Episode 2: Blockchain

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Transcript of Audio:

Blockchain is the use of a distributed ledger with cryptographic security settings that allow for transparent record keeping validated through consensus.  If you would like to get deeper into the technological aspects of blockchain, there is a list of references below you are free to peruse.  Blockchain in the past few years has become known as the technology driving bitcoin and a slew of other cryptocurrencies that have emerged.  The ICO, or Initial Coin Offering, has become particularly popular this year with nearly 130 closed ICOs for the year and nearly 150 either currently in the field or on the horizon.  However, there are so many applications to blockchain that are just beginning implementation, so while I will touch on cryptocurrencies today they will not be the focus of the discussion.

Topics we will cover today:

  • Why blockchain works.
  • How cryptocurrencies replace cash
  • Security implications around sensitive data
  • Use cases: Things we’ve seen so far
  • An idealized future from Amanda’s head

As always, if you think I’m missing a notable point or have questions, comment below and I will try to follow up.  But before we get into any of that let’s cover the key points:

What: Today we are talking about blockchain, a distributed ledger system that uses cryptographic algorithms to ensure a secure and transparent method for keeping records.

Who: Big players in blockchain include Hyperledger (a consortium of companies including Accenture, Cisco, Fujitsu, IBM, Intel, JP Morgan, R3, and SAP among others), the Republic of Georgia with partner Bitfury, Consensus Systems, and of course Satoshi Nakamoto and the community of miners, developers, and users on bitcoin and any altcoins.  I will touch on a few of these in my use cases later on.

Why: While cryptocurrencies have gained media attention as of late, the idea of full scale distributed consensus is a way off.  I would argue that as the generation of Uber and AirBNB millennials were taught to share more effectively than others but adoption of blockchain large scale is a bit more of a leap than that both psychologically and technologically.  Also, blockchain has the potential to make real waves across all sorts of industries in a dramatic way. Think what the printing press did for the documentation of records, or what the assembly line did for operational efficiency.  If and when it gains traction, blockchain has true change potential.  That is why I label it as an outlier.

So that’s my thesis: Blockchain is an outlier because it is an agent for global socioeconomic change.  Believe me?  If not, keep listening.  If you do, keep listening anyways.  My dad always says ‘Don’t start something you don’t plan on finishing.’ Ah parents.

Why Blockchain Works:

First, let’s talk about why blockchain works, because anything that is going to be a global agent of change has to work before it’s a global anything.  There are three reasons this outlier holds water:

It works off of systems we humans already use, namely trust.  Any transaction you make and any record you use is valid because you trust it or you trust the institution it comes from.  You trust that the credit cards used to buy fidget spinners at your specialty fidget spinner emporium are authorized by a bank and that bank is backed by the government and you trust the government so sure you will accept this swipe of a plastic card in return for this strange plastic widget.  Or when you go to the records office to receive the death certificate for great aunt Mae, you trust the time listed is correct because a doctor signed it and it was certified by the government and you trust both of them.  Or you don’t, I don’t know you.  The point is, blockchain takes that trust and spans it across a sweeping community, and oh yeah adds proof of work (defined protocols we’ll get into in a minute) in case you trust no one.  So, you no longer have to trust in a single person or institution, you just have to trust that based on the defined protocols all of these people can’t all be wrong.

It has built in security.  Due to the very nature of blockchain, built through proof of work, each block is both publicly transparent and privately held.  What that means is that anyone can see the records of a particular block but that block is still owned by one person and can only be changed or transacted by one person.  Proof of work comes from the need to ‘mine’ the blocks, solving cryptographic puzzles through brute force processing.  When completed, this results in a block, a public key, and a private key.  Both keys are unique to the individual block and used together decrypt and allow access to that user’s block.  A public key can be used alone by any user in the system to verify the validity of that block.  Private keys, if kept private by the owner, will keep any stored data within the block the property of the owner.  This means that all blocks are secure through asymmetrical encryption and much more secure than systems without it.

It creates industry agnostic operational efficiencies.  Due to the inherent trust found in blockchain protocols, there can be a lot of disposing of the middleman so to speak.  If you’ve ever gone through real estate and/or divorce proceedings (so many similarities) frustrated as your funds sit in escrow while the lawyers figure out what’s what, you could be helped by blockchain.  Or if you’re sick of waiting in line at the county clerk’s office because your dog ate your social security card and you need a new one.  Lengthy, costly, and frankly annoying administrative tasks such as these are sidestepped through blockchain use.  So are things such as verification of goods and delivery process through blockchain.  Imagine never having to wait for that fidget spinner you ordered ever again because someone lost something somewhere but no one knows who or what or where and now there’s infighting and I just want my fidget spinner oh god!  Exactly.  So as the world and our demands on it speed up let’s try to let fewer things fall through the cracks and maybe save a little (a lot) of money in the meantime.

