“Blockchain”: State of the Art and Prospective
It was the magic word in 2016; capturing our imaginations, promising infinite possibilities, “blockchain” hype probably peaked during this period. But what is really hiding behind this term, where does the technology stand, and what can we expect in 2017?
Blockchain — who are you? where do you come from? what do you do?
What is the blockchain? Without going into the technical details, we will look at its characteristics — what this technology provides and why it has aroused so much interest.
This promise is the direct and secured storage and transmission of digital assets. In order to deliver on this promise the technology must offer:
- storage and transmission of information: a database;
- between individually identified persons: using secure encrypted identification methods;
- no defined intermediary: distributed between the participants;
- transparent: public and freely accessible, at least for its users;
- secured: having a consensus mechanism which resists attacks.
It can thus be considered that technologies which do not meet all of these criteria are not actually “blockchains”, but rather distributed databases. Bitcoin, Ethereum, Ardor, etc. are without a doubt blockchains. Various private initiatives, whether consortium or not, may meet these criteria but it is important to remain vigilant in this respect as the term is sometimes used solely in order to ride the trend.
Where does blockchain come from? From the bitcoin, doubtlessly. The bitcoin and its derivatives, cryptocurrency in general, constitute the essence of the technologies’ possibilities: making digital assets “tangible”, associating these assets with a pseudonym (an account), and the transfer of these assets according to the desires of their legitimate holder. In fine, these characteristics make it possible to envisage the existence of true digital property rights; with all of this taking place on a secure public platform, which is accessible to all.
Articles for the general public insist on the fact that the blockchain permits direct exchanges between participants who do not know one another, by shifting the trust from the social system (trusted third party) to the technical system. This is true, but it must be remembered that this trust is made possible by the “tangibility” of the digital inscription of an asset in the blockchain, and this is the true paradigm shift.
This technology thus makes it possible to digitally reproduce the trust that spontaneously exists between two individuals who do not know one another but who physically exchange goods for payment in person, because it gives the digital representations the same characteristics as material goods. An inscription on the blockchain is unique, comprehensible and transmissible under conditions which are as clear and as immutable as the laws of physics. Ethereum, which makes it possible to develop, on a “global computer”, decentralized applications automatically managing these assets, directly programmed on the blockchain and without passing through external services (the famous “smart contracts”), significantly increases the possibilities offered by the technology. And the open nature of these protocols makes it possible to envisage not only assets but also very diverse types of inscriptions: proof of existence, signatures, votes, computer programs, etc.
By making digital inscriptions tangible, by guaranteeing both their link with a digital identity and their unique nature, by making it possible to envisage the programming of exchanges and automatic management of these assets, the technology opens the door to many possibilities. This rightly gives rise to dreams for idealists and materialists, and rightly frightens those who see these possibilities as a threat to the systems currently in place and more generally the existing social structures.
The blockchain as a system
The blockchain is thus a system which can only be understood using a holistic approach. Each of its participants and technical components depends on the others and it is this interdependence which allows the system to continue and even to improve. The technical foundation which enables the creation of digital assets is based on a feeling shared by all: greed, the desire to acquire more, to protect ones assets, the fear of losing them. The genius of the blockchain protocol is that it uses this universal feeling to maintain and develop itself, while also enabling very diverse uses which may have nothing (or very little) to do with it.
A blockchain operates to maintain and develop the value of the assets and the inscriptions it contains. All its participants have an interest in its continued operation: the miners, who made or are making a financial investment in order to operate it and who are expecting a return on this investment; the holders of cryptocurrencies, who own the bitcoins, the ethers, and who do not want to lose them or see them lose value; the developers, who invested time and money to develop platforms or decentralized applications (dApps), and whose business depends on their operation, and the users of these services who naturally wish to continue using them. It is a self-perpetuating system; if you have invested in the system you will probably act to improve it, in accordance with your perception of what constitutes an improvement, of course. Improvement will bring new users, operators, and participants and they themselves will be motivated to improve the system, etc.
It is this shared interest by all the participants which causes the decentralized system to progress, despite the obvious imperfections in its governance (technological stagnation of the Bitcoin blockchain, unclear governance, and subject to conspiracy theories concerning Ethereum…), as an antifragile system; an attack against a blockchain, in fine, strengthens it, because all of its participants have an interest in correcting the defects which made the attack possible and enabling the chain to continue.
Current status and future potential
This being stated, where does the blockchain currently stand? It was a busy year for the two main public protocols, Bitcoin, of course, but also the newly created Ethereum. Monero, ZCash and several technical advances such as Segregated Witness also made news. Without going into detail on the events which occurred during the year, at the close of 2016 the challenges and potential developments are numerous.
Complex and rapidly evolving technology…
Firstly, this is very new technology; it has the vigor of youth but also suffers from teething problems. Although the technical foundation has stabilized as concerns Bitcoin (which has existed since 2009) and its limited uses (mainly cryptocurrency bitcoin and proof of existence), it is not the same for the other blockchains. The scope of the work to be carried out to enable the technology in general to scale and include all the types of work currently imagined is staggering: development of tools for the general public to interact with the chain, improvement of consensus protocols (Proof of Work, Proof of Stake…), increase in the number of transactions processed per second (through improvement to the network such as Segregated Witness on Bitcoin, sharding on Ethereum; by the sidechains or state channels), creation and improvement of development tools, research on good practices for the security of smart contracts, implementation of de-identification protocols for transactions, etc. The list is long, and the task is enormous. But those involved seem eager to take the bull by the horns and research is progressing at a fast pace, giving rise to occasional existential crises (in particular concerning Ethereum), which eventually resolve themselves (cf. antifragile, etc.).
