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What Makes Blockchain a Technological Revolution?

The idea of distributed ledgers existed for quite a while. Introduced in 1991 by Stuart Haber and W. Scott Stornetta, the notion of a publicly-posted growing list of records offered the potential to have a fully-auditable, cryptographically-secured database available for public applications. However, it took the advent of bitcoin to popularize the concept.

While some have discounted the concept of blockchain as being hype or modern snake oil, there are others that see the potential in this unique data structure. This approach towards establishing a workaround around the inherent Byzantine fault found in a trustless environment provides opportunities some might see as miraculous or the fount of a larger technological revolution.

This article will look at five ways blockchain is a technological revolution. The potential to redefine and reimagine our relationships with data, money, and each other creates the possibility that blockchain can – like the Internet – usher in a new wave of personal and collective productivity.

 

It is a trustworthy way to share data in a trustless word.

Imagine this, if you would: you was asked to participate in a social experiment with 12 other individuals. Each of you are in your own room, separate from each other. You are allowed to send or receive a one-way message to your fellow participants; you are not allowed to directly respond. The point of the experiment is to conduct a single vote, either yes or no. If everybody say “yes,” the group will get to share a cash prize. However, if even one participant says “no,” the prize is forfeit. The group can only vote once. The situation is complicated by the fact that the experiment organizers have indicated they may pay one or more of the participants to ruin the vote.

Under these circumstances, how do you ensure a consensus vote? How can you trust anyone?

A possible way around this is this: each voter, one at a time, would – instead of voting for themselves – send their votes to all of the other participants to “verify” it. If the verifier receives a vote that matches the consensus, and he/she has not voted yet, he will submit the vote. If the vote does not meet the consensus, if he/she already voted, or if someone else has already voted for that participant, he/she does nothing. The next participant sends his/her vote and the process repeats. Theoretically, this would ensure a universal yes vote, even though there is no trust between the participants.

This example is a version of the Byzantine Generals Problem, in which one asks how an attacking army can find consensus to attack when both communication and allegiance are compromised. The Byzantine Generals Problem reflect the key problem behind digital data collaboration.

In a perfect world, trust would not be an issue. Everyone would want to ensure the integrity of the system and would do everything possible to assure confidence in the system. Data would be verified without questions of motivation. No one would act against the integrity of the network. There would be no bad actors.

Unfortunately, this is not a perfect world, and in a permissionless system, there can be no trust. There will be those that seeks ownership or control of the shared data for their own ends, and would accept a compromised network as the price of satisfying their own needs. The way to think of this is a candy bowl full of candy with a sign that says “Take only one.” While there would be some that faithfully follows the rules, you must assume that there will be at least one that grabs a handful of candy, especially if he/she assumes no one is watching.

The way around this is to:

  • Make sure everyone can see what is going on,
  • Make every piece of candy accountable,
  • Record those involved in each “transaction” and how much candy was taken each time, and
  • Allow other candy-takers to audit the official reporting.

A blockchain does all of this without the need of a third party. By serving as a “witness” to each transaction, the blockchain establishes trust in a trustless environment.

 

It is a way to tokenize and homogenize data.

Data is a funny thing. The world runs on data; it is present in the vehicles we drive, the devices we use to amuse ourselves, the way we communicate with each other, the way we work, even the way our appliances communicate with us. We are surrounded and inundated with data today, yet we have yet to come to an agreement on what shape that data should take.

Every system has its own way of storing and formatting data. These differences can mean that two different systems cannot share data without some type of medium or exchange between the two. As data systems grow more complex, developing hybrid interfaces become complicated and costly.

If the data systems exist in two different location or are managed by different owners, creating this hybrid interface could be impossible. This is what happened during the rollout of Healthcare.gov.

Boggled by legislative hurdles, the healthcare.gov team was forced to create a system that can draw information simultaneously from IRS, SSA, HHS, and individual insurance companies’ data servers in a seamless way. The challenges were immense and on launch day, the system crashed fabulously. While the government was able to get the system going, the episode showed that getting opposing systems to work together can be a challenge, even when you have the best minds working on it.

