What is Blockchain? How does it work? Where can it be used?
Blockchain 101 with Pascal Marco Caversaccio.
Meet Pascal Marco Caversaccio, Blockchain consultant at Apps with love, a full-service digital agency. At Moqod we couldn’t have thought of a better person to explain Blockchain.
Moqod: Hello Pascal! Could you please tell us a few words about yourself? What do you love about Blockchain and how did you get into this field?
Pascal: Well, my name is Pascal Caversaccio, I am 30 y.o., I live in Bern, Switzerland. As you’ve already mentioned, I am a Blockchain advisor at Apps with Love. I’m supporting the development of Blockchain-based apps — the so-called ‘decentralized apps’, as well as educating clients on all things that have to do with Blockchain.
I’m also a serial entrepreneur focusing generally on the realms of Blockchain and machine learning. I was one of the co-founders of Alethena, a former Swiss Blockchain startup that successfully pioneered the digitalization of equity on the Blockchain.
What is more interesting, is how I got into the Blockchain topic! Back in 2012, I was studying at the Swiss Federal Institute of Technology in Zurich. A friend of mine was focusing on cryptography. He forwarded to me a Bitcoin Whitepaper — a document that elaborates certain ideas and how it’s implemented. My background is in financial mathematics, so cryptography has always been an interesting topic for me. It is complex but it is pretty exciting if you try to understand it fundamentally.
After reading the Whitepaper several times, I realized that Bitcoin solved the long-existing problem. It combined distributed systems with asymmetric cryptography and enables peer-to-peer cash transactions. Today we have seen the evolution of ideas behind Bitcoin but back then, the original idea of Bitcoin was the peer-to-peer cash system.
Disclaimer: I’m not a crypto trader! I do hold some Bitcoin and Ethereum but back then I wasn’t investing in Bitcoin.
I got involved pretty early due to the technology and not due to the potential to make money. Second, it was also thanks to my libertarian mindset — I’m not a huge supporter of state-owned banks and the monetary system the way it is now.
In 2014–2015 the first ICOs (initial coin offerings) started. It is when a startup raises money not via equity but by issuing tokens. One of the biggest ones was Ethereum in 2015.
Ethereum was doing more than Bitcoin — for example, issuing the so-called ‘smart contracts’, where you write words into code and execute them. It was a huge playground for me. I wanted to know what was possible beyond the Bitcoin blockchain.
It started with the technical part for me and developed into what was possible to change in society with technology.
Moqod: Playground, libertarian mindset, it goes beyond the technology! Sounds exciting.
Pascal: Being a crypto trader is a very religious field. Then you have Bitcoin maximalists, Ethereum maximalists. All these people believe in one blockchain or the technology itself. However, it goes far beyond the technicalities.
It is kind of a cult. It is helpful to stay back and reflect. Not one blockchain is the holy grail for everything. For instance, Bitcoin emphasized the security part a lot while others are more about scalability (= more transactions per second).
The political philosophy behind it — freedom. You don’t depend on a bank. Some libertarian people are Bitcoin aficionados and then other people are more pragmatic.
For me, the symbiosis of everything is good.
Moqod: Does this explain why there is so much buzz about blockchain? It touches so many aspects: relationships, economy, mindset, philosophy.
You’ve mentioned you want to elaborate on the more technical parts about it.
Pascal: I like to keep it simple. Let me explain blockchain based on an example.
A blockchain is an excel database shared with millions of people. All changes are tracked constantly, independently from who makes the change.
If I make a change on my computer, it is updated on your computer. Any change can be traced to the person who made it — like in a log file.
In blockchain terminology, you have a ‘public address’. It is like a bank account number. To make a change, you need to log in using a PIN (= private key in the blockchain).
There is no need to explain blockchain in complicated terms. It is a database that is shared with all who want to participate.
Moqod: It couldn’t be clearer, thank you! A spreadsheet is very clear and visual for everyone!
In these terms, what is NOT a blockchain? What are the biggest misconceptions about the blockchain?
Pascal: The blockchain buzz started around 2017 with the ICO hype. Companies were raising millions with just whitepaper. For me, the blockchain hype is mostly driven by marketing, the bitcoin price, and the idea of many companies to digitize their business.
However, very few companies understand the fundamental mechanics of the real value that blockchain can generate.
At Apps with Love, we focus on a specific industry with a client and elaborate together blockchain-based use cases that generate true value. Reengineering a blockchain use case just for marketing will fail in most cases. We try to be conscious with the client at Apps with Love.
The biggest misconception is that “blockchain can be used in any industry to do anything”.
Moqod: So, it is not applicable everywhere?
