Friday, August 18, 2017

Blockchain: New Frontiers

Blockchain is a technology that offers reliable by decentralized record-keeping. The best-known applications of "blockchain" technology are still the alternative currencies, of which Bitcoin remains most prominent. But it looks more and more as if the main near-term expansions of blockchain technology are not going to be about currencies, but instead relate to other kinds of ownership, transactions, and record-keeping.  A couple of recent studies emphasizing this theme are "How blockchain technology could change our lives," written by Philip Boucher, Susana Nascimento, and Mihalis Kritikos for the European Parliamentary Research Service (February 2017), and "Blockchain and Economic Development: Hype vs. Reality," written by Michael Pisa and Matt Juden for the Center for Global Development (CGD Policy Paper #107, July 2017).

Both papers offer a verbal and intuitive sketch of how the blockchain technology works. Here's a taste of the explanation from Boucher, Nascimento and Kritikos:
"Blockchain offers the same record-keeping functionality but without a centralised architecture. The question is how it can be certain that a transaction is legitimate when there is no central authority to check it. Blockchains solve this problem by decentralising the ledger, so that each user holds a copy of it. Anyone can request that any transaction be added to the blockchain, but transactions are only accepted if all the users agree that it is legitimate, e.g. that the request comes from the authorised person, that the house seller has not already sold the house, and the buyer has not already spent the money. This checking is done reliably and automatically on behalf of each user, creating a very fast and secure ledger system that is remarkably tamper-proof. Each new transaction to be recorded is bundled together with other new transactions into a 'block', which is added as the latest link on a long 'chain' of historic transactions. This chain forms the blockchain ledger that is held by all users. ..."
Thus, anyone can download the blockchain of all transactions. But who has an incentive to update and check the blockchain? Blockchain technology relies on "miners" to do this job. Miners need to spend computing resources to solve a complicated algorithm before they can add a block of transactions to the blockchain, and they are paid either by users of blockchain services or by the system itself. Again, Boucher, Nascimento and Kritikos explain:
"This work is called 'mining'. Anybody can become a miner and compete to be the first to solve the complex mathematical problem of creating a valid encrypted block of transactions to add to the blockchain. There are various means of incentivising people to do this work. Most often, the first miner to create a valid block and add it to the chain is rewarded with the sum of fees for its transactions. Fees are currently around €0.10 per transaction, but blocks are added regularly and contain thousands of transactions. Miners may also receive new currency that is created and put into circulation as an inflation mechanism.
"Adding a new block to the chain means updating the ledger that is held by all users. Users only accept a new block when it has been verified that all of its transactions are valid. If a discrepancy is found, the block is rejected. Otherwise, the block is added and will remain there as a permanent public record. No user can remove it. While destroying or corrupting a traditional ledger requires an attack on the middleman, doing so with a blockchain requires an attack on every copy of the ledger simultaneously. There can be no 'fake ledger' because all users have their own genuine version to check against. Trust and control in blockchain-based transactions is not centralised and black-boxed, but decentralised and transparent. These blockchains are described as 'permissionless', because there is no special authority that can deny permission to participate in the checking and adding of transactions." 
When blockchain is used for Bitcoin, the blockchain records the ownership of each bitcoin, and when each bitcoin is transferred to another user. But the users themselves remain (although sufficiently motivated law enforcement can sometimes find a way in). Bitcoin has been in the news lately because it has been experiencing a price spike. Here's the price of bitcoin in US dollars from Google Finance website. As you can see, the price of a bitcoin first soared above $1,000 back in 2013, sagged, slowly moved back to about $1,000, but then in the last few months has soared to above $4,000.