If there was a way to take the data from these divergent systems, scrub them so that they have the same format, and create a way to query the data in an agreed-upon, singular way, you would have a modular data system where systems can connect to it and have access to the data, granted it complies with the arrangement’s input and output rules. A blockchain could be this arrangement.

Instead of storing the data itself, for example, the blockchain could store the location of data, based on queried search terms. A smart contract could retrieve the input/output requirements of a certain file server and make a query based on it. The smart contract can then read the retrieved data and format it into a blockchain-standard format before passing it to another smart contract. The new contract could then deliver the data package to the servicing app on the requester’s desktop, which would then unpackage the data and make it readable for the user.

In this way, independent and separate components can share data in a trustless way, given that the components and users involved have permissioned access. Searches are transparent, trust is inherent and absolute, and the system can function with minimum third-party intervention. As data networks get bigger, a blockchain can be the answer to avoiding having to create larger and more complicated interfaces.

 

It is a way to manage resources without the need of a manager.

Imagine this: you are in a busy city and you are looking to rent a car. All of the lots are empty, but you notice in some of the neighborhoods, some of the cars have a sticker that say “Rent me! Go to this website to get started.”

When you go to the website, the app asks for your driver’s license and credit card information. After doing this, the app announce you are approved to rent and a car is available down the street from you. When you arrive, all you need to do is press “I have arrived” button on the website, the website transmit the unlock code for the door, and you retrieve the keys in the glovebox. In less than ten minutes, you just rented a car with no human intervention.

Was that magic?

No, it wasn’t, but it felt that way. What you experienced was a blockchain-powered rental fleet in action. When the idea of a smart contract was introduced, it was equated to a vending machine. “Many kinds of contractual clauses (such as collateral, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with, in such a way as to make breach of contract expensive (if desired, sometimes prohibitively so) for the breacher,” computer scientist Nick Szabo wrote in 1997.

“A canonical real-life example, which we might consider to be the primitive ancestor of smart contracts, is the humble vending machine. Within a limited amount of potential loss (the amount in the till should be less than the cost of breaching the mechanism), the machine takes in coins, and via a simple mechanism, which makes a freshman computer science problem in design with finite automata, dispense change and product according to the displayed price. The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor. The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas.”

Taking the vending machine concept further, it is feasible to make a smart contract not only resemble a vending machine, but act like one. A vending machine functions by:

  • Qualifying the client. This is done by the customer inserting money into the machine or reading a scannable card,
  • Accessing inventory levels. A vending machine will indicate or show its inventory levels via a message or a “Out of Stock” light,
  • Taking the order. The machine will take the order and deliver the item accordingly, and
  • Report inventory status. Higher-end vending machines will report its inventory to the right authorities for replenishment.

For our rental app, our well-programmed smart contract could imitate the same function set as our theoretical vending machine:

  • Qualifying the client. The smart contract can test to see if the client has a customer account with up-to-date driver’s license, credit card, and reputation information. If not, the smart contract would refer the client to an external app to create the account. Likewise, the smart contract will reject the client if there are red flags on the account, such as an expired or suspended driver’s license, insufficient funds on the credit card, or a poor reputation score,
  • Accessing inventory levels. After qualifying the client, the smart contract (or an independent smart contract, following a hand-off) will see what cars are available, what cars are due to return soon, and what cars have yet to be “verified.” When a car is returned, the smart contract will ask a nearby member to report on the return status of the car and to clean it, if necessary, for a rental credit. The smart contract detects the client’s location and show “verified” vehicles near him/her that are available for rent,
  • Taking the order. The smart contract or a different smart contract will remove the selected car from the inventory. Once GPS location data suggest that the client is near the car, the smart contract will contact the unlocking service and transmit the appropriate code, unlocking the car,
  • Report inventory status: Once the client “returns” the car, he/she “checks out” with the external app. This will tell the smart contract to add the vehicle to the inventory, find a nearby member (who is not the client) to “verify” the vehicle, and mark it ready for rental. If there is reported damage from the “verifier,” the smart contract will contact the client to report the possibility of additional charges.

