Want to know about blockchain but you’re not a tech nerd or evil finance overlord? Read on…
My mum is a former software engineer, introduced me to the internet years before anyone had even heard about it, always has the latest gadgets and understands more about technology than the most hardcore geeks I know. She recently told me I should write something about blockchain. For once, I’ve decided to listen to her and put together something I am going to call Blockchain For The Mildly Curious.
A ‘blockchain’ is a system that allows a group of people to record transactions with each other. A constantly updated list of those transactions is held by all of the participants, and some of them also verify the transactions in ‘blocks’ (depending on the blockchain, there are different incentives to make sure that happens). Thanks to some fancy cryptography, those transactions are visible for everyone to look at but because they’re spread across multiple computers no one person or organisation can tamper with them. Put another way, it’s a shared, trusted, tamper-proof public ledger that everyone can inspect, but which no single party controls. And the reason it matters is that it lets people carry out a transaction without having to go through a third party like a bank. Think of it as a 21st century machine for creating trust.
Until about a year ago, the word ‘blockchain’ was synonymous with Bitcoin, a digital currency that was the original use case. But in the last twelve months, things have started getting interesting. For a start, the community that administers Bitcoin is currently having a big internal punchup. The currency has gotten so popular they’re struggling to keep up with number of transactions that have to be processed, and they’re arguing about how to fix it. These arguments are difficult to resolve precisely because it’s a decentralised community. And there’s a lot of money at stake. There are good reasons to believe they’ll eventually figure it out but right now there’s a lot of uncertainty.
Meanwhile the big banks are piling into blockchain like lemmings, lured on by the smell of money and pushed from behind by the fear of disruption. They know their role is to serve as secure storehouses and transfer hubs for value (tell that to the investment bankers — ed.) and they also realise that a digitised, public, secure and tamper-proof ledger can perform the same function. That’s why in the last six months almost every big financial player has announced some kind of blockchain initiative. It’s leading to a lot of hype. One nice little side effect of this is that former crypto nerds turned blockchain experts are being snapped up in droves, commanding salaries they once only dreamed of.
As far as the finance industry is concerned, two competing models are emerging. In the one corner we’ve got those betting on private ‘consortium’ blockchains. This includes 42 of the world’s biggest banks who’ve created something known as the R3 Initiative. In the other corner we’ve got companies like IBM, Accenture, Intel and Fujitsu who think public and open-source is the way to go. The flagship project there is something being developed by the Linux Foundation called the HyperLedger Project. The obvious comparison is of course the early days of the internet. In 1994 websites were still a novelty, and until 1998 there used to be people tracking the latest Fortune 500 company to get one. Substitute ‘website’ with ‘blockchain’ and the similarities are uncanny. Back in the 90s, the whole public vs. private thing was a big deal too, with many network protocols vying to be the communication standard. we all know what happened there — I’m sure many of our readers are still recovering from the experience of using company intranets.
The reason blockchain is really interesting though, is that a ledger can record many things besides payments. That’s why we’re seeing blockchain trials for land registries,cybersecurity, academic certification, voting, car leasing, forecasting, insurance claims,music sharing, stock trading, healthcare, legal transactions and even social media. The most revolutionary initiative however, is a concept known as smart contracts. These are like little mini programs that live on a blockchain and respond to real world parameters such as dates or money or identities. In principle, that means someone can create a legal will that looks a little like this:
IF I don’t log in to my account for 180 days
THEN transfer all my digital assets to my nephew
IF I do log in
THEN do nothing
The big player here is something known as Ethereum, the new cool kid in town. It was built from the ground up to avoid the mistakes that Bitcoin made. And unlike Bitcoin, Ethereum has smart contracts built right into its system. In the last few weeks we’ve seen its currency, Ether, rise in value by 50%. CoinExchange, the world’s largest digital currency exchange, recently announced that they would start selling Ether. And in the last two months, the world’s first ever fully autonomous corporation has been created using Ethereum, and has raised US$150 million to date.
It’s a little like the Wild West out there right now. Fortunes are being won and lost. And sure, maybe none of this matters for you now. Maybe it won’t matter for another few years. But it will eventually.