Blockchain — great hope or great hype?

In terms of disruption, blockchain technology is in a league of its own.

It has the potential to shake the very core of western civilisation; changing the way we exchange value, do business, and organise ourselves.

Can it live up to the hype?

As a technologist I am often guilty of worshipping new technology, but as someone who loves to create digital products, it is important to cast a critical eye to see the real value.

• What benefits does it offer compared to existing technology?
• How can it be leveraged to create new products?

In this series of articles I hope to distill the key benefits of blockchain and cut through the hype.

Blockchain technology was invented as the underlying technology of the bitcoin digital currency back in 2009 by the mysterious Satoshi Nakamoto. Bitcoin is the world’s first distributed digital currency. It is still the biggest digital currency with between $500m to $1b (USD) of transactions processed each day. Digital currencies, like bitcoin, are an innovative form of money, used to store and exchange value over the Internet. There are now many digital currencies with a total market cap of over $150b (USD).

At its simplest a blockchain is a spreadsheet of financial transactions; transferring value from one party to another.

A blockchain tracks who owns what value: it is a highly-secure and tamper-resistant ledger. Today most financial transactions use trusted financial institutions to maintain ledgers ensuring one party’s account is debited and the other is credited. Blockchain removes the need for intermediaries, it becomes the trusted source of information so that parties can transact with each other directly. This is a big deal, it means we can exchange value personally and in real-time.

Since the birth of Bitcoin in 2009 more platforms have been developed, building on Bitcoin’s rise, improving and diversifying the ecosystem. There are public blockchains that allow everyone to participate and there are private blockchains that restrict participation to select companies or groups. Each blockchain platform has strengths and weaknesses depending on their market or philosophy.

On these new platforms the value transacted is not exclusively digital currency. The value could also be digital assets or tokens representing ownership, voting rights, or usage rights.

To explain the far reaching impact of blockchain technology it helps to think about it like a stack of pancakes. Each pancake layer forms the foundation on which more delicious benefits can be added. Maslow’s Hierarchy of Needs never looked more appetising.

Mmmm pancakes.

How I see it, blockchain technology has three distinct benefits:

1. Secure Public Record (this article)
2. Financial Services (next article)
3. Organisation (third article)

Secure Public Record

The bottom layer of our tasty stack is Secure Public Record. To confidently exchange value you need a reliable and trustworthy public record. If I transfer 20 bitcoins to you, the ledger must state that 20 bitcoins were transferred from me to you.

Blockchain technology achieves this using:

• Digital signatures
• Decentralised architecture

Digital signatures

When you sign a document with your unique signature it shows you authorise the contents of the document. Digital signatures work in the same way but are a lot more secure than your illegible scrawl. Each blockchain transaction is digitally signed so that you can be sure it came from a particular party.

Decentralised architecture

Blockchain technology provides confidence because it uses a decentralised architecture meaning there is no central authority running the show. Instead of relying on a central authority that could become corrupted, unreliable, or hacked, blockchain uses game theory to economically incentivise a large group of individuals called miners to validate transactions. This incentivisation ensures that the system is highly secure, robust, reliable and completely neutral.

So let’s break down what happens:

1. A transaction is digitally signed to certify that the transaction came from a particular party.
2. The blockchain automatically validates that the transaction is valid, i.e the party has enough bitcoins to spend.
3. Once transactions are recorded they cannot be changed and are globally verifiable.

Identity

Digital signatures are an important element in the way blockchains work, allowing us to verify a transaction’s source. Unfortunately unless we know the identity of the source up front, we don’t know if we are transacting with the right person. To explain — imagine you receive a call from a random mobile number. You know it is that number calling but unless you have their contact details you have no idea who they are. By associating an identity to a digital signature many more things are possible.

Identity is a fundamental part of humanity but it is estimated that 2.4 billion people worldwide lack official documentation excluding them from social protection. In developed countries, such as Australia, identify theft costs individuals $1.6 billion (AUD) per year. Blockchains can provide global access and security to identity information.

Identity is so fundamental it can be difficult to define but in essence it is:

• The things you do?
• The things other people say about you?

If both of these are securely written to a blockchain other people can use them to reason things about you. Blockchain transactions can be used to store this information. A blockchain can, in this way, be thought of as a massive global database. As an example let’s say the government signed a blockchain transaction recording the fact that, you are a citizen of Australia — this gives you a trusted, globally verifiable fact about your identity. If all your KYC (know your customer) information was stored on a blockchain it would provide all the necessary credentials to transact with a business — no more paperwork! Signing up with a new provider would be simple, just point them to the blockchain record.

You might be thinking: what about privacy?!? It turns out there are techniques that preserve privacy while allowing authorised parties to verify facts recorded on a blockchain. Many governments are looking at blockchain technology for this type of application. Some hope that we can move towards Self-Sovereign Identity where instead of fragmenting our virtual identity across many companies, we can create a globally verifiable identity where the individual is in full control of sharing elements of their identity (maybe even financially profiting from it).

Identity is a key element necessary for blockchain innovation. There are a number of interesting identity projects, such as Civic, uport, and Deloitte’s Smart ID, but no clear standard has emerged so far.

Trusted Information

The power of blockchain technology is enabling multiple parties to engage in secure value transfer. By providing a secure public record, information can be passed directly between parties without the need for intermediaries to maintain trust. Applications such as land registries and supply chain provenance are ideal candidates for blockchain. Countries like disaster ravaged Haiti are in dire need of a robust land titling system, that does not rely on delicate paper documentation.

Early days

A running theme through this series of articles is that blockchain technology has great potential, but it is a maturing platform — key elements are still under development. Much of the infrastructure you need to build customer ready products is being built. The platforms themselves are also in flux. If you are like me, you take this as an exciting opportunity, a chance to build the future.

Next: Financial Services

With the first delectable pancake layer laid down other layers can be built on top. In the next article I will explain how financial services will be disrupted by blockchain technology.