How blockchain technology could change our lives

Blockchains are a remarkably transparent and decentralised way of recording lists of transactions. Their best-known use is for digital currencies such as Bitcoin, which announced blockchain technology to the world with a headline-grabbing 1000% increase in value in the course of a single month in 2013. This bubble quickly burst, but steady growth since 2015 means Bitcoins are currently valued higher than ever before. There are many different ways of using blockchains to create new currencies. Hundreds of such currencies have been created with different features and aims. The way blockchain-based currency transactions create fast, cheap and secure public records means that they also can be used for many non-financial tasks, such as casting votes in elections or proving that a document existed at a specific time. Blockchains are particularly well suited to situations where it is necessary to know ownership histories. For example, they could help manage supply chains better, to offer certainty that diamonds are ethically sourced, that clothes are not made in sweatshops and that champagne comes from Champagne. They could help finally resolve the problem of music and video piracy, while enabling digital media to be legitimately bought, sold, inherited and given away second-hand like books, vinyl and video tapes. They also present opportunities in all kinds of public services such as health and welfare payments and, at the frontier of blockchain development, are self-executing contracts paving the way for companies that run themselves without human intervention. Blockchains shift some control over daily interactions with technology away from central elites, redistributing it among users. In doing so, they make systems more transparent and, perhaps, more democratic. That said, this will not probably not result in a revolution. Indeed, the governments and industry giants investing heavily in blockchain research and development are not trying to make themselves obsolete, but to enhance their services. There are also some wider issues to consider. For example, blockchain’s transparency is fine for matters of public record such as land registries, but what about bank balances and other sensitive data? It is possible (albeit only sometimes and with substantial effort), to identify the individuals associated with transactions. This could compromise their privacy and anonymity. While some blockchains do offer full anonymity, some sensitive information simply should not be distributed in this way. Nevertheless, although blockchains are not the solution for every problem and even if they will not revolutionise every aspect of our lives, they could have a substantial impact in many areas and it is necessary to be prepared for the challenges and opportunities they present. This report provides an accessible entry point for those in the European Parliament and beyond who are interested in learning more about blockchain development and its potential impacts. In doing so, the aim is to stimulate reflection and discussion of this complicated, controversial and fast-moving technology. The report is non-sequential, so readers are invited to choose the sections that interest them and read them in any order. The section immediately below presents an introduction to how blockchain technology works. The subsequent eight sections each present two-page briefings about how it could be deployed in various application areas, its potential impacts, and its implications for European policy. Finally, a concluding section presents some overall remarks and potential responses to blockchain development.

How does blockchain technology work?

