Easing into Blockchain

Blockchain. Bitcoin. Smart Contracts. If you’ve spent any time reading up on the subject, you’ll know it often goes down one of two rabbit holes: dense technical discussion or fervent visions of a utopian economy. 

So let’s not do that. This article aims to provide an accessible explanation of the problem blockchain solves and some practical applications for how it’s already being used in commercial applications. 

The technology first emerged as the underlying platform for bitcoin, the original ‘cryptocurrency’. Cryptocurrencies are digital currencies that are decentralized (not controlled by any organization) and are not tied to a government-issued currency or underlying asset. Making an online purchase using a cryptocurrency like bitcoin is pretty much the same experience as using PayPal. The difference is what’s going on behind the scenes. 

As with bars of gold, fiat currency or a handshake, trust is central to a cryptocurrency transaction. With a ‘bearer instrument’ like a gold coin or $20 bill, there is common trust between parties as to its value, and agreement that the person in possession of the asset - the bearer of the instrument - owns it. 

When we make ‘traditional’ digital transactions using a credit card or an intermediary like PayPal, our trust is reliant on a network of financial institutions to move funds from our account to someone else's. We trust in banks and credit card companies (and we pay them dearly) because they provide a reliable and convenient means to make cashless purchases. 

Blockchain provides an alternative means to establish a similar - or superior - level of trust without ANY central authority. No banks, no governments, no corporations - and (in theory, though not often in practice), no fees. The cryptocurrencies you’ve probably heard about - Bitcoin, Ether, ZCash and a dozen others - are all run on blockchain platforms. Let’s take a look at how they work.

Blockchain applications use a ‘distributed computing’ platform where all computers running a given blockchain-based application participate in keeping track of information. The information is stored in a series of connected ‘blocks’ with new blocks being created as user activity generates more information. Think of this stored information like an accounting ledger, one that keeps track of new accounts being added, how many dollars each person has in their account, and details of every transaction between accounts. 

Almost all of the digital economy to date has relied on financial institutions to maintain these ledgers for us. Blockchain obviates this dependancy by distributing copies of the ledger across the network, meaning hundreds of thousands of copies of the ledger exist, and each ‘block’ of data in the ledger is cryptographically signed by the block that preceded it. It’s complex but quite elegant, and it means that transactions recorded in the blockchain are immutable: once data is written into a block it’s impossible to hack or modify it. 

While cryptocurrencies like bitcoin have garnered most of the attention to date, the real potential of blockchain is in what are known as ‘smart contracts’. First proposed in a 2013 whitepaper written by a 19-year-old University of Waterloo dropout named Vitalik Buterin, the Ethereum platform advanced the idea that blockchain could do more than securely store lists of transactions that external applications could verify. It could also run software in the blockchain itself, in the form of decentralized applications, or dapps. 

A smart contract is the part of these applications that defines how they operate, performing many of the same functions that lawyers, brokers and banks do today. Smart contracts can be written to define the complex terms and regulations of international financial trades and ensure all financial regulations are met - all at a fraction of the settlement time and with none of the cost of current institutional solutions.

This is exactly what Vancouver’s BTL Technologies is doing with a pilot program currently underway in Europe. A distributed application running on BTL’s Interbit blockchain is managing a complex cross-border energy market, with embedded smart contracts executing energy trades in compliance with all regulations, record keeping requirements, data management, and contract settlement without significant human intervention. 

New York financial services company R3 has developed their own distributed ledger platform and has many of the world’s largest banks already on board. The Corda distributed ledger (which isn't actually a blockchain) functions like a automated clearing house, processing transactions—settlements, transfers or swaps between huge financial institutions at near-instantaneous speed and at a vastly reduced cost. More importantly, Corda ensures permanent, trusted record keeping and managed visibility into details of the transactions themselves. Regulators and the directly involved parties would have full access to transaction details, while competing institutions might be limited to restricted or delayed data.

Since you’re reading this post, let’s extend this idea to the publishing industry. Many of the challenges that publishing faces are a result of revenue models that have not adapted to the patterns of digital consumption. 

In the relationship between a writer, a publisher and a distributor, each has a stake in the value of the content that is produced. Imagine each article or ebook, when published, contains an embedded smart contract that requires the consumer to have a connected ‘wallet’ and charges the reader as content is consumed. Revenue is then immediately divided and distributed (within a few minutes) to the publisher, the distributer and the author according to the terms of the smart contract. Since cryptocurrencies support incredibly small micropayments (roughly 1/1000 of one cent) with zero transaction costs, all sorts of business models are possible here.

Just around the corner are platforms like the Mist browser project that have blockchain authentication and payment built in. Once you’ve ‘signed in’, access to streaming content, software services, wireless data consumption, videoconferencing and pretty much every digital service you can imagine will be available via a wide range of frictionless micropayment models. 

Most importantly, blockchain provides trust. It provides proof of identity, proof of access and proof of payment in a way that everyone associated with a transaction can agree on. It can do this without the traditional providers of trust - e.g. financial institutions - and can distribute revenues fairly and near-instantaneously on every individual transaction. 

Another way to leverage this trust is in identity management. Last year Toronto’s SecureKey received a $27M investment from Canada’s 6 biggest banks to fund development of a digital identity ecosystem that will be rolling out across North America in 2017. SecureKey builds on the one widely-used and highly secure identity platform consumers use most frequently - their online bank account - to facilitate secure registration and login services. With a blockchain securely storing trusted customer info behind the scenes, SecureKey offers triple-blind security: your bank never knows what service you’re signing into, the service doesn’t know which bank or trusted provider is being used to sign in, and SecureKey never sees any of the actual data. SecureKey’s Concierge service has been used by the Canada Revenue Agency since 2013 and currently serves over 7 million Canadians.

For certain there are still challenges with blockchain and cryptocurrencies. Operating entirely outside of established monetary system it’s expected (and healthy) to have some skepticism about the stability of any decentralized currency. And the applications where blockchain platforms can provide incredible value are systems where critical information and vast sums of currency change hands every day. Not the sort of thing anyone will jump into before they understand how the damn thing works. 

But make no mistake. This does work, and it is the future.

We are biologically predisposed to try to fit new ideas into existing constructs, and this often limits our ability to accept the potential of new technology. Blockchain is one of the rare quantum leaps forward that breaks a previously intractable limitation on commerce and identity services. Its potential is already huge, and we’re only getting started.

 - March 6, 2017