This recent spike,while it certainly gladdens the heart of those who already hold bitcoins, is actually part of the reason why bitcoin is not an especially good currency. Useful currencies are relatively stable in value! In most modern economies, traditional currencies typically allow transactions that are already relatively fast, secure,and cheap. For most people, it's not clear how they would benefit from using bitcoin for transaction purposes. Pisa and Juden explain (footnotes and citations omitted):
To usurp the role of national currencies, bitcoin would first need to fulfill some (though perhaps not all) of the core functions that money provides, including serving as a medium of exchange, a unit of account, and a store of value. Currently, bitcoin does none of these things very well: its extreme volatility prevents it from being a good store of value and unit of account, and retailers and consumers—who appear satisfied with the cost/benefit tradeoffs associated with using credit cards—have not accepted the currency widely enough to consider it a reliable medium of exchange. National governments also present an obstacle:  currently, no government allows taxes to be paid with bitcoin, which reduces the incentives for individuals and companies to use it.
"Even if national governments choose not to resist broader usage of bitcoin, there are questions about the technology’s ability to scale due to the speed of the network. Currently, the Bitcoin blockchain can process a maximum of seven transactions per second. To put this in context, Visa processes an average of 2,000 transactions per second and has a peak capacity of 56,000 transactions per second. Increasing the speed of the Bitcoin network could be accomplished through increasing block size. This is technically feasible, but some network participants have resisted it, since it would increase the cost of mining bitcoin and give more control to larger entities, leading to greater centralization of the network. Finally, there are concerns about the energy intensity of mining. Although estimates vary widely, some indicate that bitcoin mining could consume 14,000 megawatts of electricity by 2020, which is comparable to Denmark’s total energy consumption."
But although bitcoin and virtual currencies may not be likely to take over the money supply anytime soon, the blockchain technology can be adapted for a considerable array of other purposes. Here are some suggestions about these other purposes.

Ownership of Digital Media (as explained by Boucher, Nascimento, and Kritikos)
"When consumers purchase books and discs, they come to own physical artefacts that they can later sell, give away or leave as part of their inheritance. There are limitations to their rights, for example they should not distribute copies, and should pay royalties if they broadcast the content. In buying the digital equivalent of this same media, consumers know they will not gain ownership of a physical artefact, but many do not realise that they do not gain ownership of any content either. Rather, they enter into a licensing agreement which is valid for either a period of time or a fixed number of plays. These licences cannot be sold, given away or even left as part of an inheritance. Building a collection of legitimately-owned digital music, literature, games and films often comes at a cost similar to that of a collection of various discs and books with the same content. It is a substantial lifelong investment but one that cannot be transferred and that expires on death. While older generations might take pleasure in reliving the tastes and experiences of loved ones via the boxes of vinyl, books and games they left behind, today's children may not enjoy the same access to their parent's digital content. Could blockchain technology help resolve these and other problems with digital media? ... 
"The blockchain could be used to register all sales, loans, donations and other such transfers of individual digital artefacts. All transactions are witnessed and agreed by all users. Just like transactions in a bank account or land registry, artefacts cannot be transferred unless they are legitimately owned. Buyers can verify that they are purchasing legitimate copies of MP3s and video files. Indeed, the transaction history allows anyone to verify that the various transfers of ownership lead all the way back to the original owner, that is, the creator of the work. The concept could be combined with smart contracts so that access to content can be lent to others for fixed periods before being automatically returned, or so that inheritance wishes could be implemented automatically upon registration of a death certificate. ... Using blockchain technology in this way could for the first time enable consumers to buy and sell digital copies second hand, give them away or donate them to charity shops, lend them to friends temporarily or leave them as part of an inheritance – just as they used to with vinyl and books – while ensuring that they are not propagating multiple unlicensed copies."
Management of Global Supply Chains (as explained by Boucher, Nascimento, and Kritikos)
"Blockchain-based applications have the potential to improve supply chains by providing infrastructure for registering, certifying and tracking at a low cost goods being transferred between often distant parties, who are connected via a supply chain but do not necessarily trust each other. All goods are uniquely identified via 'tokens' and can then be transferred via the blockchain, with each transaction verified and time-stamped in an encrypted but transparent process. This gives the relevant parties access whether they are suppliers, vendors, transporters or buyers. The terms of every transaction remain irrevocable and immutable, open to inspection to everyone or to authorised auditors. Smart contracts could also be deployed to automatically execute payments and other procedures.

"Several companies, innovators and incumbents are already testing blockchain for record-keeping in their supply chains. Everledger enables companies and buyers to track the provenance of diamonds from mines to jewellery stores and to combat insurance or documentation fraud. For each diamond, Everledger measures 40 attributes such as cut and clarity, the number of degrees in pavilion angles and place of origin. They generate a serial number for each diamond, inscribed microscopically, and then they add this digital ID to Everledger's blockchain (currently numbering 280 000 diamonds). This makes it possible to establish and maintain complete ownership histories, which can help counteract fraud and support police and insurance investigators tracking stolen gems. It also allows consumers to make more informed purchasing decisions, e.g. to limit their search to diamonds with a 'clean' history that is free from fraud, theft, forced labour and the intervention of dubious vendors who are linked to violence, drugs or arms trafficking. ...

