Blockchain as a foundation for the future
If online exchange is nothing more than sending digits back and forth, then why couldn't a crooked participant in a system send the same digits more than one time? He could. It would actually be very easy to do so, and it would produce unlimited digital fraud, resulting in the downfall of the system.
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Any system of online exchange must solve this challenge. The obvious solution is to use a trusted third-party who is responsible for keeping track of all transactions. The third-party creates a ledger, reconciles it, and is the voice of truth in the system.
It's a reasonable solution but has the following problems:
- Slow clearance of transactions
- Single point for hackers to attack
- Expensive infrastructure
When bitcoin was created, these problems were recognized, and a better approach was sought.
Satoshi solved the double spending problem by rethinking the role of the trusted third-party. In short, the role was broken into thousands of parallel pieces and dispersed to a crowd. The innovation that allowed this was the blockchain.
How a Blockchain works
Blockchain technology consists of two parts; a ledger and a crowd of third parties. A block in a blockchain is a group of transactions, recording the parties involved, the amount, and the time. In the bitcoin system, it is reconciled every ten minutes. Each block is then identified with a unique identification (hash) and chained to the blocks that have been previously reconciled. An important note is that the identities of the parties involved in the transactions are represented only as private keys, which are cryptographically secured and are not identifiable.
The difference between this method of reconciliation and a conventional system is that the third parties are not trusted. Trust is embedded in the crowd as a whole, while trust toward individuals within the crowd is completely agnostic. Currently, the bitcoin system has over 6,000 third parties, which are called nodes in the system.
If the third parties agree that the block is legitimate, it is approved and linked to the previous chain of blocks. The database holding the blockchain copies to all participants. While there is no official or trusted copy of the database, there is a mathematical method to judge if individual instances of the blockchain database are legitimate. If necessary, this can lead a crowd member to update their copy of the database so that the most trusted instance stays evergreen.
Why join the crowd?
An incentive is needed in order to get thousands of entities to participate in a reconciliation crowd. In bitcoin, the incentive comes from the mining process, which pays successful participants in bitcoin and is the ad nihilum creation process for bitcoin, analogous to bank loans or central bank borrowing in conventional currencies.
Since the creation of bitcoin will eventually stop, the incentive will eventually need to move to a transaction fee. The structural advantage of blockchain means that even with transaction fees, costs will be significantly lower than a conventional system. This also means that other applications can use blockchain technology.
Blockchain is a breakthrough solution for the trust at a distance problem. Therefore, any transaction system facing this issue is a potential application. This includes financial instruments such as:
- Cash movement
- Credit card payment
- Stock trading
- Real estate
It also includes non-financial applications as identification management, control of electronic files, and voting. Two interesting examples can be used to illustrate.
London-based startup Everledger is digitizing diamonds. The system will allow transactions in the stones to be recorded in a global system, securing the authenticity and history. A basic blockchain system can be bare-bones, including nothing more than the parties, transaction amount, and a timestamp. Since a blockchain is (at its core) simply a database, the amount of descriptive information that can be appended to each transacted item is limitless.
Everledger is taking advantage of this database property and describing valuable diamonds well beyond the four C's. Each stone is defined by forty properties. For example, a cut diamond can be thought of as three pieces; pavilion (lower part), crown (upper part), and girdle (between the other two). Finding many diamonds that have the same pavilion height is common. Finding diamonds that have the same pavilion height and same crown height is much less common. By the time 40 aspects are described, the stones are unique.
Under the current trading system, diamonds which are not uniquely described are fungible and can be traded without barriers. One estimate is that 65% of fraudulent gem transactions are not detected. Creating a digital fingerprint can tackle the problems of fraud, theft, and unethically sourced diamonds.
Everledger has a B2B business model, which will eventually be supported by access fees for diamond dealers and others in the diamond logistics chain. The interest of these parties is protecting the integrity of the product. Eventually, this method could support enhanced certification and offer further certainty for consumers.
While Everledger started with a focused on diamonds, it is extending its technology. A recent announcement revealed a partnership with Vastari, an international fine arts consulting and management firm. Protecting the provenance of world-class art is the focus of this new venture. Future plans of Everledger include managing the logistics chain of high-end luxury goods to combat fraud. The common thread in the work of Everledger is accurate descriptions of valuable good to ensure their identity be establishing uniqueness.
Merchandise in global trade for 2015 totaled $18.5 trillion, carried in over 50 million intermodal containers. Each shipment must manage custody, tariff, and a host of other legal and regulatory constraints. A single shipment can change hands over a dozen times and have over 200 paper documents associated with it. In short, this antiquated system may be at its limit to accommodate a significant increase in activity.
CargoChain, a project under development led by Dominik Schiener, was recognized as a top innovation in the Shanghai Blockchain Hackathon. The goal is to use blockchain technology to improve the efficiency, reliability, and integrity of international trade. The system has three major components resting on a blockchain; digital trade documents, a chain of custody system with physical data, and smart contracts.
These three components integrate the major domains of international trade; compliance, condition and position of goods, and legal agreements. It also links them into a single seamless system, connecting these domains at natural touchpoints.
If the information seamlessly followed the cargo, the shipment could be safer and quicker.
Are you already registered for our Blockchain event?
Come to Yacht Utrecht and join us on September 28th. You can register by sending your invitation to email@example.com. For more information read the event information through the link below (the event will be Dutch spoken).
The blockchain revolution comes from a few characteristics of this technology:
- Automated actions, prompted by fulfillment of preset conditions
- Ability to link a large number of parameters to an identified item
- Networked validation (allowing trust-less truth)
While these characteristic arose from the need to solve the singular problem of reconciliation of bitcoin, the solution taken in a general context is applicable to a host of applications. In the coming years, the extent of change will become clear. Considering the types and varieties of applications that have been seen to date, it is likely that blockchain is not a refinement but the foundation of a new information system.
The ultimate result will be the replacement of trust, an increase in efficiency, and a reduction of third parties - along with the transaction costs and delays associated with them. All of these results point towards increased economic efficiency and a future of greater wealth.
"New Kids on the Blockchain" Shermin Voshmgir - TNW Conference 2017
"The Rise and Rise of Bitcoin" Nicholas Mross - Documentary
https://soundcloud.com/a16z/blockchain-bitcoin - Podcast