What is blockchain technology?
Blockchain is a distributed ledger technology that evolved from the internet of information and represents a second phase of the internet. Whereas the first era of the internet democratized the exchange of information, blockchain promises to democratize the exchange of real value. Blockchain emerged in late 2008, in the midst of the global financial crisis. Satoshi Nakamoto released a new protocol for a “A Peer-to Peer Electronic Cash System” and created a digital currency or cryptocurrency called Bitcoin based on block chain technology, with the first Bitcoin transaction being realized on January 12, 2009. Cryptocurrencies differ from traditional fiat money in that it is not issued by a national state. They are not stored in a bank vault or a credit recorded in an electronic file somewhere; it is a global spreadsheet or ledge of all transactions which leverages the resources of a large peer-to-peer network to review and approve each bitcoin transaction. But blockchain is more that cryptocurrencies, blockchain has more applications and investors realize commercial potential and money is entering at fast pace.
Blockchain has five properties that makes it a potentially transformative and disruptive technology:
A protocol establishes a set of rules in the form of distributed mathematical computations that ensures the integrity of the data exchanged among a large number of computing devises without going though a trusted third party. Each block chainblock is run on computers provided by volunteers around the world, there is no central database to hack into, corrupt, or shutdown. This means that things of high value—money, stocks, bonds, intellectual property rights, music, car, and even votes —can be stored and exchanged without an institution or middleman.
Blockchain uses a two-key authentication system to maintain virtual security.
- Inclusive and transparent
In the case of public blockchain, anyone can view all the transactions that reside on the network so no person or institution can hide a transaction. Since blockchain is open source, anyone can download it and use it. Satoshi imagined a world in which any person can interface with the block chain though a “simplified payment verification mode” that can be used on a mobile device. No documentation or physical presentation of proof is required to be trusted or to gain access.
Within minutes all transactions are verified and, cleared, and stored in a block that is linked to the preceding block, thereby creating a chain. Each block must refer to the preceding block to be valid. This structure permanently timestamps and stores exchanges of value, preventing anyone from altering the ledger.
Since block chain is a distributed ledger representing a network consensus of every transaction that has ever occurred, the block chain must be preserved in its entirety. Storage matters a great deal. It allows the provenance of products, art, diamonds to be traced easily.
The value of this new technology is that it allows trusted transactions to occur directly between two or more total strangers, authenticated by mass collaboration on a network of interlinked devices, and motivated by collective self-interest, rather than by profit-motivated corporations or governments motivated by maintaining power and may be interested in surveilling its citizens or stifling dissent. Blockchain in short eliminates middlemen.
These properties allow developers to elaborate applications for a number of different purposes.
Actual and Potential Applications
* Financial Services
Bitcoin is the first and most prominent application of block chain technology as an e-payment system. Bitcon was created in January 2009 by Satoshi Nakamoto as a digital currency independent of any central authority, transferable electronically, and with very low transaction costs. A stable and widely accepted crypto currency stands to revolutionize e-commerce, money transfers, and even letters of credit. Cryptocurrency poses a challenge to traditional banking. Besides Bitcoin there are other cryptocurrencies such as Litecoin, Ethereum, Ripple, Peercoin, and Namecoin. To date, the value of cryptocurrencies have fluctuated widely as they struggle to gain widespread use. Nonetheless, the top ten cryptocurrences have a market capitalization of US$98.8 billion as of June 2017 but this amount is still a miniscule value of the total value of financial assets worldwide.
- Retail and Services
It can be used in retail and services. Any merchant who accepts digital money as payment can exchange their goods and services. Persons and companies involved in a supply value chain can use private block chains to reduce transaction costs in their business relationships and make payments and transfers along the chain as well as pass information in a very transparent manner. For creative artists and craftspersons, using block chain along with digital media management technologies may allow them to directly market their wares, reduce piracy of electronic media, and assure quick and accurate payments.
- Digital Identity
Identity theft is emerging as a bane of the digital age. Currently taking precautions against identify theft and attempting to restore identity after it has been compromised is an $18.5 billion annual business and growing yearly according to Distil Neworks. Using blockchain technologies would make the tracking and managing of digital identities both secure, efficient and low-cost. Identity could be uniquely authenticated in an irrefutable, immutable, and secure manner and would revolutionize online commerce, passports, e-residency, birth certificates, wedding certificates, and work-related or government issued IDs.