With a smart contract being able to be adapted to any circumstance or product, such “vending machines” may be the wave of the future.

 

It is a way to automate back office operations without replacing legacy equipment.

A large organization typically require a large back office to keep things moving. This could include a dedicated human resource staff, an administrative staff, replenishment and ordering staff, warehousing and inventory staff, and more.

But, what if all of this could be replaced by a computer program?

Just as a blockchain can be used to make a “smart” vending machine, it can be used to automate observation-based calculations, such as payroll and prediction-based ordering. For example, if your office’s time management system was connected to a smart contract that also monitor employee records’ in a tokenized form, it can determine automatically that employee’s payroll and facilitate its distribution.

Similarly, training, benefits enrollment, and reimbursements can be handled via tokenization. This allocation of automated tasks is a convenient function of smart contracts and the compartmentation that comes with a distributed ledger system. As the format of this data and the smart contracts being used can be changed easily, this system saves in the cost of replacing legacy equipment or licensing new software.

Better, such a system is near-infallible. It is resistant to being hacked or changed without permission, it cannot be easily lost through hardware failure or intentional negligence, and it is easy to audit. A blockchain-system offers a level of security and transparency that is not easily manageable with a traditional system. In offices with multiple sites or which coordinates with external firms, this security is essential.

 

It is a way to rethinking wealth.

The use for cryptocurrency most people are familiar with is cryptocurrency. The dream of e-currency has led many to imagine cryptocurrency as being the fount of a better world. Patrick Young once said, “The governments of the world have spent hundreds and hundreds of trillions of dollars bailing out a decaying, dickensian, outmoded system called banking, when the solution to the future of finance is peer-to-peer. It’s going to be alternative currencies like Bitcoin and it’s not actually going to be a banking system as we had before 2008.”

The idea of tokenizing data creates the possibility of conveying wealth. This can be expressed as either a function of the rarity and demand each token bears, or it could represent a set amount of a commodity – such as a share in a profit-bearing property or business, a physical asset, shares of stocks, or a set amount of fiat currency. Even if a token is not meant to have monetary value, a utilitarian token’s association with a potentially successful platform may be enough to give the token significant worth.

This possibility bears the potential to redefine destinies. Not-for-profits can fundraise in a new and transparent way. Those that have no access to banking now have a new monetary infrastructure to use. Businesses can raise millions in a matter of minutes, creating new channels of seed capital.

Of all of the uses for blockchain, however, cryptocurrency is the weakest. As it is demand-based, its price will always fluctuate and it is too prone to bad actors to be a reliable wealth base. However, tokens’ capability to convey wealth offers unique possibilities. For example, cryptocurrency can be used to resolve the problems with real-time gross settlement.

Cross-border payments can be a dicey proposition. As it involves banks working together to deliver a payment transnationally, it is subject to excessive fees, backlogs, and potentially lost payments. As maintaining large networks of correspondent banks is expensive, many of the larger banks have closed its networks in less profitable areas, increasing the need for “hand-offs” and increasing user cost and wait times.

“The complexity of cross-border transactions brings with it a relatively high failure rate,” a 2016 report from consultancy firm McKinsey & Company reads. “A 2015 study by Traxpay indicates that about 60 percent of business-to-business (B2B) payments require some kind of manual intervention, each taking at least 15 to 20 minutes. Major variations in account structures, messaging and bank systems generate far more corrections, investigations, returns and stalled payments than are seen in domestic payments or in payments where one party controls the transaction from beginning to end. Over 90 percent of the resulting costs are incurred in banks’ efforts to manage counter-party bank relationships in the back office, rather than in the technologies and networks that handle the value transfers between banks. As a result, the cost of handling international payments is counted in dollars, not cents.”

A blockchain can help resolve this. By tokenizing the cross-border payment, it becomes possible to transfer the payment peer-to-peer, similarly to an email. A payment that can cost 25 percent of the total fee and take days can be transmitted for pennies in a matter of minutes.

Blockchain offers a potential of redefining how we relate to money. From loan origination and management to commodity clearing to credit management, blockchain can change everything. Such is the miracle this rethinking of data offers.

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