What is Blockchain?

The secret to the ballooning price of bitcoins and the threatened bubble lies in the term blockchain. Under the blockchain system, essential information is about any kind of transaction or documentation incorporated into a digital block that is hooked into to the previous block, all the way back to the first one created in 2009. That’s the chain.

Incorporating essential information about any kind of transaction or documentation incorporated into a digital block

The cryptographic code in cryptocurrency is used for transforming the information to give it a unique code. It means that each segment is unlike any other.

You can’t change it unless you change every other block in the chain and on every computer in the system. And every participating computer is part of the system. Hence, the blockchain technology is supersafe.

The Geneva-based World Economic Forum and its new Center for the Fourth Industrial Revolution (sited in San Francisco) published Realizing the Potential of Blockchain, by the Canadian father and son team of Don and Alex Tapscott, on 29 June 2017. When the World Economic Forum issues a “white paper” on an issue you can be sure business has woken up and has taken notice of a new situation in the financial world.

More than a simple explanation of blockchains and the challenge to conventional financial systems, the 46-page document also includes several proposals on how the system can move safely forward.

Safely? Well, that same month bitcoin, which started the year at $997 per token, reached $3,018 (on 11 June), then dropped nearly 20 percent to $2,456 by 15 June. As of 12 August 2017 the price was back up to a record $4,154.75 and reached $6,000 in October 2017. As of 8 November each unit costs $7,344.

Bitcoin’s main rival in digital coinage, Ethereum or ether, and the main subject of this article, had an even more spectacular month. On 21 June 2017 it “flash-crashed” in price from $296 to 10 cents before recovering its losses.

Analysts blamed Ethereum’s flash-crash largely on computerized stop-loss sales, that is computer algorithms to automatically sell Ethereum tokens when the price dropped by an amount that would create unwanted losses (whether 1%, 5% or 20%).

Ethereum tokens had gained nearly 4,000% in 2017 (for non-mathematicians, that means the price was close to 40 times what it started the year at $8.20). By 13 August the price was back to its normal rollercoaster. At 10.15 am Ethereum was at $290.80. One hour before it had been $298.20. That is, by coffee time it was 2.5% down.

This is not how a currency behaves, except perhaps in Zimbabwe (see this report from cryptoinsider where bitcoin sells at nearly double the world price). But the problem was not in the blockchain system. The wild swing came from how it was used.

One difficulty is that no-one seems agreed on how to describe cryptocurrencies. They are not money, unless you can change them into cash. Waiting three days for this to happen does not cut it. If cryptocurrencies stay that way, they can never replace credit cards, except for people who need to get out of cash (Koreans and, it appears, millions of Chinese, Japanese, Venezuelans and Filipinos) .

Smart Contracts

Cryptocurrencies are more like investments or assets, such as initial public offerings (IPOs) when private companies raise capital by going public. Or crowd-funding. Ups and downs with IPOs are quite common, and some are a bust. IPOs, however, are highly regulated.

Altcoin promoter Joseph Lubin does not even call cryptocurrencies financial instruments, the Tapscotts point out. He told the authors on 16 June 2017: “There are no investors. There are stakeholders who bought a software product called Ether that enables business and software developers to build on and use the decentralized application platform.”

But the unique identifiers in the Ethereum blockchain system can be used to create “smart contracts” that don’t need trusted (or expensive) intermediaries such as banks or lawyers to ensure the terms are carried out.

Currently, international cash transfers cost up to 10 percent of their value. Alex Tapscott calls it “the remittance ripoff”, since expatriate workers often have to upfront so much of the cash they want to send back home, and payment often takes five days. Blockchain systems can cost almost nothing and deliver transfers almost immediately, when they work as planned.

Helping those without IDs

Management costs for trading internationally are regularly two percent or more, not to speak of spending on legal services, goods monitoring and paperwork all along the trail. And  millions of people without paper identity documents, paper title to property or bank accounts could use blockchain technology to indelibly record such details for them.

The digital ledgers that record such information are available to every computer with an Internet link under the blockchain technology. In fact, the encrypted details of the ledgers are stored on every computer that has signed up to be part of the system. No longer does one book or site or office hold all the details.

So nobody can feasibly make changes retroactively once they have become part of the blockchain. The details are distributed to all participants. Hence the alternative name of distributed ledger systems.

The Tapscotts declare that with blockchain technology, “we needn’t worry about the weak firewalls of the US Democratic National Party, a thieving staffer of Morgan Stanley or a perversely incentivized employee of Wells Fargo”. All of these fnancial grabbed the headlines without analysts warning that the economic and political system faces collapse.

Richard Samans and Zvika Krieger of the World Economic Forum point out in the Tapscotts’ report that, because of the difficulty of fiddling the books, blockchains “could prove to be a broader force for transparency and integrity in society, including in the fight against bribery and corruption.”

