In my previous post, I covered the governance implications of Bitcoin. This post delves into the underlying technology behind Bitcoin — blockchain. Almost everybody agrees blockchain is the real game-changing innovation that enabled Bitcoin’s success. However, these are still early days for the technology. Apart from Bitcoin, most blockchain projects have yet to survive the proof-of-concept stage. Nonetheless, the technology remains a powerful idea that merits discussion. Successful use of blockchain has far-reaching implications for improving efficiency and transparency both within government and beyond.
So what is Blockchain? Most proponents would summarize blockchain as a decentralized, immutable, programmable ledger system. But this is still an impenetrable mouthful of buzz words! Let me unpack each of these terms separately.
Decentralized: There is no single central database. Instead, every transaction is recorded on every ‘block’ of a chain. Any block can be used to verify digital records. This makes blockchain a powerful platform for transparent management of public services for reasons I’ll discuss below.
Immutable: The decentralized nature of the database makes blockchain immutable. In order to erase a record without leaving a trace, every single ‘block’ would have to be modified. This makes it extremely difficult to manipulate transaction history. Publicly verifiable blocks with a permanent record of all transactions lend themselves well to automating auditing services.
Programmable: Blockchain can be programmed to execute transactions automatically, if certain pre-decided conditions have been met. Pre-programming transactions is, of course, not a new idea. However, a pre-programmed ledger of assets where transaction history cannot be manipulated is much more secure for transactions involving multiple parties. ‘Smart contracts’ are often cited as the most exciting application of blockchain.
The above qualities make blockchain a technological solution to what economists call ‘the fundamental problem of exchange.’ The fundamental problem being this — every economic exchange requires a certain level of trust. Any time one party initiates a transaction, it has to hope the other party will uphold their end of the bargain. So far, society has solved ‘trust’ problems by relying on third-party intermediaries. Civil courts, banks, and real estate property agents essentially mediate transactions between individuals. Third parties verify that each party owns the assets it is attempting to exchange and then execute the transfer of assets.
A well-designed blockchain can automate this entire process and eliminate the need for third-party mediation. Ownership of assets can be digitally verified and automatically executed when agreed upon conditions are met. Blockchain can reliably perform this service since its transaction history cannot be privately manipulated. With a perfectly maintained record of transaction history, authenticated blocks can also be used to generate real-time audit statements. As we begin to digitize assets, blockchain can therefore dramatically reduce costs for executing and validating transactions. Bitcoin’s digitization of currency was just an early example of the technology’s potential. The world is beginning to move on — from maintaining academic records to trading securities, there are many ongoing efforts to use blockchain to remove the need for third-party verification.
Governments are starting to take notice as well. The chief scientific advisor to the UK government recently published a report on the potential of blockchain to support innovation. Some countries are going one step further and beginning to implement blockchain for public services. The Republic of Georgia and Honduras are attempting to build land title registries based on blockchain technology. Ukraine and certain political parties in Australia are experimenting with using blockchain to secure voting.
Conceptually, blockchain makes a lot of sense for governments. Blockchain’s ability to prevent manipulation of records solves a key data management problem for public institutions. Transparent, immutable data systems limit the scope for personal discretion — the primary source of rent-seeking opportunities in the public sector. Digital asset ledgers can also reduce the burden citizens bear to prove their eligibility for public programs. Lack of reliable records often acts as a barrier for the poor attempting to access public services. Digital registries would also allow the poor to use their assets as collateral, and improve their access to formal credit markets. This is precisely why some countries are attempting to build land records on blockchain.
Ultimately, however, blockchain is a data management solution. Its success depends entirely on the quality and usability of the end product. Bitcoin’s biggest achievement was to scale a decentralized data system where every user followed the same protocol. Blockchain will need to pull off a similar act of creating a scalable product that thrives on transparency and public participation. Unfortunately, many financial institutions are limiting their investments in blockchain to creating private chains for internal purposes. This does not contribute to the larger goal of establishing chains that can be publicly verified. Some reports suggest that, at this rate, mainstreaming blockchain may take more than 10 years. The greatest gift blockchain could offer the world is a secure, common protocol for individuals to execute transactions. However, a common language is only possible if the protocols are public. Governments have a large role to play in shepherding this technology and leveraging its full potential for the public good.