investing heavily into research of blockchain technology, roughly a billion US Dollars in the case of IBM’s investments last year. But, what they seek to achieve is something phenomenal. A generic technology that could be easily implemented across different fields, a concept called “smart contract”.
Let’s look at the shipment of a particular item as an example. Naturally, the process involves several entities : the manufacturer, the distributor, the shipping agent, retailers and several government authorities, and also, a lot of paperwork. Put these two together and we immediately identify three major problems.
I) Due to the large number of documents involved, there is a high possibility of data inconsistency and data redundancy.
II) The number of entities involved contributes to the amount of bureaucracy in the process, which in turn, reduces the efficiency of the overall system.
III) The possibility of fraud, due to each entity not being aware of what the other entity is doing at a given time.
This also applies to other processes as well such as the issuance of mortgages and insurance contracts. IBM Blockchain proposes a novel solution to facilitate smart contracts. According to the model proposed, all entities of a particular process rely on a single “block” , which can only be generated by the one that initiates the process. As the item/service passes down, the contract is transferred to the next relevant authority and so on, and this can only be done with the consensus of all entities involved. However, the contract is designed in such a way that, the information shown on it, is only what is relevant to that particular body holding it at that point of time.
James Wallis of IBM Blockchain commented, “We feel like that in 2016 blockchain is where the Internet was in 1995”. IBM also described as the “democratization of infrastructure”. The implementation of such a technology would shift the existing paradigm in a whole new direction. Yes, it would mean the eventual disappearance of bodies such as clearing houses, but it would also establish the groundwork for new businesses and new businesses models, and also, an overall increase in the efficiency of contract-based processes.
However, one of the most popular and rapid rising blockchain-smart contract platforms, is the Ethereum project. Proposed by Vitalik Buterin in 2013 and crowded-funded since August 2014, Ethereum has drawn the attention of several businesses, considering its highly transparent mechanics and wide availability of support. Ethereum offers users the ability a great degree of customization to build their application on, mostly through a pioneering programming language for smart contracts, known as Solidarity.
“The DAO” was one startup that built off Ethereum as a digital decentralized autonomous organization and a form of investor-directed venture capital fund. Once again, it was a crowd-funded initiative and all their code was made available as open-source. It was also declared as “stateless”, not having links to any particular government, which in turn brought up questions of how they were to be assessed and to be held accountable, but that’s a whole new story.
However, the code used by The DAO was far from infallible and in July 2016, disaster struck. It was a Mt.Gox all over again. Hackers exploited a loophole in the code and transferred a large number of funds to a “child DAO”. Multiple solutions were brought forth by the Ethereum community, which ultimately led to the “Ether”, Ethereum’s take on cryptocurrency, to be split into two different branches, and, ultimately, two different currencies.
So, as seen from this incident as well the Mt.Gox incident, the need for stronger cryptographic mechanisms is in dire need, as well as a common standard to be adopted by the entire community. Yet, despite all this, Blockchain technology still seems like a plausible way forward.
Quoting John Lancaster, “A decentralised, anonymous, self-verifying and completely reliable register of this sort is the biggest potential change to the money system since the Medici [the first successful bank in fifteenth century Florence]. It’s banking without banks, and money without money.”
It offers a break from the control of malicious entities, be it governments, organizations or even individuals, and the ability to have complete faith in the validity and authenticity of what is being processed. Several organizations and individuals are bracing for its impact. But, would it really be the driving force forwards? Only time can tell.