The Danger of Blockchain

From 2010 to 2017, a single bitcoin rose in value from mere pennies to nearly $20,000 on the CoinDesk Bitcoin Price Index (BPI). The cryptocurrency’s meteoric ascent introduced the modern world to the notion of blockchain (the technology upon which bitcoin relies) and soon, the term began to grip dialogue shared at family dinners and around office watercoolers. Bitcoin pundits lauded the e-currency, validated across a network of nodes rather than a central authority, as a kick in the face to the powers that be — a direct attack on the powerful financial institutions, like Visa and NASDAQ, that shape our economic landscape. However, a simple change of prefix, from “bit” to “gov” gives us “GovCoin,” a vastly different blockchain entity working with the UK government to regulate welfare payments in direct opposition to bitcoin’s original intention of decentralization. GovCoin is just one example of a larger wave of blockchain adoption by financial institutions taking advantage of the expediency provided by distributed ledgers. Unfortunately, since the nature of blockchain places convenience and security at direct odds with decentralization, the technology incentivizes a dangerous concentration of power through data aggregation on a permanent record.

Whether through micropayments or automated escrow or one of the other endless possibilities, blockchain has the potential to make the economy more efficient and more secure. Imagine a college student watching a TV show but who can only make it halfway through a given episode before she has to leave for class. With the micropayment infrastructure provided by the startup ChangeCoin (acquired by Airbnb in 2016), she would be able to pay a few cents for what she consumed instead of for the entire episode. ChangeCoin takes advantage of the blockchain’s support of probabilistic payments to allow for the secure and immediate transfer of values as small as 1/10th of a penny. According to the Journal of Electronic Commerce Research, micropayments are already stimulating low-cost exchange over the internet — a fact recognized by companies as the percentage of new enterprises offering micropayment schemes in comparison with all e-payment schemes nearby doubled in the past two years.

Larger financial institutions like investment banks can also benefit from distributed ledgers that can be incorporated into automated systems with benefits like shortened settlement times, instantaneous security delivery and payments, and the elimination of transaction fees paid to third parties. And with the cost reduction potential of blockchain adoption across the largest global banks estimated to be close to 30% according to Accenture, blockchain growth will continue, fueled by powerful commercial incentive at all levels of the economy.

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Within this accelerating growth, blockchain is being adapted in a number of ways. While it seems counter-intuitive that a technology first used to produce a decentralized and anonymous payment system could actually be adopted for large-scale data collection, this adaptation actually makes sense given how ledgers are implemented. In the consensus protocol used, a transaction submitted gets broadcasted to a network of nodes or individual electronic devices (that willingly give up computing resources in exchange for small fees in blockchain “mining”). Only when enough devices are in agreement that the transaction is valid, will it be added as a block to a “chain” of transactions. Since the blockchain is represented through computationally-expensive hashing that produces a one-to-one mapping of input to output, the chain of transactions is represented as a unique output, making it an incorruptible and absolutely true record. Therein lies the irrefutable security of the system; since a slight change to the input would result in a huge change to the chain representation, tampering would become immediately obvious in the transparent network where each node stores a local copy of the valid chain.

While the nodes for cryptocurrency like Bitcoin are widespread with miners on each continent but Antarctica, Accenture has described a method of institutional adoption that consists of a network owned and operated privately. While the identity of users can be concealed behind cryptography to maintain anonymity in blockchain systems like cryptocurrencies, if a financial institution like the People’s Bank of China (which has already discussed issuing the national currency on a distributed ledger) uses blockchain to manage constituent finances, they must store certain sensitive pieces of information on-chain in the interest of network capacity, scalability, and automation. And since different individuals served by the institution shouldn’t be privy to data like someone else’s account balance, the distributed ledger necessitates privacy over public accessibility.

Likewise, the immutability of the chain is crucial to security, but there does exist a method of chain redaction that allows for edits when the chain is constructed with a specific hash called the chameleon hash. Links constructed in this manner could be broken with the use of a secret key held by an administrator. The secret key could replace “erroneous” blocks in the chain without altering the rest of the chain and without external detection. Of course, while the key can typically be distributed over several key holders for safety, the admin of a private ledger would be hesitant to distribute the key given that powerful economic incentives could motivate the ill-intentioned. Nonetheless, this leaves what should be a categorically true record vulnerable to forgery when considering that a single party might be able to tamper the record.

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Regulatory institutions like the US Federal Reserve System widely support blockchain adoption because the technology allows for easy and accurate reporting. More specifically, distributed ledgers have the potential to improve data quality, lineage, and auditability through the electronic records they provide. If we revisit GovCoin, we can see that institutions have already implemented blockchain solutions that accumulate data in frightening quantities. According to TechRepublic’s Conner Forrest, GovCoin’s solution, in conjunction with the UK government, encourages welfare claimants to receive and spend their benefit payments through a mobile app. The system then records each transaction for perpetuity on a blockchain distributed ledger. While the ledger allows the government to reduce fraudulent claims and makes allocating payments easier, it also exists as an enduring archive that could be exploited by the government to monitor claimants and regulate the way they spend their welfare payments. Forrest has pointed out the “irony in a technology that is lauded for its ability to limit oversight in financial transactions is being used by a government to increase its oversight in financial transactions.” His words succinctly summarize a bizarre situation where the very technology intended to democratize the economic landscape has the potential to empower already powerful institutions with data.

Published exclusively in Brown Tech Review. Image source.