Blockchain as a building block

A nice piece written by my colleague @Michiel Hegemans

Blockchain is in the news a lot lately, yet I feel most people do not understand what it is or what it can do for our society. I believe most people think about the high BitCoin price when they think about blockchain and wish to somehow profit from that as well. However using a technology or trading currency are two very different things.

Blockchain, the technology behind BitCoin, is designed to allow two individual entities, that do not trust each other, to perform transactions. They don’t need to trust in each other to do transactions, because they trust in the blockchain system. However this is only a transaction of BitCoins, and it makes very little sense to trade BitCoins for BitCoins, in most cases a person would buy goods, services or other coins in exchange for BitCoins. So in reality the system is used by an exchange or vendor of goods and services, which is known to deliver (trusted), to receive payment by a client (untrusted party).

For example, because the blockchain is a distributed ledger we now have indisputable proof that we transferred BitCoins to a place that is allegedly a pizza joint. It could be something else entirely and when you realise that, it is virtually impossible to have your transaction refunded. This is important to realise, because the fact that the party receiving the transaction of BitCoins does not have to worry about the transaction being refunded later, does not automatically mean that the promised goods or services are delivered. Therefore not automagically solving all trust issues in the world, which is what some misguided blockchain enthusiasts want you to believe.

Let's do a short case study.

So how can it help our society? When fraudulent people buy goods and resell them, say concert tickets, they often buy them with stolen credit card information and the person who owns the stolen credit card often refunds illegal purchases leaving the company that initially sold the tickets with a chargeback which effectively earns them no money (and sometimes even results in a negative sale). The fraudulent person reselling those tickets experiences no downside to this transaction, other than possibly getting caught eventually.

Will blockchain be a solution to the previous problem? We first must understand the problem in order to solve it. Reselling tickets itself is not the problem, this will still happen even when the transactions are not fraudulent, so we’re not trying to solve that problem. The problem is with people using stolen information to buy something. The concept of a credit card is flawed in my opinion, since you need to provide a website you may or may not trust information so they can withdraw money from your account on your behalf. It does not specify which amount of money they can withdraw and what for. In the Netherlands electronic payments are more secure, since websites can send a payment request to your bank for a one time payment and they do not need to store information that can possibly be abused by others to make more payments. This system is called iDeal (https://en.wikipedia.org/wiki/IDEAL). So handing out information to do payments on your behalf is a bad idea.

When you do a transaction on the blockchain you do not hand out any information to do the payment, all the other party sees is that you made a transaction. So this does indeed solve the problem of stolen credit card information.

However much like a pin code for your debit card, in order to make a transaction on the blockchain you need a private key. Which serves roughly the same purpose as a pin code (only you know it), however it’s far harder to guess, and thus far more secure.

Unfortunately most people are not aware how this technology works and may be in danger of storing their private key with a third party and having the ease of a more familiar system, a username and password log in. Hence circling back to the original problem, sharing information you need to make a payment being in someone else’s hands.

However this is not a flaw in the blockchain system. Unlike credit card payments, with blockchain transactions there is no need to give away your information. People merely need to know what they are doing. Whether people are sufficiently prepared to take on this responsibility is a topic for another discussion.

Alright, we talked a lot about helping the businesses in our society. But I feel like doing business with another parties always requires some form of trust that the supplier will deliver their goods or services and this trust cannot be gained from a technical solution. So while it may certainly help, it will not do a whole lot in the bigger picture.

So how can this now famous technology help us out? The trust problem comes from the difference between on-chain (paying BitCoin) and off-chain (getting the pizza) transactions. Everyone can see you paid the pizza joint, but no one can see you actually got the pizza.

It would make more sense to do transactions of which both sides are on-chain. Enter smart contracts, another concept that people tell us will solve all problems we have in the world, but will it?

A common example of smart contracts is an artist selling music. Because this artist puts his music in a smart contract (somehow), it will forever be marked as theirs and when you purchase this you transfer money to the artist, and not to some record label. This record label is called a middleman, and will be discussed later.

Now we can buy music directly from the artist through the blockchain, but unfortunately the music is digital and nothing, except perhaps my moral standards, is preventing me from copying this collection of bits and redistributing it off-chain, so the problem of piracy is not fixed. Could there perhaps be other problems that are not fixed by blockchain? I’m sure you can think of other things.

This last thing may seem like I do not think blockchain is a good idea, which is not how I intended to write this article, so let’s move to something more positive. Which situations can benefit from total transaction transparency?

A good candidate would be democracy. It is very important that every person’s vote is counted, and counted exactly once. But modern democracies aren’t totally transparent, people need to be able to vote anonymously, so there must be no way to track your vote to you as a person. Lucky for us the same technology used to launder BitCoins (making them virtually untraceable) can also be used in this process to be anonymous. It’s not often in our history that something evil is being used from something good, it’s generally the other way around. Keep in mind that this laundering is done partially off-chain so while blockchain helps a great deal, it cannot do it alone.

Another good candidate is a charity organization. They are sometimes in the news, because the money they receive magically disappears or other questionably financial transactions are made. If people can track transactions made by these organizations they can gain more public trust, because people can see the money actually goes to the intended target.

The refugee crisis is another situation where the blockchain shines. People who have to flee their country can have their bank accounts frozen by the government, effectively cutting them off from all their money. This is of course not possible with bitcoins since the data is stored on a globally distributed network controlled by no one. Sometimes organized anarchy works.

In line with refugees, homeless people who are eligible to receive support from the government are also a situation where it could be helpful. Banks often require you to have an address, but when you’re homeless you don’t have an address. BitCoin wallets don’t require you to have a physical address, so everyone with access to the internet can have a wallet and receive transactions.

Something we hold very dearly, freedom of speech, is also something where blockchain and its immutability can be very useful. Not being able to delete someone’s statement can be powerful to counter censorship. You can always verify that someone made public statement, whether or not that statement is true is still for you to decide.

Do I believe blockchain is useful? Yes, I certainly believe that in the correct situation blockchain can be a powerful tool to force people to be honest. I do not believe it will automatically instill trust in whatever system claims to adopt blockchain. It is certainly not true that simply because you cannot delete something it makes it true, which often seems to confuse people who attempt to use blockchain to counter fake-news.

I do not believe blockchain is a tool to cut out the aforementioned “middleman”. This middleman is often portrayed as some evil person or company that’s only out to make money. While it is certainly not untrue that they are out to make money, it is a business after all, they do actually add value. Our society is advancing because we have people that can specialize in certain areas. A farmer is great at growing food, but not so great at fixing his tractor. This specialization is what allows us to put a person on the moon and cure diseases. It is only logical that you require people in the middle who form a chain so specialists can be linked together. Yes, a bank is a corporation that makes you pay for every transaction that you make, but in return you get a relatively safe place where you can store your money as well as the ability to have transactions refunded. Middleman in most cases do add meaningful value to society. That does not mean there are certain situations where they are indeed there to simply make profit. But cutting them out all together is certainly a bad idea and will lead us to a society where we all have micro jobs. (https://en.wikipedia.org/wiki/Micro_job).

Blockchain is not the holy grail but just another building block, like we know the internet.

Credits to & written by: Michiel Hegemans