Most people’s first contact with the word blockchain is probably in relation to the cryptocurrency Bitcoin. Blockchain technology and the currencies based on it (Bitcoin is just one of them) really started gaining ground at the beginning of this decade. When was the exact moment that people started taking notice of these cryptocurrencies? It was probably when someone using the pseudonym of Satoshi Nakamoto published a white paper in 2008, explaining for the first time what exactly Bitcoin is.
2008 was also the year when the collapse of the US investment bank Lehman Brothers caused a stock market crash and set off a global financial crisis that went on for years. The crisis demonstrated to the world the inherent risks hidden in the financial system – primarily due to the centralisation of financial institutions.
Since the early 2010s, cryptocurrencies built on the blockchain have developed into a significant force on the capital market (10 billion USD market capitalisation and around 5 million users) and are thought to have the potential to radically transform the financial sector.
Because basic blockchain technology and the code of the Bitcoin protocol are both open source, they were picked up by numerous developers and further refined. Since then they’ve been transforming so rapidly it’s hard to keep up. Today you can find blockchain technology in many other areas, including in the fields of digital rights management, logistics, eGovernment and the IoT (Internet of Things). It’s also being used to make it easier to decentralise the production of energy.
This article explains the technology behind blockchain and suggests ways it could be used to help us build a fairer and more sustainable economic system.
How Does Blockchain Work?
Blockchain is a decentralised file where information about transactions are recorded. It is managed on several computers at the same time. A transaction describes the exchange of a digital value between the participants of a network, for example the transfer of an amount of money or property rights. All of the new transactions are verified approximately every ten minutes, and a new “block” of saved data is added to the constantly growing chain.
The transactions are encrypted via a so-called cryptographic hash function. These are basically one-way mathematical functions that can map strings of characters of any length to a bit string of a fixed length (otherwise known as hash functions). One-way here means that the mapping can only happen in one direction and it’s practically impossible to work out what the input value was or recreate it by looking at the output value. It therefore cannot be inverted.
Before a transaction can be added to a block, it has to be validated by the majority of the users of the network – every blockchain has a specific protocol for this. This validation ensures that nobody in the network is able to manipulate the transaction. There’s no central institution in charge of validating transactions – instead it is carried out by people throughout the network, the so-called “miners”.
Miners are people who – to put it simply – offer their computer’s processing power to validate transactions and create new blocks. The more miners that participate, the tougher it is for the Blockchain to be manipulated in any way. The system distributes the power throughout a whole peer-to-peer network without any central control system. In return for their work, the miners receive a Block Reward – new Bitcoins, for example.
As soon as a transaction has been validated, it is permanently saved in a block and can no longer be changed. As well as transactions, each block contains encrypted information about all previous blocks. That creates a blockchain that can’t be tampered with (or at least, not without a huge amount of effort) and allows you to trace the history of all transactions right back to the first block.
As well as saving the transactions, in principle the blockchain can record any kind of information – although it’s particularly suited to working with confidential or security-critical information.
Decentralisation, Immutability and Transparency: Blockchain’s Strengths
Decentralisation, immutability and transparency are the key concepts of blockchain technology. The combination of these three fundamental concepts is what makes the blockchain so secure.
- The information is spread throughout the network on the “distributed ledger” of transactions, meaning there’s no central database that could break down or be attacked.
- Altering the record of a single transaction is virtually impossible for one single individual, because it would require comandeering the whole network. In order to manipulate the blockchain, all of the people involved who have access to a copy of the database have to come to an agreement and make the same changes.
- The transactions are public and can be easily verified and scrutinised by everyone in the network.
So How Can the Blockchain Be Used to…
1. Revolutionise the sharing economy?
Blockchain technology can be used in various different fields and developers are constantly coming up with new ways to apply and expand on the existing technology. One example is smart contracts – these allow people to exchange units of value (money, property, services etc) automatically when specific conditions are met, without the need for middle men. The users in the network define when and how the transaction is to take place and the contracts are coded in such a way that no individual can stop or control the operation.
With smart contracts, you can make sure that a digital asset is only issued for a particular purpose, or an amount of money is only transferred when a certain service is rendered – it ensures instant payment on delivery of services or goods, and it’s virtually foolproof, with the contracts executed on all computers within the network.
One platform that is emerging for the implementation of these smart contracts is Ethereum, designed by the developers Vitalik Buterin, Gavin Wood and Jeffrey Wilcke. In the past few years it has developed into a serious contender to the Bitcoin network and allows for the construction of so-called DAOs (decentral autonomous organisations). These are virtual organisations that are entirely based on blockchain technology and use a global peer-to-peer infrastructure, run through the rules encoded in the smart contracts.
A real world example of smart contracts and the Ethereum blockchain in action is the company Slock.it, which has dedicated itself to the task of revolutionising the sharing economy by automating the contractual process of renting real objects (apartments, cars, bicyles, washing machines etc.) within the Ethereum Blockchain.
Smart Contracts allow each user to use their smartphone to open and close a lock for a specific amount of time after they have paid the fee specified in the contract.
It’s a win-win situation for both renter and rentee – the owner of the object benefits from extra security (they can issue a different contract for each user and have each contract deleted after a specific time, meaning the object can’t be used by multiple users all using the same single payment) and the rentee gets instantaneous access as soon as the payment has gone through (so no waiting around for someone to bring you the key or check their bank account, before you’re allowed to get going).
