December 28, 2015

Blockchain - A dawn of new digital world

Pasi Iljin

Head of Technology and Foresight, Tieto

When I first time opened my Netscape browser in my first job in 1994 little did I know that internet would become the platform for digital disruption. The company web pages contained only some scattered information and there were only a few companies that had anything in the web. I still thought Netscape was cool technology although I was totally clueless about its enormous potential to change the everyday business and personal life.

Today, I have the same feeling with blockchain. The more I read about it, the more convinced I am about its disruptive potential. It could be the next web, the universal platform of digital life and vehicle for artificial intelligence and humans to collaborate in the future. Also, blockchain is today in its infancy just like the Internet was in 1994.

Bitcoin is the first well-known implementation of blockchain -- a cryptocurrency which uses blockchain as distributed public general ledger. Blockchain is built on the same foundation that BitTorrent P2P (peer to peer) sharing protocol and utilizes the latest breakthroughs in cryptography (cryptographic hash algorithm) to build an unbreakable and unmodifiable chain of transactions stored in distributed fashion in all the participating nodes in the Bitcoin network.

Why would this nerdy technology create a revolution in the digital economy? Why does this matter?

Bitcoin is not revolutionary because it can be used to transfer money digitally. It is revolutionary because you do not need intermediaries in the transaction. With Bitcoin you can pay anyone in pure P2P manner without involving middlemen - banks, money transfer services, credit card companies, etc - to process your transaction.

This is why it matters. For those of us who take electronic banking services for granted, the Bitcoin may not be that attractive, but for those 5 billion unbanked households this is a revolution. In any case digital currency is just one of the uses for the blockchain technology. With blockchain you can transfer any digitally representable asset to anyone without third parties. For example if you buy a house, the ownership of the house could be recorded in a blockchain and the ownership would transferred to you when the corresponding payment is executed.  As everything is digital, you can execute both transactions at the same time without any human intervention. Actually, you can put any contract in the blockchain and associate it with automatic behaviour -- see for example open source project Ethereum.

Imagine an automated taxation system, where your income is recorded in blockchain and your tax return is automatically processed according to the current taxation rules and your tax payment history. Some futurists talk about Distributed Autonomous Organizations, DAOs, which would execute contracts and process transactions according to predefined rules -- in the same manner as algorithmic trading systems in investment banking do today. The difference is the universal nature of blockchain. This has carries the potential to link these autonomous systems to one another and have them collaborate with each other. I see the artificial intelligence and internet of things as critical enablers to this vision. A DAO with sensors to physical life and with artificial intelligence would learn from its environment to enhance its behaviour.

Today, there are hundreds of startups and companies experimenting on blockchain. Billions of dollars are spent to finance these experimentation efforts. Banks and other financial institutions are probably the first players to experience the disruption. There are more than 500 cryptocurrencies already now, Ecuador even launched its own cryptocurrency. Another area of big disruption fueled by blockchain is supply chain, which would be greatly optimized and automated using blockchain-based technologies.

Trust is the key inhibitor to blockchain adaption. Sometimes blockchain technology is called trustless because you as a user do not have to trust  any central authority to perform a payment. But of course you trust the system. And because blockchain and the cryptocurrencies built on top of blockchain are still at their infancy, there are some problems in the digital system. The episode with MtGox to lose millions of private keys of Bitcoin wallets educated many about the vulnerabilities of the system. There are also some doubts about the cryptographic seal between the blocks in the blockchain being secure enough, especially if NSA or similar governmental agency would like to alter the blockchain. These are undoubtedly very valid concerns and we would need to monitor these carefully before we can really trust the system.

Blockchain is a key ingredient in the digital world of DAO’s. It can potentially have an impact to the world that we have never experienced before. It is the next step in our digital journey. In the early days of internet we did not trust the web nor we thought it would change the world. But it did. Today, we do not think that in the future a DAO would process our tax return, or that there would be no credit card company for the payments, but I think there is a big change that this is closer than we think.

Read also my previous blog post: The digital future is already here - 10 domains that will change the world.

 

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