Wal-Mart, the world's largest retailer, is trialling Blockchain for food safety. It is expected that a Blockchain-based accurate and updated record can help to identify the product, shipment and vendor, for instance when an outbreak happens, and in this way get the details on how and where food was grown and who inspected it. An accurate record could also make their supply chain more efficient when it comes to delivering food to stores faster and reducing spoilage and waste.
International Financial Transactions (as explained by Pisa and Juden)
"The cost and inefficiency associated with making international payments across certain corridors present a barrier to economic development. Whether it is a business making an investment in a developing country, an emigrant sending money back home, or an aid organization funding a project abroad, moving resources from rich to poorer countries ultimately requires money to be sent across borders. ... [C]onducting  these transactions through the formal financial system can involve considerable cost and delay. Cross-border payments are inefficient because there is no single global payment infrastructure through which they can travel. Instead, international payments must pass
through a series of bilateral correspondent bank relationships, in which banks hold accounts at other banks in other countries. The number of such relationships that a bank is willing to maintain is limited by the cost of funding these accounts as well as the risk of conducting financial transactions with banks who lack strong controls to prevent illicit transactions ... 
"One consequence of the fragmented global payments system is the high cost of remittances, which are an enormously important source of development financing. Roughly $430 billion of remittances were sent to developing countries in 2016, nearly three times as much as  official aid. The global average cost of sending remittances worth $200 is 7.4 percent but varies greatly  across corridors: for example, the average cost of sending $200 from a developed country to South Asia is 5.4 percent, while the cost of sending the same value to sub-Saharan Africa is 9.8 percent (World Bank 2017).  ...
Small and medium-sized businesses face similar costs when conducting cross-border payments. Industry surveys suggest that approximately two-thirds of cross-border businesses are unhappy with the delays and fees associated with using traditional bank transfers for sending international payments ...
"Using a bitcoin-based company to send remittances to countries that have deep bitcoin exchange markets can be cheaper than using traditional MTOs. For example, sending a $200 remittance from the United States to the Philippines with currently costs 3 percent, while World Remit, an established MTO that relies on the traditional system of bank wires, charges 3.5 percent. However, in most corridors, bitcoin-based remittance companies have  not been able to offer fees that are substantially lower than traditional players. As a result, many have closed, while others have shifted to emphasizing business-to-business payments ..."  
Public record-keeping and land registries (from both sets of authors)

Boucher, Nascimento, and Kritikos write:
"The most immediate applications of blockchain technology in public administrations are in record keeping. The combination of time-stamping with digital signatures on an accessible ledger is expected to deliver benefits for all users, enabling them to conduct transactions and create records (e.g. for land registries, birth certificates and business licences) with less dependence upon lawyers, notaries, government officials and other third parties. ...
"The Estonian government has experimented with blockchain implementations enabling citizens to use their ID cards to order medical prescriptions, vote, bank, apply for benefits, register their businesses, pay taxes and access approximately 3 000 other digital services. The approach also enables civil servants to encrypt documents, review and approve permits, contracts and applications and submit information requests to other services. This is an example of a permissioned blockchain, where some access is restricted in order to secure data and protect users' privacy. ... 
"Several countries including Ghana, Kenya and Nigeria have begun to use blockchains to manage land registries. Their aim is to create a clear and trustworthy record of ownership, in response to problems with registration, corruption and poor levels of public access to records. Sweden is also conducting tests to put real estate transactions on blockchain, in this case to allow all parties (banks, government, brokers, buyers and sellers) to track the progress of the transaction deal in all its stages and to guarantee the authenticity and transparency of the process while making considerable time and cost savings.
"The Department for Work and Pensions in the UK have also trialled the use of blockchain technology for welfare payments. Here, citizens use their phones to receive and spend their benefit payments and, with their consent, their transactions are recorded on a distributed ledger. The aim of the initiative is to help people manage their finances and create a more secure and efficient welfare system, preventing fraud and enhancing trust between claimants and the government. The UK government is also considering how blockchain technology could enable citizens to track the allocation and spending of funds from the government, donors or aid organisations to the actual recipients, in the form of grants, loans and scholarships."
Pisa and Juden write:
"The idea of storing land titles on a blockchain has obvious appeal. Most importantly, sharing a land registry across a distributed network greatly enhances its security by eliminating “single point of failure” risk and making it more difficult to tamper with records. It could also increase transparency by allowing certified actors (including, potentially, auditors or mon-profit organizations) to monitor changes made to the registry on a near real-time basis, and enhance efficiency by reducing the time and money associated with registering property. ...
"A blockchain cannot, however, address problems related to the reliability of records. This is an obvious point but one that is often overlooked. As noted earlier, the blockchain is a “garbage in, garbage out” system: if a government uploads a false deed to a blockchain (either out of carelessness or deceit), it will remain false. This suggests that using the technology to store land records works best in places where the existing system for recording land titles is already strong. This was certainly the case in Georgia, which initiated a project with The Bitfury Group and the Blockchain Trust Accelerator in 2016 to register land titles on a blockchain. ... Bitfury’s pilot project in Georgia has reportedly been a success. By February 2017, NAPR had registered more than 100,000 documents and the Georgian government announced a new agreement with Bitfury to expand the use of blockchain technology to other government departments. The question now is whether this success can be replicated in less favorable environments. Bitfury will face this challenge in Ukraine where it recently reached agreement with the Ukrainian government to put all its electronic records (not just land titles) onto a blockchain."
Private and Validated Proof of Identity (as explained by Pisa and Juden, citations and footnotes omitted)