…which requires a serious effort to achieve understanding
As a natural consequence of its youth, the technology is also misunderstood. It is possible that you have read 50 articles on the subject without having really understood what it’s all about: this is normal. Blockchain gurus are everywhere, but true experts in the sector are still rare; those who have clearly understood what this technology is and means. Watch out for consultants who bill exorbitant consulting services to desperate companies who have heard of this phenomenon and want to develop a “blockchain project” at all costs, even where this makes no sense at all in the context of their business activities. Learn to recognize them from a combination of all or some of the following clues: they insist on separating the “blockchain” from crypto-currencies and the Bitcoin in particular, which they equate with speculation “like Dutch tulips”, reject any use of a public blockchain, converse in buzzwords (in combination with IoT / big data / deep learning / uberisation of uber…) and focus heavily on 1) the supposed complexity of the system — which frees them from going into detail, and the 2) the threat this incredible invention poses to your business activities…
A developing ecosystem
The newness of the technology also explains that of the ecosystem. It wasn’t until 2013/2014 that the first serious crypto-currency exchange platforms and service companies came into being. Currently, the sector is buzzing, with numerous start-ups and also initiatives by major companies. There is still one entirely missing element: identity management. On the public blockchain, everyone is anonymous, or rather pseudonymous, identified by an account number. This is fine for certain types of use, but other uses require an identity that can be certified and associated with a particular account, and that this account can by recovered by its legitimate owner in the event of loss. This is a major complex issue arising from the design of the technology; however, numerous initiatives are on-going in this area (e.g. AEternam, a French initiative, and uPort from ConsenSys).
Since the advent of Ethereum, this ecosystem also includes emerging entities on the blockchain, i.e. the dApps, or decentralized applications. In 2016 we discovered their potential but also (painfully) experienced their weaknesses during the hack of the DAO. The security of smart contracts is still at an early stage, and considerable efforts will be necessary before envisaging the automatization of very high value added operations. Numerous initiatives have already been initiated in this respect and will continue in 2017: fundamental research, formal analysis software, improvement of the language and even the Ethereum Virtual Machine, etc. It should also be noted that the current issues are not discouraging those working in the sector: numerous dApps projects were funded this year, in particular through ICO (Initial Coin Offerings), and should be launched in 2017 or 2018. We will also be watching planned projects: Augur/Gnosis, Digix, Etherisc, uPort, Golem/iEx.ec, CharityDAO, SingularDTV, Ledgys, etc.
Challenges of the legal framework…
Numerous types of blockchain use are thus under development. And, where there is use there must be rules of use, a legal framework… and currently, the law is lacking. We are not speaking here of the law in the sense of a “blockchain law” which would restrict or control the use of this technology (although this will happen soon enough), but rather a form of legal recognition of the new categories created by this technology. In particular, blockchain assets in their most obvious form, cryptocurrency, but also in their derived forms, proof of existence, programmable tokens, votes, etc. Acknowledgement of the unique characteristics of these inscriptions, by local, European law and international treaties, under both general law and by the various regulatory bodies by sector (finance, healthcare, energy), would be a big step forward, which would allow businesses to develop the disruptive types of use which generate wealth.
We are still a long way off, as the lawmakers and regulatory bodies are taking a wait and see approach, giving rise to a state of complete legal uncertainty! This lack of official recognition also impacts private sector involvement; it is still difficult for those involved in the blockchain sector to open bank accounts, find accountants, etc. If Europe wants to be at the forefront of the “Blockchain revolution”, it must do more, both at the national and international levels.
In the meantime, the applicable law is explored directly by the law professionals; notably lawyers that are focused on the issues raised by their clients (and notably Fieldfisher LLP firm, of which I am a member).
…and governance
Finally, it is impossible to address the “blockchain” without mentioning governance, which designates here the mechanisms which govern the development of public blockchains (in particular technical protocol developments). As we have seen, the governance mechanisms are complex, as the blockchain is a system with diverse participants whose interests do not always converge. This lack of clarity is a legitimate cause for concern. However, an essential part of the technology, its decentralization, is at stake here. A blockchain with a central point of control having sole power to make decisions would find itself with a single point of failure, which is exactly what the technology seeks to avoid… This does not mean that all initiatives aimed at improving the development process for public blockchains are doomed to failure. Projects such as Tezos are based, in particular, on the idea of new governance, as decentralized as the blockchain itself… Is this feasible? Time will tell.
In 2017, we will be watching for:
- major technical developments such as the formal verification of smart contracts, proof of stake, sharding, etc.
- recognition by the public and private sector of cryptocurrencies and more generally of blockchain inscriptions.
- projects in development (projects involving blockchain, dApps, off-chain and on-chain services) which will be launched in the short and medium term.
As for me, I will be working in all of these areas.
For those interested, a look at future developments will be provided at the EDCON conference, dedicated to the Ethereum blockchain, which will take place in Paris on 17 and 18 February 2017, with the notable participation of Vitalik Buterin and other members of the Ethereum Foundation.