Before attempting to understand how blockchain ledgers work, it is worth taking a look at traditional ledgers. For centuries, banks have used ledgers to maintain databases of account transactions, and governments have used them to keep records of land ownership. There is a central authority – the bank or government office – which manages changes to the record of transactions, so they can identify who owns what, at any given time. This allows them to check whether new transactions are legitimate, that the same €5 is not spent twice and houses are not sold by people who don’t own them. Since users trust the manager of the ledger to check the transactions properly, people can buy and sell from each other even if they have never met before and do not trust each other. The middleman also controls access to information on the ledger. They might decide that anyone can find out who owns a building, but only account holders can check their balance. These ledgers are centralised (there is a middleman, trusted by all users, who has total control over the system and mediates every transaction) and black-boxed (the functioning of the ledger and its data are not fully visible to its users). Digitisation has made these ledgers faster and easier to use, but they remain centralised and black-boxed. Blockchain offers the same record-keeping functionality but without a centralised architecture. The question is how it can be certain that a transaction is legitimate when there is no central authority to check it. Blockchains solve this problem by decentralising the ledger, so that each user holds a copy of it. Anyone can request that any transaction be added to the blockchain, but transactions are only accepted if all the users agree that it is legitimate, e.g. that the request comes from the authorised person, that the house seller has not already sold the house, and the buyer has not already spent the money. This checking is done reliably and automatically on behalf of each user, creating a very fast and secure ledger system that is remarkably tamper-proof. Each new transaction to be recorded is bundled together with other new transactions into a ‘block’, which is added as the latest link on a long ‘chain’ of historic transactions. This chain forms the blockchain ledger that is held by all users. This work is called ‘mining’. Anybody can become a miner and compete to be the first to solve the complex mathematical problem of creating a valid encrypted block of transactions to add to the blockchain. There are various means of incentivising people to do this work. Most often, the first miner to create a valid block and add it to the chain is rewarded with the sum of fees for its transactions. Fees are currently around €0.10 per transaction, but blocks are added regularly and contain thousands of transactions. Miners may also receive new currency that is created and put into circulation as an inflation mechanism. Adding a new block to the chain means updating the ledger that is held by all users. Users only accept a new block when it has been verified that all of its transactions are valid. If a discrepancy is found, the block is rejected. Otherwise, the block is added and will remain there as a permanent public record. No user can remove it. While destroying or corrupting a traditional ledger requires an attack on the middleman, doing so with a blockchain requires an attack on every copy of the ledger simultaneously. There can be no ‘fake ledger’ because all users have their own genuine version to check against. Trust and control in blockchain-based transactions is not centralised and black-boxed, but decentralised and transparent. These blockchains are described as ‘permissionless’, because there is no special authority that can deny permission to participate in the checking and adding of transactions. They can also be described as embodying social and political values such as transparency and the redistribution of power. It is also possible to set up ‘permissioned’ blockchains, where a limited group of actors retain the power to access, check and add transactions to the ledger. This enables ‘mainstream’ actors such as banks and governments to maintain substantial control over their blockchains. Permissioned blockchains are less transparent and decentralised than their permissionless counterparts and, as such, they embody somewhat different social and political values.

1 Currencies: the vanguard of blockchain technology

While currencies are just one of several possible application areas of blockchain technology, they are by far the most popular. Likewise, while Bitcoin is just one of many currencies implemented via a blockchain, it is by far the most well-known. Many recent initiatives have focussed upon the more wide-ranging possibilities of blockchain technology, but it is rare to find any mainstream discussion of blockchain without some reference to Bitcoin or, minimally, to blockchain-enabled currencies. Since currency applications dominate discussions about blockchain and represent the most mature and well-known applications, they have great influence upon the development of blockchain technologies more broadly. Here follows a brief discussion of how blockchain applications for currencies work and some of their implications. However, since there are already several accessible guides and discussion pieces on this topic, the focus will be on how Bitcoin’s dominance of the blockchain field could affect wider development of the technology and other applications of distributed ledgers.

How do they work?

Bitcoin was launched by Satoshi Nakamoto, a pseudonym for the mysterious and elusive publisher(s) of an article describing how cryptography, combined with a distributed public ledger, could be used to implement a digital currency without a central authority to authenticate payments. Traditionally, people can exchange money with those they do not know because both actors trust a third party, usually the validity of a banknote or an intermediary such as a bank or currency exchange. Nakamoto’s system has no hard currency and no intermediary, but creates a trustworthy system through innovative use of cryptography and peer-to-peer networking. When one user sends Bitcoin to another, the transaction’s details (such as sender and receiver addresses and the amount of funds transferred) are broadcasted to the Bitcoin network, so that the transaction can be validated by all network peers. Once it has been validated by the network, the transaction is packaged into a ‘block’ of transactions, and added, through the ‘mining’ process, to the ever-growing list of blocks that form the blockchain ledger. This list is stored by peers in the network. Bitcoin also has a feature whereby new bitcoins are generated and added to the system, having an inflationary effect. These are distributed to miners (in addition to the sum of transaction fees in the block) as a reward for successfully adding transactions to the blockchain. Mining can be done by any user with any computer, but an industry of professional miners has emerged, using dedicated computers developed especially for the purpose. The distributed structure of the system coupled with its cryptographic functionality make Bitcoin incredibly robust. The trust required to enable transactions is achieved through the knowledge that all transactions – past, present and future – are witnessed (albeit automatically) by all users. Bitcoin is by far the largest blockchain-based currency, although several others exist with slightly different technical features. Differences are often found in the mining process, which can require substantial computing resources. For example, some currencies use less resource-intensive algorithms than Bitcoin. Peercoin’s algorithm is designed to become less resource intensive as it develops. They also vary in the rate and mechanism by which new currency is generated and distributed, (therefore, in their inflation policies). Many have a predefined maximum number of coins and, once this cap is reached, no new coins will be generated and miners will profit only from transaction fees. Some currencies use algorithms that are designed to avoid the emergence of ‘professional miners’ that use specialist mining equipment. Because transactions cost very little (currently from €0 to €0.10), but provide a permanent, secure record, it is possible to use Bitcoin blockchain for other non-financial purposes. This ‘piggybacking’ could be used to explore and launch several other non-currency-related applications from voting to patent protection. While this kind of approach prevents the developer from implementing bespoke features that they may have introduced in their own blockchain implementation, it does provide a low-cost, readily accessible and stable infrastructure, making it an excellent ‘sandpit’ for exploring ideas. Other blockchain-based currencies have been set up with wider applications explicitly in mind. Ethereum is a blockchain implementation set up following Vitalik Buterin’s white paper and crowdfunding campaign. It includes a currency (ether, which is described as ‘fuel’) and also a code that can be used to implement a wide range of non-financial functions (see smart contracts, digital rights management and decentralised autonomous organisations).

