The confusion over Blockchain

By Amir and Eli Schragenheim

Blockchain is often described as the technology that is going to change the world economy. In itself such a declaration makes it vital to dedicate a lot of time to learn the new technology and what value it can generate.  Blockchain is vital for the Bitcoin and similar crypto-currencies, but the claim of changing the economy looks far beyond the virtual money.  The direct connection between Blockchain and Bitcoin is causing a lot of confusion. While the Bitcoin is based on Blockchain technology, there might be a lot of other things to do with Blockchain as a technology by itself. Assessing the value of a new technology is open to wide speculations that add to the confusion.  For instance, Don Topscott says, among other predictions, that Blockchain would lead to the creation of a true sharing economy. A post on Bitcoin already appeared in this blog, (https://elischragenheim.com/2017/12/28/raw-thoughts-about-the-bitcoin/), where the biggest concern was that the exchange rate of the Bitcoin behaves in a too volatile way to be useful as a currency.  Let’s have a look on Blockchain as a new technology and inquire what the future value can be.

Let’s start with Goldratt’s Six Questions on assessing the value of a new technology. This is a great tool for guiding us to raise the right questions and look for possible answers:

1. What is the power of the new technology?
2. What current limitation or barrier does the new technology eliminate or vastly reduce?
3. What are the current usage rules, patterns and behaviors that bypass the limitation?
4. What rules, patterns and behaviors need to be changed to get the benefits of the new technology?
5. What is the application of the new technology that will enable the above change without causing resistance?
6. How to build, capitalize and sustain the business?

The power of the Blockchain technology

The simple answer to the first question (What is the power of the new technology) is being able to both execute financial transactions and (mainly) recording the information, being confirmed, in a way that is very safe.  The first part means transferring money from one digital account to another without the need of an intermediary.  However, the currency has to be one of the crypto-currencies and both sides need to maintain their digital wallets.  The technology checks that there is enough money in the wallet to make the transfer.

The second part of the power is keeping the safety of the information records that comprise the general ledger. This is the true unique feature of Blockchain.  Going into the general ledger already involves a certain level of checking and confirmation of many distributed computers.  In itself the recorded information is transparent to all (unless one codes it using the current available techniques). The unique part is that it is practically impossible, even for the involved parties, to change the information of the transaction.  If there is a mistake then a new transaction of correcting the previous one has to be executed and stored.

Coming now to the second question: what limitation is eliminated or vastly reduced by the new technology?

Blockchain experts claim that the current limitation of lack of trust between parties that hardly know each other is eliminated by Blockchain. Trade is problematic when the minimum trust isn’t maintained, thus governments force rules on trade.  The basic minimum trust means that when you pay the required price you have confidence that you are getting the merchandise you have paid for.  This is what governments try to control through regulations and laws. When it comes to exchanging value between entities in different countries maintaining the trust is problematic.

Is the limitation the need to use intermediaries? In most value exchange through the Internet we currently need, at the very least, two different intermediate parties – one that transfers the money and one that transfers the purchased value.  The intermediaries are, many times, slow and expensive.  Can Blockchain substitutes the shipping company? Is the essence of the value of Blockchain aims at lowering the cost of the value transfer?  If Blockchain would become effective in bypassing the banks then we might see a major improvement in the banks and substantial reduction of the cost.  When this takes place what would be then the limitation removed by Blockchain?

While Blockchain can directly supports the actual transfer of virtual money, it can only record the data about the physical transport of merchandise, unless the merchandise is digital. So, for buying music, ebooks, videos and other digital information it is possible to overcome the limitation of trust by Blockchain.  This is a unique market segment where Blockchain provides the necessary minimum trust for the value exchange.

We propose that the safety of the data is the key limitation that Blockchain is able to vastly reduce.

Is the current safety of the information on transactions, especially financial transactions, limited?

The irony is that the threat to our digital data is not that high today, but it is growing very fast. So, while people still feel relatively secure with their financial and intellectual data stored in the bank and in their computer or on the cloud, then in the not-too-far future this safety is likely to diminish substantially.

Let’s now evaluate the third question: how the security issues of value exchanges are done today?

First let’s focus on value exchange. Later, let’s review whether keeping very critical data safe would add substantial value.

What are the current generic difficulties of exchanging value? The first need is reaching an agreement between buyer and seller.  Does the seller truly own the specific merchandise the buyer is interested in?  The current practice is to buy only from businesses that have established their reputation – like digital stores that seemingly objective sites have recorded testimonies of satisfied buyers who purchased from those stores.  The more expensive the merchandise the more care the buyer needs to apply.

Credit-cards, banks, PayPal and the like play a major part in making money transfer relatively safe. Very large deals would use direct transfer between banks, and it is true that such a transfer, between different banks at different countries, takes today about three days and uses the cumbersome SWIFT system.  Credit card transaction might face the risk of giving away the credit card details, but there seem to be currently good enough protection, on top of the credit card companies taking certain responsibility and operating sophisticated machine learning algorithms to solve that.  As already mentioned we do not have any guaranty that in the near future all the current safety measures would not be violated by clever hackers.

Yet, there are two different major safety concerns from exchange of value. One is the identity of the site I’m communicating with for value exchange.  More and more fake sites appear that disguise as a known site.  This causes an increasing feeling of insecurity.  The other concern is that the seller would not follow the commitment to send the right goods on time.

The current generic practices regarding the safety of data lean heavily on the financial institutions using their most sophisticated solutions to protect the data. However, those institutions also become the desired targets for hackers.

Protecting our most important data, especially the identity of the person, the ownership of real-estate assets and medical records is of high value, requires using the best available protection means, and if a much better data protection technology appears then for such data it could bring a lot of value. Other data, which is much less critical, could use less expensive protective means.

The fourth question focuses on the detailed answer on how should Blockchain operate, and what other means are required to significantly improve the current situation regarding safety.

A solution based on Blockchain should come with procedures that, at the very least, follow a whole deal, from recording the basic intent to buy X for the price of Y, then initiate the money transfer, no matter whether it is a direct transfer or sending instructions to a financial institute to move dollars from the buyer account to the seller account.  Then the solution should record the shipment data of the goods until confirmation of acceptance.  The chain of confirmed data on transactions seems to be the minimum solution where the safety and objectivity provided by the Blockchain service (an intermediate!) yields significant added value to the current practices.

Such a service could also check the record of both the seller and the buyer: how many past deals were completed successfully, how many pending deals are open for relatively long time.  This is a much more powerful check than testimonials.  Fake accounts, without proven history, could be identified by that service, providing extra safety to deals.

Using such a service should have a cost associated with it, and we’re not sure it should be low. The users will have to decide whether to use it or stick to the current technologies depending on the perceived level of safety.

When such a service is launched, offering extra safe records of deals, then it could be extended to record keeping of ownerships and identities. In a world that is under growing threats to its digital records safety such a service is very valuable.  Will it cause a revolution in the economy?  We don’t think so.

As we don’t have, at the moment, a full Blockchain service there is no point in addressing the two last Goldratt questions.  Organizations that like to offer a service using Blockchain and complement it with the required additional elements would need to provide the full answer to the fourth question and then also answer the two final questions in order to build the full vision for the Blockchain technology to become viable.