Pascal: Exactly. It is a misconception. For many applications, you need flexibility. Using blockchain can limit a company in doing business.
You need to fundamentally understand what value the blockchain adds. Do you maybe just need a centralized part that can change quickly to a password? Is it really necessary that you have a lot of people interacting within the network? It generates overhead costs because you need software that everyone needs to download and run.
If you promote a distributed system, you need to make sure that the peers are constantly live. Otherwise, you can manipulate the chain. This is a lot of work for the company.
Discussions about tech governance are also important.
Let me give an example from the art world. For instance, at Apps with Love, we have a great project which is digital art where you can put digital art on the blockchain if you have a token + authenticity certificate, the so-called ERC-721 token. The project is called Elementum. You don’t have that much interaction with the real world.
However, let’s see what happens if you have physical art and you try to tokenize the physical art. The physical art is a Picasso picture and it could be a fake. You still put it into the blockchain. It is still garbage in, garbage out. The concept of garbage in, garbage out holds in the blockchain — you have a lot of interactions and frictions with the real world. You have to make sure that the notary is doing the right job, for example.
For example, you have a container shipping goods from Japan to Switzerland and you have to track where the container is going. There are supposed to be bananas in the container but in reality, there are no bananas. You can track all you want but the value is not there. At the end of the day, the blockchain doesn’t provide you with real value.
For me, the best use cases are where you can digitize most of the things. Like financial contracts. The dimensions can be written in code and executed — you don’t rely on any third parties.
Some industries need to decide that if they can digitize a lot of the supply chain, a blockchain can work. It is about reflecting on what can be digitized and predefined and then, deciding whether a blockchain solution can be applied.
Blockchain is not a holy grail that can solve everything.
Moqod: In this case, could you please name some industries where blockchain can be most beneficial?
Pascal: Number one is financial services. You have a lot of inefficiencies here that could be ‘intermediated’ by blockchain. It is perfect for clear predefined contracts common in this industry.
Another promising industry is e-government. For instance, voting. Quick disclaimer for all the technical nerds out there: I am FULLY aware that it is not that easy to implement due to technical challenges. I am just saying there is a lot of potential.
The industry that I have already mentioned is digital art. You can create an immutable digital record of ownership.
Another application is a more technical one — tokenization. You have a one-to-one relationship from a real-world asset with a digital token on the blockchain. This can help make many things liquid, such as real estate investment.
I am not so confident in healthcare and the supply chain. You have a lot of real-world interactions. The mantra of ‘garbage in, garbage out’ holds in the blockchain space. If you are a medical doctor who enters wrong patient data in an immutable way, this can generate a lot of problems.
When it comes to currency, the daily cash use case where you spend two dollars on something is not very relevant for blockchain.
The blockchain is more applicable to big transactions with low transaction costs. For instance, with the Bitcoin blockchain, you can transact huge volumes of value for a couple of dollars. In a regular bank, you’d pay a lot of fees.
Moqod: What about logistics and transportation?
Pascal: It is applicable but you have to consider user case specifics. Again, if you have many interactions where a lot of people in different countries need to enter data, it is very prone to errors. If you can make sure that at the beginning there is an initial state and then the blockchain does things on its own and when you end up in Switzerland, not many people have interacted with it — there are much more applications to it.
A lot of people suggest different industries. I always suggest focusing on a case and how it looks exactly in terms of workflow. If you don’t understand the mechanics of the business together with the blockchain, you will fail as a business.
Moqod: So far you have mentioned two major conditions: large transactions for a small cost and as little as possible human interactions to avoid errors. If you have a use case with these two conditions, then blockchain is a good idea?
Pascal: There are other conditions too and yes, these are the basic layer for me. Also, the possibility of digitizing the process is important.
Even if you understand the mechanics of the flow and the blockchain per se, if you have a physical asset that you need to transport, you still need to transport it. Blockchain won’t do it. It is about understanding what asset can be digitized.
Another example: equity. For some non-publicly-listed companies, certain shares are issued as certificates on paper. It’s crazy! If you want to sell the share, someone needs to pay the price and someone needs to ship it.
Through time, people understood that you could digitize it. You don’t need any certificate but there is a central entity in the middle where you can issue 100 shares. It is registered and you can maybe issue it as a token. If you have a token, it’s just a digital share representing a paper certificate behind it. This is in very simple terms — of course, you have a lot of legal processes behind it. You have a certificate that represents a share becoming a token. You were able to digitize a physical asset.