Potential impacts and developments

In 2014, a European Banking Authority opinion highlighted several risks presented by blockchain based currencies. It also dismissed their immediate benefits – notably fast, secure and cheap transfers – as irrelevant in the EU, where conventional transfers are already relatively fast, secure and cheap. For many users, the real advantages of blockchain-based currencies lie, beyond minor time and cost savings, in the functionality and values that are not found in traditional currencies. These may include some of the well-publicised ‘problems’ of Bitcoin, such as its huge price spikes and use in illegal markets on the dark web, both of which may in fact have attracted many new users. Simply put, if there were no substantial benefits to using blockchain-based currencies in Europe, then there would be no substantial use in Europe. Adoption of blockchain-based currencies continues to grow, however, despite a major security breach which tested Ethereum’s ideological foundations. These currencies are already at the vanguard of blockchain development, which could lead to a major techno-social upheaval. If they fulfil their potential, they could spearhead a process of decentralisation whereby the institutions that traditionally govern finances – including governments and banks – become less powerful. On the other hand, these same governments and banks are currently driving blockchain research and development in directions that suit their own purposes. These blockchains may prove less decentralised and transparent than others. However, perhaps the greatest impact of blockchain-based currencies will be found in other areas beyond the financial system. Bitcoin et al provide a wide user base, fertile spaces for experimentation and ‘fuel’ to propel new ideas forward. Even if Bitcoin does not revolutionise the financial system, it might well pave the way for other implementations that could offer serious benefits for supply chains and government services, for example. While discussion of a wide range of applications of blockchain are now commonplace, currencies such as Bitcoin have dominated most media and policy attention to blockchain over the past few years and this could affect the ways in which the technology develops. In other words, frequent reference to the fluctuating value of Bitcoin and its use in black markets may distract the relevant actors and public from a more productive debate about the wide range of opportunities and challenges that the technology actually presents.

Anticipatory policy-making

Blockchain-based currencies present many legal and regulatory challenges including consumer protection mechanisms, enforcement methods and possibilities for engaging in illegal activities such as tax evasion and the sale of unlawful goods. They also present several potential benefits for citizens, including reduced costs, improved security and a more accessible and innovative financial system. These and other issues were recognised in a recent motion passed at the European Parliament, which also highlighted the wider potential of blockchain technology ‘well beyond the financial sector’, and called for a proportionate regulatory approach and the development of appropriate capacity and expertise at EU level.


AUTHORS Philip Boucher, Scientific Foresight Unit (STOA), DG EPRS, European Parliament Susana Nascimento, Foresight, Behavioural Insights and Design for Policy Unit, DG JRC, European Commission (Chapters 6-8) Mihalis Kritikos, Scientific Foresight Unit (STOA), DG EPRS, European Parliament (Anticipatory Policy-Making sections)

SOURCE http://www.europarl.europa.eu/


About sooteris kyritsis

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