Why you should know about blockchain
Our trust in computers, since the birth of the Internet, has come and gone. At first, we had full confidence in them – perhaps because of their scientific or mathematical basis. It was in the 90s that the first hackers, most of whom were bored but harmless students who defaced websites for fun, made us realize that it is not terribly hard to crawl into someone else’s computer and turn zeros into ones. Now we take any computer output with a certain level of skepticism.
We have since become so completely reliant on computers, however, that it’s important for us to find a way to trust them again. That is why I want to talk about blockchain: the technology heralded by the most prominent scientists as an innovation that will change our lives as radically as the Internet did, and which might help us regain this lost trust in computer technology.
Blockchain and prejudice against Bitcoin
Don’t be put off by the fact that it was Bitcoin which gave us blockchain technology. It is true: The volatility of this virtual currency attracts investment speculators, and its anonymity makes it suitable for trading in “alternative markets” such as drugs or fake passports. It is not anonymity, however, that makes Bitcoin’s chassis, the blockchain, a fascinating tool for the financial, industrial, logistics or public sectors. First and foremost, it is a transparent technology that shifts the way we trust information and changes how we view authorities. This could change our lives in a fundamental way.
Block + Chain
Blockchain is not Bitcoin, but rather the underlying technology behind Bitcoin. It is a distributed database protected by cryptography to ensure that only the right person can access the relevant data, and it keeps a record of every change made to it. Blockchain works as follows: Data is saved into individual “blocks” that are connected one by one into a “chain”, hence the name. Think of it as a train with a series of wagons. Each wagon contains data, and the door is protected by a cypher. The wagon keeps information on who inserted data into it and when, as well as a fingerprint of the previous wagon, so that if that one is modified, an alarm is set off. You can only insert information into a wagon once, and that information can never be changed. If you need to modify the contents of the wagon, you will have to insert those changes into a new wagon. All changes are recorded, so that you obtain something like an endless “undo” button.
The resulting train is then copied across many identical train stations (computers). These stations monitor each other and check their integrity against the others. When new information needs to be inserted into a new wagon, no one knows which train station will be the first to perform this action. That task is assigned randomly to whichever station wins the competition to solve a math problem that can only be guessed by brute force, namely by trying different results. This is what Bitcoin calls “mining”. When the winner creates a new wagon, all the other stations copy it.
If someone were to break the seal of just one wagon, which we currently consider to be mathematically impossible, they still could not hack all of the stations around the world at exactly the same moment. Even if the attacker could manage this on one or a handful of stations, the other stations would notice and reject the attempt immediately. This is why blockchain is considered to be the most perfectly safe storage that the world has ever seen. The system is decentralized. No one can modify data once it has been written. No single entity decides who gets to create the next wagon – it is an entirely random process. All of the data contained in the wagons is completely secure, but also transparent, so that all participants can see everything that goes on. Blockchain is public truth.
Banks to adopt blockchain
Blockchain is suitable wherever several parties need to confidently store and exchange values, but no party has supremacy. When mystery man Satoshi Nakamoto released the technology in 2008, the world was in the throes of a financial crisis that has often been attributed to an irresponsible or greedy financial sector. Many thought the timing was not a coincidence: They saw blockchain as a means to bring the banks to their knees. Bitcoin could be used for everything a bank does – including transfers, payments and even loans – without having to go through the bank. This is because Bitcoin solved the problem that all electronic data had until then: the fact that it could be duplicated too easily. If you have a JPEG picture on your computer, and you send it to me, both our computers now have the same file. This is obviously problematic when it comes to money, because any money you send me should no longer be in your possession once you’ve sent it. Private and central banks currently take care of this issue. During an electronic money transfer, they responsibly substract the appropriate sum from the original account. Their authority doesn’t rest on any special technology, but on centuries of building a reputation in the financial sector.
Initially, there certainly appeared to be a conflict between the banks and Bitcoin. The virtual currency is still prohibited in many countries, including Bangladesh, Thailand and Iceland. However, banks, stock exchanges and insurance companies simultaneously began investing heavily into using blockchain for its own sake. As such, blockchain can no longer be considered as a technology that threatens traditional banks. The situation has evolved, and financial institutions are now more likely to adopt this technology and use it to perform their existing role more securely and effectively. How exactly they will do this is not yet known. There are many studies and some initial proof-of-concept implementations that focus on lowering the risk and transaction costs of both financial and non-financial transfers. Deutsche Bank, HSBC, UniCredit and UBS are among the banks that have publicly presented strong plans involving blockchain technology.
Technology of trust
The level of attention that blockchain has attracted from the corporate world is often seen as a hype. In fact, many blockchain projects may well be motivated by a marketing effort to “look innovative”. That, however, is not the important point. Blockchain is pure mathematics – and those can be fully trusted. Two plus two equals four, and nobody can do anything to change that. The problem is that most of our information is now stored in computers, and they can be easily manipulated. In computers, you can’t distinguish facts from claims. Since the birth of the Internet, information technology has moved into a “post-factual” era.
Take for instance the infamous case of Hillary Clinton’s email server hack. On the one hand, you have a ton of computer evidence collected by FBI agents that clearly leads to Russia, and on the other you have Donald Trump’s claim that it’s “fake news” and that no hack ever took place. We criticize people who give both propositions equal weight even though one is a fact and the other a mere claim. Yet from the point of view of computer science, we are forced to agree that there really is no difference. It is indeed possible to hack Clinton’s server from Korea and make it look like it was done from Russia, or to create false evidence on a server that was not hacked at all. It is the widespread lack of trust in information technology that is slowing down the adoption of cloud computing. In a survey conducted by The Economist, only 16 percent of respondents stated that they trust the cloud. In a way, this is understandable – but blockchain can change all of that.
Many companies and organizations are already exploring how. Most current experiments deal with situations where several entities need to exchange information and no party is “on top”: These range from recording the details of container shipments or energy flows to so-called “smart contracts”. The latter are simple applications stored in blockchain “train wagons” that can be used by insurance companies or in sports betting to automatically execute previous agreements. Telecommunications firms could use blockchain to reduce the cost of fraud in roaming and in identity management, or use it for authentication in future networks such as 5G or the IoT.
Libertarian dream or practical tool for the government?
The decentralized model of information management that underpins blockchain feeds libertarian dreams of replacing many of the functions of regional or central governments with blockchain technology. Papers are regularly published about using blockchain for e-voting, car, land or citizen registries. Even a decentralized model for courts or police functions has been theorized. So, will blockchain replace the land registry? A more likely scenario is that governments will simply utilize the technology to increase the trustworthiness of their existing records. Nigeria and Ghana, two countries with an unfortunate history of land fraud, are already using blockchain to track the ownership of real estate properties.
When Barack Obama was accused of not being born in the United States during his first candidacy, he eventually presented proof in the form of a paper birth certificate from Hawaii. How difficult would it have been, in this league, to produce a fake one? Estonia has been recording birth certificates in blockchain since 2012. If a future presidential candidate is born in Estonia today, it will one day be possible to verify the facts related to this birth with absolute confidence. Of course, this presumes that no error was made when recording it. If information is entered into the blockchain incorrectly, that’s how it will be recorded – a point that also holds true in the context of other use cases. Nevertheless, it will always be absolutely clear who made the record and what modifications, if any, were made to it afterwards. Now imagine that not just some, but all important information is stored in such a decentralized, trustworthy way on computers around the world. How hard would it be to prove the truth in any matter?
About as hard as putting two and two together.
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