Here’s a video showing it in action.
2. Help electricity flow more easily?
The innogy initiative Share & Charge that kicked off at the end of Setember 2016 combines blockchain technology with a sharing approach and tackles an issue that is still thought to be one of the biggest obstacles to the future of electromobility: the lack of effective charging infrastructure. Share & Charge works on an airbnb style system that is built on the Ethereum Blockchain, allowing customers to charge their EVs at any charging station – including privately owned ones, at people’s houses – with complete ease.
With the help of smart contracts, details can be processed between the vehicle and the charging point during charging, meaning the user doesn’t have to enter into a contract with a local energy provider in advance – they can just roll up to another person’s house, plug in and start charging.
The EU recently drafted legislation that included widespread support for plans to allow citizens to generate and sell their own green electricity – using their own solar panels, for example, or wind turbines – putting consumers in the driving seat of a revolution in the way electricity is produced, consumed and traded.
The move from fossil fuels to renewable energy is inextricably linked to the decentralisation of energy production – which means that anything that promotes the democratisation of energy supplies is an important step in the right direction.
3. Tell you where your food really comes from?
One major way that blockchain could help improve environmental sustainability is its potential to improve the transparency of supply chains: Where did my fish come from? Was this wood produced sustainably? Is this apple really locally grown?
According to Swedish scientist Guillaume Chapron, environmental crises are also linked to a lack of trust between actors within our globalised world – consumers and producers are more distanced from each other than ever, meaning there’s less transparency and more potential for deception somewhere along the supply chain.
Blockchain can be a game changer here, by restoring some of that lost trust. In the blockchain the algorithm is responsible for ensuring that all of the transactions are verified and cannot be changed at a later date.
The International Programme for the Endorsement of Forest Certification Schemes – that according to its own account has certified 265 millions of hectares of forest worldwide – has run a pilot project looking at the blockchain as an alternative method of following the path of wood products – from raw resource to ready-to-use final products.
Another pilot project from the company Provenance used the blockchain to document the journey of tuna – from the area in Indonesia where it was fished out of the sea, all the way to the end consumers. Fishermen registered on the service sent a simple SMS to register their catch – this simultaneously created a digital value in the blockchain.
Every transaction in the supply chain from one person to the next created a permanent, unchangeable entry in the Blockchain that allowed the journey from fisherman to end consumer to be securely traced back later on.
4. Help eliminate corruption in the developing world?
Wherever transactions have to be documented efficiently and securely, and increased decentralisation can create trust, blockchain technology has huge potential for new, future-oriented business ideas. One area where it might be particularly effective is when it comes to fighting corruption in developing (and already developed) countries.
The traceability of financial transactions on the blockchain’s open ledger technology and the use of smart contracts could be useful when it comes to reducing the misappropriation of loans, charity donations and Foreign Direct Investment by corrupt governments. When it comes to ensuring charitable donations reach the correct recipients, BitGive is already working on a solution – that they’re calling GiveTrack – where the blockchain helps donors track where each donated dollar really ends up.
Blockchain technology could also be used to help ensure the integrity of elections. With each individual vote recorded on a public ledger, the blockchain could help make the electoral system more democratic in countries where public votes are often subject to bribes and corruption.
So… are there any drawbacks?
The first challenge is a very fundamental one. How can we disseminate knowledge and understanding of how blockchain, smart contracts & co actually work, what they’re capable of and how people can use them to make money? Other challenges include how to develop suitable business models, the scalability of blockchain applications (and the transaction speed associated with large-scale projects) and how to optimise usability.
And ecologically speaking, one of the blockchain’s biggest issues is its huge energy consumption. The validation and encryption of transactions is already getting through huge amounts of energy. A single bitcoin transaction has been calculated to consume 5000 times that of a typical credit card payment and a recent article estimated that it could be using as much electricity as the whole of Denmark by 2020.
In an attempt to make the blockchain less of an energy hog, the Ethereum community has come up with a new consensus mechanism, the so-called Proof-of-Stake. In contrast to Proof-of-Work, which relies on energy and real-life resource use, where all participants of a network have to carry out a complex computer calculation (the “mining” we mentioned earlier), Proof-of-Stake occurs when a miner puts up a stake (locking up an amount of the coins that they own) in order to verify a block of transactions. PoS doesn’t require such complicated calculations, making it much less resource-intensive.
As Ethereum founder Vitalik Buterin said himself on the Ethereum blog,
“Proof-of-Stake is much more environmentally friendly; while Proof-of-Work requires miners to effectively burn computational power on useless calculations to secure the network, Proof-of-Stake effectively simulates the burning, so no real-world energy or resources are actually ever wasted.”
For a straight-forward visual guide to how all of this works, check out the video below.
Following a long development period and lengthy discussions about security, Etherum’s founder Vitalik Buterin will soon test out a hybrid system of both Proof-of-Work and Proof-of-Stake under real-life conditions. We can expect a lot of developments in the future around the consensus debate in order to more successfully unite both security and sustainability in the blockchain.
Author: Tobias Weiß (2017)
Translation, Localisation & Update: Marisa Pettit (October 2017)