In Focus:

Blockchain, Foundational Not Disruptive

By Julien Butter

In 2008, a paper was published to a cryptography mailing list by a hitherto unknown figure, Satoshi Nakamoto. The paper outlined a payment system that could operate without a central authority to verify transactions. Each confirmed transaction would instead be recorded as a block on a continuously growing and shared list of public records called a blockchain, the integrity of which would be guaranteed by cryptography. With this, the first application of blockchain technology, Bitcoin, was born.

Blockchain hype reached new heights last year following a slew of projects that promised to revolutionise our financial institutions, solve world hunger, and allow us to collect and breed digital cats. While many of these projects will certainly fail, 2017 was characterized by blockchain’s shift to the mainstream as major players in just about every sector from finance to health, and utilities to retail, announced they were getting involved.

Minimising trust

The great promise of blockchain is trust minimisation. Through innovations such as accounting and contract law, security and encryption, human civilisation has evolved to reduce the trust we need to put in our fellow humans in order to participate in shared endeavour. These innovations underpin our institutions in a way that we often take for granted, but without which, as proposed by Robin Dunbar in his book “Grooming, Gossip, and the Evolution of Language”, the upper limit of any society would be confined to “the number of people you would not feel embarrassed about joining uninvited for a drink if you happened to bump into them in a bar” - around 150 people.

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The great promise of blockchain is trust minimisation.

Today we are able to participate in a global marketplace, but, as Nick Szabo, leading thinker on law, economics, and security and whose work inspired the creation of Bitcoin, points out, it is at the cost of huge numbers of “accountants, lawyers, regulators, and police, along with the increase in bureaucracy, risk, and stress that such institutions entail.” By outsourcing trust from expensive human traditional institutions to computation and the network effect, blockchain provides a more efficient means to achieve what Szabo has termed social scalability.

The first use case - payments

The most common use of blockchains today is in financial settings. Blockchain-based currencies, or “cryptocurrencies”, at their best are: neutral (i.e. not serving the goals of any institution or government), borderless, profoundly secure, immutable (the blockchain stores an unchangeable record of all transactions), and resistant to censorship. These properties eschew the need for middle-men such as central banks and clearing houses, saving cost, increasing the speed of transactions and reducing operational risk. This benefits many types of financial market participant, not least migrant workers that are faced with huge remittance fees to send money home to their families. And it makes cryptocurrencies like Bitcoin, which can’t be tampered with and has a fixed money supply, attractive to citizens at risk of inflation, as in Venezuela where inflation is currently 2,600%.

Applications of blockchain outside of the realm of payments are often criticised for being little more than glorified databases that could be replicated by existing technologies and legal contracts. The criticism misses the point. It is true that in most mainstream applications, blockchains provide only marginal improvements over existing solutions. But, as argued by Vitalik Buterin, founder of Ethereum, because these applications can benefit hundreds of millions of users, even if the average benefit per user may be small, the net benefit to society could be huge.

Supply chain transparency

Certain characteristics of blockchain technology appear to have great potential for supply chain transparency. UK-based company Provenance recently concluded a pilot programme that tracked fish sourced from traditional fishermen in Indonesia to high value sushi traders in Japan. The fishermen registered their catch on the blockchain by sending an SMS; from that point on, every step along the supply chain was recorded on the blockchain, creating a fully transparent chain of custody. Restaurants at the end of the chain could then scan a QR code or RFID tag to verify that the fish were caught legally and sustainably. Provenance is teaming up with some very major players in its next project to encourage tea farmers in Malawi to use more sustainable methods through the promise of cheaper finance.

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Blockchain is being developed today as the foundation for decentralised applications, businesses and even digital identity

A decentralised future?

Somewhere along the way, blockchain pioneers realised that decentralisation could go much, much further. Blockchain is being developed today as the foundation for decentralised applications, businesses and even digital identity. The blockchain project Powerledger is enabling peer-to-peer decentralised trading of energy in Australia, maximising the use of local and renewable energy. Another project, Banqu, promises to “bank the unbanked” enabling financial inclusion for the nearly 2.7 billion people worldwide whose lack of credit history or verifiable economic identity prevents them from rising out of poverty. And while the idea of blockchain based identity is powerfully relevant for those in poverty, refugees and displaced peoples, identity systems based on blockchains are being touted as the foundation for a decentralized internet, or Web 3.0. If you didn’t realise that the internet was broken, Steven Johnson, in his article Beyond the Bitcoin Bubble reminds us that “a single corporation owns the data that define social identity for two billion people today — and one single person, Mark Zuckerberg, holds the majority of the voting power in that corporation.” That’s a pretty compelling argument for decentralisation.

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Blockchain may indeed revolutionise our societies, but it probably won’t be in the way that anyone today can fully envision.

Foundational, not disruptive

As Marco Iansiti and Karim Lakhani in the Harvard Business Review have commented, blockchain is a foundational technology as opposed to a disruptive one. It has enormous potential to create new economic and social systems, but change will be slow and steady. It is worth considering Amara’s Law on forecasting the effects of technology: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run. Blockchain may indeed revolutionise our societies, but it probably won’t be in the way that anyone today can fully envision.

About the author

Julien Butter

Analyst at SustainAbility deeply interested in ways that business can unlock radical new models of prosperity for people, planet and profit.