But don’t relax yet. The Tapscotts suggest blockchain “promises to disrupt business models and transform industries”.

Processing migrants and refugees. (Photo: UN/IOM)

The U.N. is already on it

The World Food Programme (WFP) has already shown how blockchain systems can help deliver aid more securely than any other system.

WFP’s blockchain innovation, called ‘Building Blocks’, got its first successful field test helping 100 people in January 2017 in the heart of Sindh province, Pakistan. As vulnerable families received WFP food and cash assistance, the transactions were authenticated and recorded on a public blockchain through a smartphone. Transaction reports generated were then used to match disbursements against entitlements, the WFP website notes.

In the Azraq refugee camp in Jordan, WFP registered people anonymously on its blockchain, entering their entitlements. It then linked the record to an iris scan of the recipient already being used in the camp.

Refugees could then go to a supermarket within the camp, collect the items they wanted to buy, then pay for them simply by looking into a register-side iris scanner. WFP later paid the supermarket for its entire bill with one transfer.

The project that ended on 31 May recorded and authenticated transfers for about 10,000 people. All funds received were used to purchase food (olive oil, pasta and lentils).

Safe from hacking and shut-downs: Distributing food entitlements more securely

Blockchain technology, based on the ethereum system, reduced the cost of fees charged by financial intermediaries, reports ETHNews, a cryptocurrency news service. By registering refugees through the blockchain, WFP could also distribute food entitlements securely.

“By doing the blockchain version, we don’t have any costs with the banks other than the transfer fee to the supermarket. We’re not sharing beneficiary data, and we’re not advancing money to anyone,” a WFP official told the website fastcompany.

WFP plans to expand its effort to 100,000 people in Jordan, reports the cryptocurrency news website coindesk.

Supporting seven million refugees

Since the start of 2017, the newly appointed special advisor for UN engagement and blockchain technology at the UN’s Office for Project Services (UNOPS), Yoshiyuki Yamamoto, has been meeting informally with members of other agencies to imagine what the organization would look like if it was truly united on a blockchain, adds coindesk.

UNOPS established a cross-agency working group on blockchain, bringing in the main emergency agencies, and in April invited blockchain industry members to provide information on the issues involved.

The Tapscotts highlight the need for networks on standards, for an openness to “radically diverse views”, respect for members’ interests, steps to “ensure that no-one does any harm through watchdog networks”, and coordination of policy. “The blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred,” they write. There is no central database to hack or shut down.

“Innovators are programming this new digital ledger to record anything of value to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, rights to intellectual property, educational degrees, financial accounts, medical history, insurance claims, citizenship and voting privileges, location of portable assets, provenance of food and diamonds, job recommendations and performance ratings, charitable donations tied to specific outcomes, employment contracts, managerial decision rights and anything else that we can express in code.”

The Office of the Geneva-based United Nations High Commissioner for Refugees (UNHCR) is working with Microsoft and Accenture to give those without identities a fresh start. The digital ID, called United Nations ID2020, aims to facilitate banking and education for those who would otherwise be unable to access such services. Its website points out that 1.1 billion people live without an officially recognized identity.

Accenture’s website reports: “The Accenture Platform is the heart of the Biometric Identity Management System currently used by the United Nations High Commissioner for Refugees, which has enrolled more than 1.3 million refugees in 29 countries across Asia, Africa and the Caribbean. The system is expected to support more than 7 million refugees from 75 countries by 2020.”

For the past two years, the Finnish Immigration Service has been giving asylum seekers who don’t have bank accounts prepaid Mastercards instead of the traditional cash disbursements. Today the programme has several thousand active cardholders, reported Mike Orcutt at technology review on 5 September 2017.

The card is linked to a unique digital identity stored on a blockchain.

Providing refugees with identities

Jouko Salonen, director of the Finnish Immigration Service told Orcutt the card account functions like a bank account, removing a major barrier to gaining employment. People can use their accounts to make purchases, pay bills, and even receive direct deposits from employers. The public, virtually incorruptible database enables the Immigration Service to keep track of the cardholders and their spending.

What usually keeps asylum seekers from getting bank accounts and jobs is that they have no strongly authenticated identity. Salonen notes: “We have found a way to solve that.”

The Sustainable Development Goals for 2030, endorsed at the United Nations General Assembly in September 2015, include a target of providing a legal identity for all, including birth registration (target 16.9).

The key problem facing blockchain businesses is managing the validation process for transactions, and that is allied to its phenomenal growth. The Tapscotts quote Matthew Roszak, Co-Founder of Bloq Inc.: “Bitcoin is a car going down the road at 1,000 mph. Developers are not the drivers of this car, yet they are tasked with repairing and upgrading this car without turning it off, stopping it or rebooting it.”

One result is that validation is taking longer and longer. Which means that transactions are taking much more time to go through. Some dealers have stopped owners from cashing out their tokens because of the slowdown of the system, and with the amazing volatility in the tokens’ prices, this can cost investors huge amounts of real money.

Similarly, you can opt to pay a higher transaction fee to go to the head of the queue for processing. That can privilege the big investors, and may have been responsible for the “flash-crash” of 21 June. On 1 August 2017 the blockchain system changed, freeing up the block handling process to speed up transactions.

But the blockchain technology also needs platforms that can meet the requirements set by regulators of capital markets for transactions, Jesse McWaters of the World Economic Forum argues. The anonymity of cryptocurrency may be appealing to drug users and criminals, but not to legislators concerned with ensuring people meet legal disclosure requirements in buying or selling a house, for example.

And then there is the “open war” between developers and different “cryptocamps” about how blockchains should go forward, report the Tapscotts. A board member of the Bitcoin Foundation has been arrested for embezzlement, and the Ethereum original developers have split over the device used to stop a fraudster siphoning off $70 million (in value at that time) via a faulty contract.

Ethereum re-established the accounts of those whose stop-loss accounts sold off their tokens. So they still held the same number, and no-one lost tokens because of the fraudster, though it took time for the value to bounce back. But the split between developers continues, and over the long term may undermine the changes launched on 1 August.

“Making decisions in a decentralized system is not easy,” notes Roszak. The Tapscotts document some of the vituperative postings in the debate. They conclude: “The bitcoin community needs a shared and inclusive vision for the future and a mechanism not just for sorting the important signals from the noise of trolls on social media but also for mobilizing to address them as an ecosystem.”

August 1 put the collaborative spirit of system maintainers to a hard test. Three different proposals have been put forward. In theory, the people with the computers that keep the blockchain system going can each accept any of the ideas, or none. They are known as miners, but that’s a terrible term for what they do, using their computers to validate transactions and be rewarded with tokens. These days they are mostly “mining farms”, huge collections of computers in places like China.

The most popular proposal doesn’t have any of the current Bitcoin Core (original) developers on board, the Tapscotts point out. “If the network fails, all the unconverted bitcoin they’d earned (or could earn) through mining would be lost, worthless or at risk,” they note.

As of now, there are two kinds of bitcoin and two kinds of ethereum, and more are likely in the pipeline. The latest fork, creating Bitcoin Gold, took place on 23 October. Another one was due on 16 November until it was suspended on 8 November because of lack of consensus.

Another difficulty facing the blockchain is that as it grows, so does the cost of keeping it going. “The energy consumed is unsustainable,” the Tapscotts warn. “Estimates liken the bitcoin network’s energy consumption to the power used by nearly 700 average American homes at the low end of the spectrum and to the energy consumed by the island of Cyprus at the high end”.

Add to that the cost of keeping the computers cool (roughly 50%). One company has set up in Iceland and Georgia, and others in similar places, to reduce electricity costs through cold climates and renewable power.

Teunis Brosens, senior economist at the Dutch bank ING, has calculated that bitcoin transactions use so much energy that a single trade could power a home for almost a whole month: 200kWh.

Comparing the amount of energy used for a bitcoin transaction to running his home in the Netherlands, Brosens said in the report published on 15 October: “200kWh is enough to run over 200 washing cycles. In fact, it’s enough to run my entire home over four weeks, which consumes about 45 kWh per week costing Ä39 of electricity (at current Dutch consumer prices).”

Ethereum, by contrast, uses 37 kWh. “Visa takes about 0.01kWh (10Wh) per transaction which is 20,000 times less energy,” Brosens noted.

Allied to the energy cost is the incentives problem: the blockchain pays people to use their computers to keep the system going but most computers used for the blockchain must be replaced every three to six months.

Ethereum has promised to move to a less-energy-intensive system (known in the trade as proof-of-work), and talks on its website of making the switch this year. But a coindesk reporter has written: “Since [the switch] has been pushed back several times, detractors see this hybrid as the latest evidence that [the new system] won’t ever be fully implemented successfully on Ethereum.”

If so, then it seems obvious that the problems will only get worse. Meanwhile, the recommendation for those who hold bitcoins is to keep them offline.

Nevertheless, more than 100 Fortune 500 companies, cryptographers, academics and veteran Ethereum developers have joined in the Enterprise Ethereum Alliance (EEA) to develop roadmaps for enterprise and industry-wide applications on the blockchain. Even in 2016, the World Economic Forum said, more than 90 central banks were holding discussions on blockchain systems. Some 80 percent of banks are predicted to have started projects by the end of 2017.

Sweden is already using the blockchain to record its property transactions. Estonia uses the system for registering its inhabitants and carrying out many business transactions. In Switzerland’s CryptoValley, Zug (population 29,000) you can pay for public utilities with bitcoin at the local council (maximum CHF200).

In one major effort to tackle the speed and scaling problem, on 12 August the 23-year-old creator of ethereum,  Vitalik Buterin, and another cryptocurrency guru Joseph Poon announced a solution through “baby blockchains” in a system they call Plasma.

A former Ethereum CEO and several academics in IOHK (the HK is Hong Kong) have spent two years developing a cryptocurrency and platform (ADA/Cardano) that should overcome all these problems through layering that separates the value token from the computer operations required to maintain it the settlement layer and the smart-contract layer. Its website says: “The platform is being constructed in layers, which gives the system the flexibility to be more easily maintained and allow for upgrades.”

Despite these ambitions it still has to make its way as an Ethereum-killer and had not issued a roadmap for its development by mid-October. As a result, each token was selling in mid-October at around US$.30 cents, while Ethereum was holding to $300..

Crypto Valley

In September 2016 Swisscom, the Swiss stock exchange and Zurich Cantonal Bank announced a consortium to use blockchain technology for selling shares outside of a stock exchange. The Crypto Valley Association, formed in March 2017 under the leadership of former UBS Group CIO Oliver Bussman, includes Thomson Reuters, as well as fintech startups such as ConsenSys. The ADA foundation is based in Zug.

Bitcoin: the good, the bad and the ugly

In an article published by the cryptocurrency platform called Monetas (based in Zug), author Graham Tonkin says terms like accounts, virtual currency, and digital currency “are misleading, or outright wrong when describing both the currency and technology of Bitcoin.”

Cryptography, producing a unique identifier for transactions, is what makes bitcoin unique rather than it being digital. These days, only a small proportion of our currency in circulation is physical.

“Referring to where one stores their bitcoin as an account is akin to saying that you have a leather account in your back pocket or purse,” he writes. “An account is managed by a third party, a bank. A wallet [where you hold your cryptocurrency] holds value directly and is only accessible by the person who is in control of it.”

For more pieces on the blockchain see crosslines.ch.

Update 17 November 2017

U.N. blockchain against child trafficking

On 10 November the U.N. announced a blockchain project to help stop child trafficking. It estimates nearly 50% of children under five do not have birth certificates. The project will aim to document children born in the world’s poorest countries.

The programme will create a digital identity within the blockchain. It will enable tracking of children, even if they are abducted, because the open ledger will be unchangeable and difficult to hack as well as thwarting identity tampering.

The announcement was made at the Humanitarian Blockchain Summit in Fordham University, Lincoln Centre, New York. The partners are the World Identity Network (WIN), the United Nations Office for Project Services (UNOPS) and the United Nations Office of Information and Communications Technology (UN-OICT).

WIN observed: “The global estimates for children under the age of 14 [without identify documents] exceed 600 million children worldwide […] These children are literally ‘invisible’ to governments or development agencies that design and deliver social programs.”

Yoshiyuki Yamamoto, Special Advisor for UN Engagement and Blockchain Technology, underlines: “Child trafficking is one of the worst example of a crime against humanity.”

WIN was launched in July 2017 at the Blockchain Summit on Sir Richard Branson’s on Necker Island in the British Virgin Islands, wrecked by Hurricane Irma in September. WIN’s CEO is Dr Mariana Dahan, formerly of the World Bank, credited as the driving force behind the Identification for Development (ID4D) agenda – a global programme she initiated.

Its partner companies operate on the Ethereum and Bitcoin blockchains. “The company is set to collaborate with the BitFury Group, ConsenSys uPort, IOTA, the Sovrin Foundation and the Secure Identity Alliance members,” WIN announced at its launch. Ethereum-based ConsenSys uPort has partnerships with Microsoft and Ubuntu.

 

Links

Blockchain: a short introduction (M.I.T. Management Sloan School) 2 min. on YouTube.

Alex Tapscott: Blockchain Revolution on YouTube.

Banking on bitcoin, a 1h:24m documentary available on YouTube.

WFP project links:

Coindesk

Ethnews

Fastcompany

Fighting hunger: wfp.org

Coindesk on U.N. consultations

Fast company on international aid

World Economic Forum: The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services. August 2016.

Wikipedia: Bitcoin, Blockchain

Cryptocurrency prices: worldcoinindex

Update links

PR Newswire on the blockchain initiative

PR Newswire on WIN launch 28 July 2017

WIN website

Humanitarian Blockchain Summit website

ConsenSys website

btcmanager report 15 November 2017

LEAVE A REPLY