What's so Exciting about Blockchain?
Blockchain is the foundational technology that cryptocurrencies such a s Bitcoin are based on. Blockchain supports a distributed ledger, meaning the records are stored redundantly across multiple servers. The data is secured by public/private key encryption in a way that some of the data can be seen by all and some functions limited to the holder of the private key.
Bitcoin may be the least interesting of Blockchain applications. Bitcoin’s only function is to move the encrypted block from one place to another. So if you hold the private key to a bit of Bitcoin, you can tell it to move to a new address, in the holder of the private key for that address now controls where it might move to next. In that way, people control bits of code with exclusive control that can be verified by all and cannot be subverted (unless the owner’s keys are stolen outside the blockchain).
Where it gets interesting is with blockchain applications like Ethereum, which contain “smart contracts.” These are not contracts in the legal sense, but bits of code that run inside the block to make it smarter than just ‘move from here to here.’ For example, if one could code an Ethereum token to say that if I give it 1 credit and you give it 1 credit, then it generates a random number from 1 to 100 and if it’s 1-50 I get both credits and if it’s 51-100 you get both credits – the credits being some valuable cryptocurrency like Ethereum itself. Now this is gambling and illegal in the US, but it’s an interesting simple application of smart contract capabilities.
Now take an enterprise like AirBnB. AirBnB stores properties and transactions on central servers and supports thousands of employees. If you programmed a blockchain application (called a dApp for distributed application) to operate similarly, a host could list their property (with details and pictures) in this chain, and a renter could secure dates and even pay the host for the stay directly in the chain. Instead of taking the 8% to 20% that AirBnB charges, the dApp would take a small processing fee (say 1% to 3%) with that much more going to the host. Now there would be a loss of some services, such as insurance for guest incidents, but this could be handled by outside parties like insurance.
Consider a similar blockchain dApp for Uber. With driverless cars, riders could book rides with the app, smart contracts could decide what cars to send where, and in a world of driverless cars they could respond automatically, and even decide to go for gas or a recharge when needed – all without the support of a traditional company.
Consider a government on blockchain. Rather than send people to polls, citizens could vote through blockchain – passing laws by majority or whatever margin required – all on the chain immutably reflecting the laws passed by the community.
Certainly, there are downsides to the lack of human intervention – code gone awry, bad code exploited, keys stolen from digital wallets. What happens if you deed Is recorded in blockchain and you lose the private key that controls it – so you lose your house? If somebody steals your private key, can they walk in and claim ownership? Certainly not – but these are issues yet to be addressed.
Blockchain also eases exchanges of value. Services on blockchain (dApps) are raising money through Initial Coin Offerings (ICO’s) where they sell the tokens that fuel their dApps to investors that either want to use the application or want to hold the token with an expectation that it will rise in value. Exchanges have been created where holders can trade these tokens and watch market conditions impacting the value. Where these tokens are considered to have present utility value – meaning they can be used for some real function in an application, they are not generally considered securities and can be traded with anybody around the world without restriction in most jurisdictions. ICO’s have raised more money in 2017 than VC’s have funded tech. Of the 300 or so completed utility token sales to date, two raised over $200MM, five raised over $100MM, 25% over $10MM, and 60% over $1MM. In post-sale trading, about half are trading above the initial sale price, many over 1,000% higher. With all that promise, however, reports say that less than 20% of these tokens really have the utility, and concerns continue to be raised on meeting the promises claimed.
Regardless, it’s clear that blockchain is a disruptive technology that will change the fundamental nature of much of the internet. Many client-server applications will move to blockchain as the next wave of disruptors seek to dethrone the Web 2.0 winners. Once again there will be winners and losers. The game is on!