Due to the digitization, you now may need a liquid secondary market. For all the publicly listed companies you have exchanges. For 99% of the companies, you don’t have exchanges. With the token, you have an instant settlement. This is the exciting part about the blockchain: I send it to you have you have it immediately.
With the token, you realize there is a secondary market you can create. For example, building a small contract that mimics a secondary market of an exchange for a non publicly listed company. Here blockchain makes sense. You start with a physical product. You digitize it and then you need a liquid secondary market. Because if you digitize something but nobody wants to buy or sell it, it doesn’t have much value.
This kind of thinking can be applied to all industry use cases: health, art, logistics. Think what is the status quo, how you can re-engineer the supply chain to make it digitized and work more smoothly. Most importantly, think about whether it makes sense to make a distributed system entering.
People always talk about private and permission blockchain. My very strong opinion on it is BS. In the end, it’s a private ledger. Why not just use a private database without adding any complexity? At the end of the day, if you have a private and permission blockchain and only two participants are there. They know each other and they can manipulate anything there. The immutability (which is the central piece of the blockchain) doesn’t play a role.
It is very use-case specific and it highlights our work at Apps with Love. This is what we do: we don’t say that an industry applies perfectly. We educate the client on the mechanics of the blockchain, we work together on what their business is doing, how the workflow looks and then we put both dimensions together. Is there a situation where the core business can be improved through blockchain? A lot of people don’t do this.
Moqod: You promote this pragmatic approach about solving a task and not just using a buzzword in your work!
Any other industries you can think of where it is underused?
Pascal: Real estate has a lot of potential.
In general, having a good voucher system. Let’s talk about an accelerator. If you are part of a startup accelerator, you get a voucher for paying a lawyer. Most of them are based on QR codes, the accelerator organization has to pay the lawyers. There are a lot of administrative efforts.
It makes sense to build a distributed-based voucher system. Where the lawyers, marketing agencies, etc., are all part of a voucher system. The start-up doesn’t need to print out codes and submit them for payment. They prove it, and that is it.
In general, ecosystems where you need instant settlements and transparent money flows have potential.
Cybersecurity is also promising.
It is hard for me to choose one dedicated industry. The ones I’ve mentioned are either pretty digital already or going in that direction.
Moqod: There is a conviction that blockchain is very secure. Is it a panacea?
Pascal: The main message is that there is no 100% secure thing. Let me quickly touch on the subject of the Blockchain Trilemma. It refers to the generally accepted idea that it is not possible to scale a public blockchain network without compromising either the security, the decentralization, or both.
This is what we see today with many of the blockchains. In my opinion, Bitcoin and Ethereum are highly secure blockchains, whereas private enterprise blockchains (not a big fan!) are highly vulnerable since only a few players are participating. This increases the overall risk. That’s why I call private permission blockchains just private ledgers.
Generally speaking, you have multiple layers of security. For example, security on the protocol level or the smart contract level. I am pretty sure you’ve heard of the news that Bitcoin was hacked or that the Ethereum smart contracts were hacked.
Another message is that neither Bitcoin nor Etheteum was hacked. These were always the institutions that were not careful with their private key handling or smart contracts. Human errors. The underline protocols were not hacked. At this level of security, blockchain is secure.
Let’s go to the smart contracts. No smart contract is key-centralized. Most of the time it has an owner: the one who wrote it, deployed it, and is responsible for the adjustment of sensitive parameters. One single person could stop the smart contract most of the time. If you think about it, it can be a huge risk.
If you have a really good and sophisticated smart contract, they are audited by specialists. The question is: Who audits the auditor? In the blockchain, it’s the community. Most of the time, smart contracts are audited, deployed and people are putting money in there. What I need to emphasize here is that the entire development right now is a big experiment. Every week there is something new discovered, fixed, etc., on the layers that are on top of the protocol. There are a lot of security risks if you don’t do it professionally.
What is tricky is that it is pretty easy to deploy a smart contract but if you deploy it, it must mimic a business logic. Matching a business logic with a smart contract is very tricky and if you don’t do it properly, some people attack it and exploit it.
It is really on the application level where you have a lot of security. The mutability is on the protocol level. If someone exploits a smart contract, it is another transaction that cannot be reverted. The security on the application level does indeed have a lot of risks. What we try at Apps with Love is that we make sure that it’s not just a smart contract but that the business logic mimics exactly the smart contract. It needs to behave in the way that it provides the business functions needed. Therefore, you also need a professional audit not only on the IT security part but also is aligned with what we want to achieve with the business?
Moqod: Is it like plumbing? If you don’t properly assemble the pipes, there is going to be leakage. If the contract doesn’t enter with the business logic, there will be leakage.
