Blockchain Technology — a Chance to Build the Economic Infrastructure for the Next Century?
We can’t solve problems by using the same kind of thinking we used when we created them. — Albert Einstein
PS. I don’t know pretty much anything about blockchain technology…
The Industrial Revolution resulted in a revolution in the information infrastructure, including the way that new knowledge is put to use in society. The post-World War II period showed an increase in government interest in knowledge utilization to stimulate economic growth through technology transfer. The computer and communication revolutions continued the shift towards a knowledge economy and global economy. In a network environment, knowledge is both an economic resource and a commodity. The world of Facebook, LinkedIn, Twitter, Google and other social media highlights the increased importance of content and knowledge rather than only information dissemination. Customization of information services, creating packages of information and repackaging it, and information utility services add value to products that lead to greater utilization. As society created new knowledge ever more quickly and implemented new technologies that intensified the creation, mass production, dissemination, and diffusion of knowledge, the utilization process became more complex, and the information infrastructure’s complexity has challenged utilization.
We need to stop thinking about governance as a centralized thing that comes top-down and think about governance as a set of coordination of institutions that people can use to work together in order to better achieve their common and shared objectives ( Vitalik Buterin).
As we’re evolving as individuals and together as a society, we’re also evolving exponentially in technological progress. New opportunities are emerging and may or may not solve existing problems. First, there was the internet and now we’re going one step forward in the evolution. Blockchain technology (or distributed ledgers) comes into play.
What is a blockchain?
Blockchains provide a way to store information so that many people can access and reconstruct settled transactions, keep a copy of it, and add new blocks to it. Once added, it is very difficult to remove or manipulate information. This can basically reinforce trust in a blockchain’s content. The disintermediation property arises because blockchains are distributed. There is no central storage location and no primary copy. Blockchains are maintained by a peer-network of nodes. Every node has a copy of the blockchain and has equal authority to add to it. Every node publishes that data for other nodes to pick up and use. The size of the network is important and ensures the immutability of the database. A single node could theoretically change historical transactions and recreate a valid blockchain, but because other nodes in the network check the data before they accept it, it becomes impossible for a single node to make a historical change as more than 50% of the network (the miners) needs to agree on “the truth” for it to be accepted.
We use money every single moment of our lives — whether we actively think about it or not. Yet very few people know the history of money in human society, and how the global money supply today is managed, moved, and yes, even manipulated, by various actors on the global stage. Money is one of the oldest industries, and in most of the history of civilizations, money has been a tool of political, social, and economic control — centralized in the hands of few for the control of many ( Meltem Demirors).
As new blocks may be added on the end of the chain by many nodes at once, blockchains need a resolution mechanism to decide which block is accepted by the network. Bitcoin uses a “proof of work” (PoW) algorithm, where nodes must prove they have solved a complex cryptographic puzzle to deciding which node gets to add its data first. Other systems use different methods such as the “proof of stake” (PoS) algorithm, which requires that nodes prove they own a certain amount of an asset, such as the cryptocurrency of the system. These consensus algorithms are protocols that describe the format of a ledger that is publicly visible and consensus functions that anyone can use to determine which of multiple candidate ledgers is the consensus ledger. Choosing a resolution mechanism for a blockchain can greatly affect the scalability of the system and how much energy it uses, particularly as “proof of work” algorithms require a lot of computing power.
There’s an interesting blog post by Bill Tai about the consequences of mining activities on the energy industry and the current development in order to solve the occurring problems around massive energy consumption and margin issues of miners — click here.
One of the systems core goals has to be to use economic incentives to reward participants who further the system’s objectives and penalize participants who harm the system’s objectives. The economic incentives are designed for stimulating specific behavior in favor of the system itself to keep it alive.
Blockchain applications
Currently, there are three applications types running on the technology which are the following ones:
- Digital currencies: used for storing and executing transactions in digital currencies (for example Bitcoin)
- Colored coins: used to represent and manage real-world assets that are transferable, but not digitally stored on the blockchain by using rather small Bitcoin transactions
- Smart contracts: executable code which runs when certain criteria (terms of the contract between buyer and seller) are fulfilled, allowing complex behavior and fully distributed applications (Dapps)
But why should people work with blockchain technology instead of centralized servers? That’s pretty simple. First of all, you can remove the need to maintain the infrastructure — the platform’s users are the infrastructure. The blockchain will also reduce your social costs of bootstrapping (social trust is very difficult and expensive to scale) tremendously, as people tend to trust more easily when they know that the crypto ledger works and there are economic incentives integrated into the system. People need and like money and that’s why almost everyone will contribute in favor of the system. Moreover, you get high security (difficult to attack) and reliability, a global network without any borders and system that is completely open for everybody.
It’s not only paradise
So far, so good. These things sound pretty nice and people are very much euphoric about the latest developments. Nevertheless, there are big challenges which have to be faced in the industry and questions which have to be thought through properly. How to ensure that by each one added to the network, there are more resources available which lead enable scalability? How to deal with the increasing data volume (can we use sharding and sidechains and still guarantee availability and tamper-resistance)? How do we link these new systems together and to the old legacy systems that still have trillions of value to them so that they interoperate? How do we pay for things sustainably? Where should we go, if we want to be able to adapt to change by using soft or hard forks? And so on…
Outlook
Blockchain technology changes the way we are looking at reputation, identity, value and trust and the ability to move value anywhere in the world instantaneously. Furthermore, it speeds up settlement as well as clearing so that your money transfer will be done within 10 to 15 seconds. Transaction costs go down and also currency trading transaction costs, in general, will go down dramatically, causing lower compliance costs as well as declines in other costs structures. In the developing world, it will result in a completely new frictionless, open and uncensored financial system. A system that will be running on a cell phone parallel to the banking system and for the first time opens up remittances microcredit and many other things that are tremendously beneficial and allow people to build real wealth that can’t be taken by restrictions.
The achieve these ambitious visions, the industry needs fancy inventors, extraordinary talented developers, and the right investors to push forward the projects with the right intentions and incentives.