A number of countries have recently enacted digital identification systems for their citizens, including most notably India, but also Estonia, Pakistan, Peru, and Thailand. However, these are not blockchain systems, but rather a combination of ID numbers, biometric markers (like fingerprints or iris scans), and cryptography (where a person needs to know a private code). Governments are not likely to outsource the identification of their citizens to blockchain technology. The question is whether it might be useful to use blockchain to provide a private proof of identification that people might use for other purposes, alongside their government ID, while having greater control over their private information. The authors explain:
"Because of the weaknesses of centralized and federated ID solutions, and the belief that people should have greater control over their own personal data and the value derived from it, some ID experts have turned their focus to developing “user-centric” or “self-sovereign” systems. These systems aim to shift control to individuals by allowing them to “store their own identity data on their own devices, and provide it efficiently to those who need to validate it, without relying on a central repository of identity data.” Until recently such a solution seemed technically infeasible, but blockchain technology appears to make it possible.
"Several benefits arise from storing certified attributes on a blockchain. The first is privacy: Alice can control both who she shares her personal information with and how much information she shares. The second is security, as the absence of a centralized database eliminates single point of failure risk. The system is also more convenient, since it allows users to provide verified information with the touch of a button rather than having to access and submit a wide variety of documents. Finally, a blockchain provides an easy and accurate way to trace the evolution of ID attributes since each change is time-stamped and appended to the record preceding it.
"The idea of a self-sovereign ID system based on blockchain is close to becoming a reality. For example, SecureKey and IBM are now piloting a digital ID system in Canada using the Linux Foundation’s open-source Hyperledger Fabric blockchain. The project connects the Canadian government (including national and provincial government agencies) with the country’s largest banks and telecoms on a permissioned blockchain network. These participating companies and agencies play a dual role of certifying users’ attributes and providing digital services. The project is expected to go live in late 2017, at  which time Canadian consumers will be able to opt into the network to access a variety of egovernment and financial services by sharing verified attributes stored on a mobile phone."
Transparency and Coordination of Financial Aid (as described by Pisa and Juden)
"An example of the first model is an application called Stoneblock developed by the company Neocapita. Still in an early stage of development, the platform will allow actors along the development supply chain (including donors, recipients, implementing partners, and auditors) to simultaneously track information about how a project is progressing and the flow of funding. The company is also exploring the use of smart contracts that would trigger disbursement of funds tied to performance metrics. In most cases, human observers would report metrics onto a blockchain (e.g., reporting the number of children attending a school) but in others, electronic meters could play the same role (e.g., measuring the amount of water produced by a well). By allowing all participants on the network to view the same information at the same time, using a blockchain to share project data could dramatically reduce administrative overhead. Storing records on a blockchain would also make them essentially tamper-proof, thereby reducing the potential for misappropriation."
These papers include other possible applications: blockchain-enabled records of when a patent application occurred; blockchain-enabled voting; "smart contracts," which might involve provisions for payments related to in loans, insurance payments, or wills that can be automatically carried out when prespecified dates or conditions occur; and even talk of setting up "decentralized autonomous organizations" on blockchain that would own assets and could carry out a set of contractual commitments with humans, firms, and other autonomous organizations. The alternative currencies like bitcoin get the headlines, but my guess is that these alternative frontiers for the application of blockchain technology are going to be considerably more important very soon -- if they aren't more important already.

For a couple of earlier posts on blockchain and Bitcoin, see: