Issue 19 : Blockchain ≠ Cryptocurrency

It does have uses in Digital Transformation though

With the announcement of Facebook’s proposal for a blockchain-based currency, I thought it would be a good idea to get in to the subject … It’s time. Time to talk about Blockchain, my apologies.

Here’s a couple of articles to get you up to speed:

On to this week’s issue.


Blockchain and how it is the enabler of cryptocurrencies

If there is a technology that has had more than its fair share of free publicity, it’s Bitcoin and in general Cryptocurrencies. Largely because the ‘value’ of Bitcoin took on another level of interest when it reached nearly 20000$. Can you spot when that happened?

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Source: Data from Google Trends/M Cowen

I’m an on-the-record sceptic of Bitcoin and other Cryptocurrencies, and so far, nothing I’ve seen has led me to believe differently. They are almost all, a waste of money. They are all, without exception, a huge waste of energy in a time when economising energy should be a priority not just for governments but individuals alike, and at the very worst end of the scale, some are downright fraudulent. That being said, the underlying technology of these currencies is actually quite interesting and has place for use in Digital Transformation, hence why I’d like to talk about it in this week’s issue. That technology is, of course, blockchain, or as it was originally known as, block chain.


Blockchain is “an open distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”, as describes in the Harvard Business Review article called The Truth About Blockchain. Let’s break those terms down individually.

Open

Blockchain’s openness is based on the fact that no central organisation manages, overseas or controls the blocks, the chain, the transactions and the ultimate lifecycle of a particular blockchain in circulation. This openness is both an advantage and disadvantage depending upon your point of view. The openness allows it to be used freely for just about any application that requires a ledger. Companies have used it for marketing purposes, granting virtual money to users. But a dark side exists too. In fact, virtually all of the online merchants of illegal drugs and stolen medicines, require payment in cryptocurrencies. You’ve no doubt yourself been a victim of spam email suggesting they have sexually compromising information about you and to present that being leaked pay them in Bitcoin (don’t by the way, it’s fake). Cryptocurrencies are believed to be anonymous, but this is doubted and there have been incidents whereby the identity of uses has been uncovered, so beware!

Distributed Ledger

The ledger, is of course, the list into which transactions (debits or credits usually) are recorded. In a small business, this is typically a spreadsheet or basic account application and is not distributed. A ledger can be distributed where the entire database and all its transactions recorded are replicated geographically in a digital format. As stated above, there is no central organisation, administrator or storage. These databases can be permissionless or require permissions to record transactions. In other words, anyone can record transactions or only specified users can. To do this you need to run a node, but I’m getting ahead of myself, more about that later.

Efficiency

I’d personally dispute this part. In my opening statements I said that it is a huge energy consumer and hence by definition is inefficient. That, sadly, is not its only efficiency problem. Blockchain is actually extremely limited in its speed and quantity of transactions and scales poorly. So much so that in 2016 several banks exploring the possibility of using the technology in the personal and business banking sector abandoned the work as blockchain was just too slow. Looking at Bitcoin, as of today it is only pushing 360K transactions per day. Some Supermarkets transact faster than that!

Digging into the why, for Bitcoin the ledger is not open, and each node has the earn the “right” to add a block to the chain. The gain this right, each node has to solve a complex mathematical problem involving extremely large prime numbers, which in turn requires massive computing power, hence energy and cost. In China, whole villages have been setup next to hydro-electric dams to benefit from the lower energy costs compared to a standard electric grid system. Incidentally, the current chances of solving the mathematical problem for Bitcoin is around 1 in 5.8 trillion (read: unlikely). This is the process that is known as mining.

Verifiable and Permanent

Blockchain’s permanence comes from the fact that when changes are entered in one copy — remember its distributed — the other copies are altered in the exact same way simultaneously, making the change permanent (there is no undo function!). This also explains why it is not efficient, because every single transaction has to be recorded, replicated across all nodes immediately. The bigger the database or the change, the slower the replication process. This simultaneous recording allows all transactions to be verified as all copies should be at exactly the same state at any given time. 

For completeness, there is some debate of its permanence, and some blockchains have been successfully hacked and currencies pilfered as a result.


Hopefully you have a clearer idea of what the blockchain is and how it is not a currency or virtual money. The technology is simply used to record transactions across the globe so that no single person controls the flow in and out of the ledger, thereby “controlling” the virtual money and potentially its value when converted to cash. Getting money in and out of cryptocurrencies is a whole different debate and one I’m not prepared to get in to at this juncture. If you’ve kept up with me so far, you’ve probably identified areas in which the blockchain technology could be useful for things other than buying MDMA on the Dark Web.

Other uses for Blockchain

So, what other uses for blockchain technology are there, and how does this integrate with Digital Transformation?

Remember the underlying technology is simply to record transactions in an immutable way. This lends itself for a whole raft of uses outside cryptocurrencies, allowing for uses where transaction recording is required or where charging a small fee for each transaction entered in to the ledger is part of the business model. In fact, much disruption in the market is predicted as blockchain has the capacity to upend not only traditional transaction-based business model but also the newcomers like Uber and AirBnB, according to some. These predictions are predicated on the fact that transactions are essentially free and hence cut out the middle-man when transacting between two parties, think driver and rider in the Uber business model, or the renter and owner in the AirBnB business. These are unlikely to come to fruition as easily as that, but you get the idea.

Areas that are more realistic and very interesting to see how they will develop are numerous and varied, with examples in the contract business, financial services (outside of cryptocurrencies), video games, digital book sales, supply chain and others. I’ll take look at a few here, to give you some ideas.

Contracts

Contracts could be administered, enforced and verified totally outside of human interaction using blockchain. This is purely theoretical for the moment as it relies on the use of Smart Contracts that are not widely implemented currently and as such their legal status has not been written in to law in most of the world. On a local basis, a blockchain-based contact between a supplier of services could take advantage without requiring a third party to verify use or abuse.

Financial Services

Aside from the failure of the larger schemes due to inefficiencies discussed earlier, blockchain can be used to do essentially the ledger tasks of smaller projects, speeding up and reducing friction in the banking sector. Backend settlements systems seem to be a target for blockchain compatibility.

Video Games

Modern video games are becoming more and more collaborative, just look at the popularity of Fortnite. Blockchain is said to be investigated to help keep track of digital assets both purchased and earn in massive online collaboration games.

Digital Book Sales

Currently ebook sales are dominated by two players, Amazon and Apple. There is talk of a blockchain implemented ebook store that by definition would bypass those their parties, resulting in possibly cheaper book sales.

Supply Chain

Several efforts and beta projects exist in the supply chain field; BiTA are working on supply chain standards, Everledger are using IBL’s blockchain services in addition to Walmart co-investing with IBM to monitor its supply chain.


Mostly theoretical

The underlying theme that is obvious when reading this issue, is that blockchain is largely theoretical in its uses, with many projects in progress but very few in active use on a mass level apart from cryptocurrencies like Bitcoin, Etherium, etc. It seems that this is unlikely to change in the very near future, largely for the reasons stated above, power consumption and transaction speed. Technology has a habit of overcoming difficulties like these, so it is worth keeping an eye on the advances over the coming years.


Reading List

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Plans for world’s largest cryptocurrency IPO shelved

Bitman Technologies (BT) were to IPO (Initial Public Offering) in September in what was expected to be the largest cryptocurrency IPO. However, the fall in the price of Bitcoin put a spanner in the works for BT. BT builds and sells all-in-one kits for cryptocurrency mining and had hoped to raise up to $3bn during the IPO. The company has holdings in both Etherium and Bitcoin and had seen huge losses of value due to the crashes in value since the beginning of 2018 — they are both riding at around 1/6 of their peak value.

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Bitcoin's Climate Impact Is Global. The Cures Are Local.

If you want to know more about the world of mining and its environmental effect, read this.

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How blockchain technology helps young Caribbean farmers access finance

A good illustration how blockchain can lend itself to initiatives on a small-scale, providing real benefits.


The Future is Digital Newsletter is intended to help you understand Digital Transformation and it’s impact on your business, I encourage you to forward it to people you feel may be interested in the subject matter.

Thanks for being a supporter. Have a great weekend.