Blockchain

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.

Supply chains: transparency and accountability at last?

Global trade is based on an estimated €16 trillion supply chain sector. Goods are produced and distributed through a vast network of producers, retailers, distributors, transporters and suppliers in a complex arrangement of processes for managing contracts, payments, labelling, sealing, logistics, anti-counterfeit and anti-fraud.
The scale and complexity of the systems involved leads to high transactional costs, frequent mismatches and errors in manual paperwork, as well as losses through degradation and theft along the way. Other issues include abusive or unsafe working conditions; environmental damage through inefficacies, illegal extraction and production processes; forgery and imitation and health risks through poor supply chain management. Such problems are frequently highlighted in high-profile incidents, for example with the supply chains for food, clothing and diamonds. Some suggest that  standards and certification have improved choice differentiation and consumer awareness, but the actual processes remain costly and unreliable, especially in regions with high levels of corruption. Full ‘chains of custody’, which prove the origins of each product or material, are still fragmented across organisations and vulnerable to fraud and error, even between certified companies. There is a growing call for safer, more trustworthy and transparent supply chains of goods and services. The question is whether blockchain technology can really improve today’s supply chains and logistics sector to respond to operational inefficiencies, fraud and perhaps even some ‘grand challenges’ such as unethical labour practices and environmental degradation.

How supply chains could be managed on the blockchain

Blockchain-based applications have the potential to improve supply chains by providing infrastructure for registering, certifying and tracking at a low cost goods being transferred between often distant parties, who are connected via a supply chain but do not necessarily trust each other. All goods are uniquely identified via ‘tokens’ and can then be transferred via the blockchain, with each transaction verified and time-stamped in an encrypted but transparent process. This gives the relevant parties access whether they are suppliers, vendors, transporters or buyers. The terms of every transaction remain irrevocable and immutable, open to inspection to everyone or to authorised auditors. Smart contracts could also be deployed to automatically execute payments and other procedures.

Blockchain states: rethinking public services

In the context of opening up data, services and decisions in the public sector through digital technologies, a new generation of open, accountable, transparent and collaborative eGovernment services are under development. The UK Government Chief Scientific Advisor recently published a report outlining how blockchain-based technologies could provide new tools to reduce fraud, avoid errors, cut operational costs, boost productivity, support compliance and force accountability in many public services. Potential applications include tax collection, identity management, distribution of benefits, local (or national) digital currencies, property and land registry and any kind of government record. The same technology also opens doors to non-state actors to provide state-like services, from notary services to global citizenship and identity. What blockchain will mean for the public sector remains to be seen.

How blockchain technology could support public services

Data used by public institutions is often internally fragmented and opaque to other actors, notably citizens, businesses and watchdogs. Blockchain technology could allow records to be created and verified with a greater level of speed, security and transparency. The most immediate applications of blockchain technology in public administrations are in record keeping. The combination of time-stamping with digital signatures on an accessible ledger is expected to deliver benefits for all users, enabling them to conduct transactions and create records (e.g. for land registries, birth certificates and business licences) with less dependence upon lawyers, notaries, government officials and other third parties.

Blockchain everything? Decentralised autonomous organisations

Early internet pioneers envisioned a new social order of more independent, decentralised and agile organisations facilitated by information and communication technologies.  Some argue that peer-to-peer and commons models would manage resource use better, and others are already developing platform cooperatives that are collectively owned and democratically governed by their users or workers. Blockchain can support such organisations by allowing for the direct and instantaneous exchange of data or property, execution of budgets, automatic enforcement of contracts or decision-making inside an organisation, all in a transparent and encrypted form. Could this herald the emergence of new blockchain-enabled organisations, and what would this mean for European society?

Decentralised ledgers for decentralised organisations

Decentralised autonomous organisations (DAOs) can be understood as bundles of smart contracts, culminating in a set of governance rules that are automatically enforced and executed through blockchains. A DAO could adopt a mediating role between different parties in a decentralised but ultimately human-controlled organisation, or it might constitute a more fully autonomous organisation that is controlled entirely through algorithms. The level of autonomy and self-sufficiency that DAOs will reach remains to be seen. The most mature DAO – named ‘The DAO’ – is not fully autonomous, although a future in which other DAOs are almost completely independent of human intervention, controlling their own resources and interacting with other humans and non-humans, including other DAOs, is not beyond imagining. For example, a DAO could own a self-driving car that acts as a taxi 24 hours a day. This would generates income that it would use to pay for its own fuel, repairs and insurance, and save money to replace the vehicle at the end of its useful life.
In DAOs, cooperation between people within and between organisations can be based not on centralised authority or pure market forces but, instead, on cryptographic consensus and transparency as basic technical features. Smart contracts on the blockchain have the potential not only to leave a tamper-proof record of every aspect of an organisation, but to automatically and even autonomously execute daily operations, such as supporting access to assets and buildings, allocating tasks, managing shares and voting rights, or facilitating profit distribution or transmission of micropayments.
It has been suggested that blockchain technology could enable a new generation of organisations to change the economic and power dynamics of traditional centralised bodies. For example, a social media platform owned by its users who rate each other and are automatically rewarded for their contributions; ride-sharing apps where drivers also co-own and manage the daily operations, or other communities such as Steem-it where users are also shareholders and where value and decision-making are distributed in a transparent way.