How Cryptocurrencies Replace Cash:

Okay.  So now that you know why it works let’s talk about cash.  Cryptocurrencies have been the most public use of blockchain, but really what bitcoin and altcoins are is the infrastructure behind all the great things that can be done with blockchain.  Remember that trust we were talking about earlier?  Well that applies to money too.  It’s been at least more than a century since currency has been based on any type of physical wealth.  A US dollar is worth a US dollar because the US government says so.  That goes for any currency across the globe.  The market dictates just how much that dollar is worth, for example if it can buy one egg or twelve, but it is a US dollar because it was minted by the US treasury and is backed by the full faith and credit of the US government.  The only difference with a cryptocurrency is that instead of a singular backer there is a distributed consensus over the validity of a block.  Not only does that create a more transparent and less costly system, blocks are much much much more difficult to counterfeit than say, a US dollar bill.  A number of countries including Singapore and Australia are looking into the creation of their own cryptocurrency but what I see as a more likely outcome is coins used in markets based on the adaptability of their protocol within that marketplace, not the physical borders they belong to.  For example, bitcoin may not be a great fit for the advertising space due to latency issues but has great potential in areas like legal proceedings.  However, an altcoin may come to light that has significantly lower latency and is a natural fit for advertisement buys.  Whichever way it falls out, move over cash you’re losing your job to automation.

Security Implications:

We already talked about security implications when we discussed why blockchain is an outlier, so I won’t spend a ton of time on it.  I do want to reiterate that implicit design of the technology ‘makes it virtually impossible to add, remove, or change data without being detected by other users’ (Goldman Sachs).  I also don’t want to get into protocol structures, but there are ways as the owner of a block to shield certain data that may be sensitive or proprietary from other users.  For an in depth and technical discussion on this and all things blockchain check out the Coursera listed below.  Do note that the recordings in this Courseraare a bit out of date as they happened before bitcoin’s hard fork.

Use Cases:

Before we get into the idealized world in my head full of puppies and seamless operational capabilities, I want to touch on a few use cases.

  • The Republic of Georgia and their partnership with The Bitfury Group
  • P2P energy transfers in your driveway
  • The ridding of education admin fees
  1. In April of 2016 the Republic of Georgia announced a partnership with The Bitfury Group to digitize land ownership records. In February of 2017 the government determined the proof of concept had been successful and signed agreements with Bitfury to expand the services to most land related contracts negotiated or recorded through the government.  The only change that has been made to the citizens’ process is the ability to check who owns any given land title, dispelling confusion around double selling and vacant property.
  2. This month (August 2017) the company eMotorWerks launched a blockchain beta test driven, literally, by the daily need for power. A hindrance to the adoption of electric vehicles is the short distances they can go before needing to be charged again.  Particularly in areas where there are few public chargers with long distances between them, this can be a significant deterrent when choosing electric or gas.  Val Miftakhov, CEO of eMotorWerks, may have found a solution in EV dense areas.  Interested users can sign up to host their own personal electric vehicle chargers in their driveway to nearby drivers looking to charge while they shop or grab lunch.  Transactions are made through the Ethereum blockchain, an alt coin that holds market cap second to bitcoin. While the Share & Charge platform is in beta and the specific need will diminish as EV battery range increases, the test will show how we react to secure P2P transactions on a daily basis in blockchain.
  3. Sony teamed up with IBM and Hyperledger Fabric 1.0 to develop a blockchain for education. Specifically, the software stores and manages educational products such as diplomas, degrees, and tests to create a ‘digital transcript’.  This can be used to ease communication between schools if a student should transfer, will prevent fraud, and ensure security while still providing pertinent access to interviewers and advanced education institutions a student may be applying for.  The system can be integrated to absorb historical data from other providers and has the potential in the short term to cut down on administrative costs.  Long term I expect to see widespread adoption of this or other similar applications in the education space that allow a student to maintain an educational fingerprint that follows them throughout their educational career.  This could not only help with transfer of students from grade to grade or institution to institution but pinpoint through analytics when a student may be falling off track and how best to help them.

As I mentioned before, cryptocurrencies are the infrastructure that allows for any number of applications to be built on blockchain.  But quid pro quo transactions will not be the only way the technology is used, as seen in the example of education.  Users will vary vastly across industries and types, and will rock the very bedrock of our socioeconomic system similar to the invention of the microchip; slowly at first but with exponentially growing magnitude.

My Idealized World:

With that, we’re coming to a close.  I want to leave you with a few personal opinions about the future of blockchain and what it means for a person’s everyday life.  Long term blockchain could change the entire fabric of our society.  It will be gradual, if it even happens, but because of the key differentiator of decentralization blockchain has the potential to turn on its head everything from how you buy groceries to how land masses are run.  A decentralized, consensus driven state is not built in the physical world, though it may extend there.  Economics will instead be built on the coin you use, the industry and value-driven communities you exist in.  Blockchain has the potential to mean borderless societies, the end of financial institutions, and an acceleration towards zero marginal cost.  This technology can support great change.  But as humans we are the ones who determine what society looks like, so our decisions will ultimately be the drivers of that change.

Thanks for listening today, this has been episode 2 of Three Deviations Out.  I hope you enjoyed it, please leave any questions or comments below.  Next week we will be talking about quantum computing, communication, and teleportation and how what Albert Einstein described as ‘those spooky actions’ of electrons may enhance scientific fields and daily interactions.

All the Best,

Amanda

 

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