Pascal: Another comparison is that the protocol levels are a house but if you don’t put the water together inside, you still have a mess up. The overall framework is pretty secure but there are a lot of nuances and problems inside. You have to put it together in the right way.
When you hear on the news that Bitcoin has been hacked or whatever. Some exchanges hold Bitcoins for their clients. If you hold them, you have to have a private key (PIN). If you don’t store them securely, someone can come, take this pin, access the funds, and transact it. It’s not that bitcoin was hacked. You were just not careful enough with securing your PIN code. The problem is human error and technical governance around it.
Moqod: A few weeks ago, we shared a video with Matthew, a security specialist. He says that if you see words like ‘hacking’ in the news, that’s not usually news about hacking. It’s about stupidity and human error, not about sophisticated hackers trying to hack your system.
Somebody just forgot the password or was too lazy to turn on two-level verification.
Pascal: That is really how it is and it applies to the blockchain space. For mainstream media, they should be more careful with how they put their headlines. They like having clickbait, of course, but it doesn’t reflect the news.
Moqod: Our conversation goes around the application of the blockchain. If you apply it correctly within the correct space where it is needed, it will solve your needs and you will benefit from it. Thank you, this is very clear.
We have a little tradition at Moqod, we ask our interviewees about a funny or a crazy situation from their work experience. Do you have an example where the blockchain application didn’t work out?
Pascal: I have two! One worked out and one didn’t.
One was around 2018 where a person … tokenized himself and sold the tokens publicly. The idea was that every token holder held a piece of him. They could vote on what the person did next. It’s crazy — you give up your freedom. Yet, blockchain IS about freedom, so it’s an oxymoron. It makes no sense!
Moqod: What did the person want?
Pascal: To raise money!
Moqod: By selling himself into slavery?
Pascal: If you think about it, through having a piece of him, you don’t own his mind.
Moqod: So, it is contradicting the area of the application you mentioned. Something physical needs to be digitalized but you can’t digitalize a guy?
Pascal: That’s why I mentioned it, it is nonsense. I didn’t follow up on it, wasn’t worth it. However, I think he raised around 200000USD.
Another example I would like to mention is Dogecoin. It was immersed in 2013 as a pure joke. It was created to satirize the growth of coins by making the internet meme of Doge a cryptocurrency. The funny thing is … crypto enthusiasts love memes! This is a crazy market cap for 500 million people. There is no use case for Dogecoin but people love to have a coin where the logo has a Doge on it.
It is crazy but it also reflects the maturity of the market. In 2016–2017 everybody was saying we were getting more professional but the reality is that we are still in the early stage. There are a lot of errors and it’s not bad. Essentially, it should be a playground. For me, a blockchain environment should be considered as a test network for new economic frameworks. We are still experimenting.
It also means that we are still at the stage where we can be looking for the right application — maybe there are applications we haven’t thought of! Blockchain accelerates the novelty: people try to do new things and many things fail. It is not bad! A failure is an option. If you are not failing, you are not innovating.
Moqod: What is your vision for the future of blockchain? For you, we are at the early stage.
Pascal: Yes, we are. We have Ethereum 2.0 coming up. A lot of technical problems on the protocol level need to be resolved. We do experiments on the application level. It’s a question of 5–10 years for me until we can see that those are the real use cases.
There are many exciting things ahead. For me, they lie in finance and tokenization. It doesn’t mean you can tokenize everything — like the guy before.
It is about seeing how we can go further. Industries can maybe first digitize the workflow and then apply what I’ve mentioned before. It’s a lot of work and this is what we try to do at Apps with Love” — lay the stage! Otherwise, you just reengineer a blockchain use case for the marketing hype. You have to be careful here.
The cryptocurrency won’t be successful as a daily-use currency case — that is my prediction.
Let’s say I go to the supermarket to buy something for $10 and I buy it with cryptocurrency… I wouldn’t do it personally.
Moqod: It would be curious to talk to you in 5–10 years and see what came true.
Pascal: Most predictions are wrong, don’t listen to me! That’s just my gut feeling. In the beginning, blockchain was about a peer-to-peer cash system but it has evolved beyond what we have expected.
In 2012 I would have never predicted where we are now. There was no Ethereum.
Even smart contracts were not invented by Ethereum. It was Nick Szabo who mentioned the term ‘smart contract’ in 1996.
It is picking up old ideas and putting them into practice. In 2012 I thought we’d make more steps into a more professional yet shared market. There are still many complexities and uncertainties we need to understand.
Maybe tomorrow somebody comes up with a better case of usage of digital money and cryptocurrencies but my gut feeling just tells me: ‘No’.