- Digital Voting
Two of the biggest hurdles to electronic poll place machines and online voting is the fear that security can be breached and that votes can be manipulated. Using blockchain, a voter could verify if his or her vote was successfully transited and remain anonymous and because of the distributed ledger technology it would not be possible to alter a vote once cased. The ability to hold e-voting could help reduce the high rates of non-participation in leading western democracies and reduce travel and wait times for countries with mandatory voting. In weak and factionalized democracies where the temptation to rig votes is high, block chain would help preserve the sanctity of the vote and reduce fraud and subsequently reduce the disruptions caused by recounts or prolonged protests against voting exercises that are perceived as tainted.
- Legal Contracting and Notaries
Legally binding programmable digitized contracts can be entered on a block chain and can be programmed to release funds using the bitcoin network once terms and conditions are met, reducing the need for lawyers and intermediary organizations such as banks. Notary publics can be replaced by having a digital proof of existence that allows users to upload a file and pay a transaction fee and to have cryptographic proof of it included on the bitcoin blockchain. The block timestamp becomes the record’s timestamp.
Despite the tremendous potential of the technology, however, if governance and stewardship issues are not resolved, the block chain technology may fail to live up to expectations. The stakeholders in the system are usually innovators, venture capitalists, financial institutions, program and application developers, internet activists, academics, and NGOs. They all have to combine and come to some basic agreement on three levels and create self-policing and regulating bodies. Since no state actors are active in this realm, the stakeholders have to collaborate, identify common interests, and create incentive to act for the communal good. Just as the early internet pioneers rejected hierarchy and acted based on rough consensus and constantly improving the code they wrote, this generation of the internet will need leadership and broad cooperation.
- Platform: Standards or protocols are needed to govern scalability (block size versus average bandwidth enjoyed by users), energy consumption, stability (switching from proof or work to proof of stake), and robustness of the network infrastructure in order to assure the long-term success.
- Applications: Some oversight is needed to ensure user-friendly interfaces and how to increase the pool of skilled developers.
- Legal structure for stewardship: The ecosystem needs a governance body to coordinate on matters such as interoperability, privacy, security, protection of identity, and actions to reduce the amount of legal uncertainty surrounding emergent technologies. They need to spurr more investments in research and confront incoming challenges from legacy operators and hackers that exploit open source coding to commit terrorist acts. On one hand, premature and heavy handed top down legislation or regulation could stifle the development of the block chain technology. On the other, a high level of disorganization and anarchy could prevent widespread adoption and deployment of the technology. As an open platform, users can use the technology for nefarious purposes that could be viewed as violating common core values and draw the scrutiny of public authorities. Most recently the hackers behind WannaCry ransomware that affected 160,000 computers worldwide and caused an estimated $4 billion in damages, demanded payment via Bitcoin because of the anonymity of the system. Large corporations with vested interest in a closed paradigm, wealthy dictators bent on repression could appropriate applications and networks they control for their own narrow interests. Whether a formal bottom up multistakeholder governance structure, an invisible, informal, collaborative force, or attempts by state-backed institutions to impose limits remains to be seen. The block chain innovation is only eight years old.
Possible Applications in the Caribbean
In the Caribbean, blockchain technology could be applied in the following areas:
(1) Migrant remittances where a reduction in transaction costs could help some of the most remittance dependent countries such as Jamaica, Haiti, Dominican Republic, and Guyana
(2) International business transfers facilitation as many of the regional banks face the loss of correspondent banking relationships (de-risking) with major money center banks due to a cost benefit analysis: small market size versus the high costs of compliance associated with anti-money laundering statutes
(3) Voting, especially in jurisdictions with contentious elections such as Haiti where complaints about voter irregularities are common
(4) Smart contracting that could reduce the cost of doing business and revolutionize public sector contract and procurement systems
(5) Digital identities in a region that both is a high source of out bound migration and where the majority of economies are tourist dependent and receive millions of visitors each year. A better checking of identities will facilitate both emigration and reduce the hassle to process visitors.