Blockchain for Dummies

May 5, 2017

Japan is a country that does nearly everything well, including handling luggage for trips. Traveling from New York City to Kyoto, I handed my bags over to the curbside skycap at the airport and strolled inside. By the time I checked-in to my hotel in Kyoto, the following entities had custody of my luggage: JFK airport, American Airlines, Narita airport, Yamato delivery, Japan Railway, a delivery truck, and my hotel. After a long trip my bags were waiting for me in my room.

Imagine a distant future where most cities in the world are capable of this miraculous feat. How might I check the status of my luggage? There is no central entity that can collect all this information from every airline, airport, hotel and delivery service in the world. We need a decentralized method for collecting information about luggage that does not depend on any central server.

If my luggage is damaged, who will pay for repairs? Assume the last company to have my bag is responsible, unless they can produce a picture proving the bag was already damaged when they took custody. Now every company will take a picture of my bag when they get it and when they hand it off to the next company in the chain. This picture can be attached to the status messages collected for my bag. But an unscrupulous company may try to change the picture in the status message, or change someone else’s picture to blame them for the damage. We need a secure system that prevents anyone from tampering with the data.

How will I choose the right delivery company to get my luggage to my hotel? There may be many companies that serve different areas of a city, handle different types of bags, and have different delivery schedules. I want my luggage delivered by 10pm to a ryokan on the outskirts of Kyoto for less than $10. The delivery companies should have software that dynamically bids for each bag based on the latest exchange rate between dollars and yen. I don’t care who delivers it, but I do want proof that someone has my bag. We need a smarter system that allows companies to write custom software for this data collection network.

Necessity is the mother of invention. For reasons I don’t fully understand, some people have long wanted a form of digital currency that is not controlled by governments nor corporations. No one could build such a system until a mysterious genius published a paper describing Bitcoin, the first digital currency. Today (May 2017) the total value of all Bitcoins is $25 billion! Since it’s inception in 2009 no one has been able to steal from the Bitcoin network, demonstrating the incredible security of this novel system. In 2013 Ethereum was proposed as a programmable network using Bitcoin’s core ideas. More importantly, the underlying technologies in Ethereum and Bitcoin, specifically blockchains and smart contracts, can be used to implement a luggage delivery network.

In the near term, blockchains and smart contracts are useful when there is already a decentralized network of companies who want to exchange information. This means there is no trusted central company or government that can gather all the data for the network. Currently these companies share their data in an ad-hoc way that error-prone and inefficient. This includes networks such as supply chains, health care records, financial products, housing, diamonds, and many more. Each of these is a billion to trillion dollar market vertical.

In the medium term, there are many companies and government agencies currently serving as a trusted central authority that could be replaced by blockchain and smart contract technologies. Blockchains are particularly useful in countries with corrupt or ineffective governments. Birth, marriage, and death certificates. Licenses to practice medicine, real estate, and massage therapy. Patents, land and car titles, and approvals for drugs.  In the private market, the roles currently played by Visa (credit cards), the DTCC (financial product ownership), and Experian (credit reporting) could be replaced by blockchains. Energy companies can be supplanted with rooftop solar/wind generation and a blockchain to coordinate energy distribution. These agencies and companies are a drag on profits and progress because they are a bottleneck in their respective networks.

In the long term, many different blockchains (e.g. health, finance, government) can be combined to create new services across networks. It’s difficult to imagine the possibilities, but people have come up with some wild ideas. For example, decentralized companies with just-in-time labor. Decentralized and fully automated venture capital funds (see the DAO). The craziest idea I can think of is a self-driving car that bids $20 to have the traffic lights turn green on its route to get to the airport on time. Although by then it’s likely we’ll have flying cars or jetpacks instead.

Some form of blockchain and smart contract technologies can replace many of today’s centralized systems. These are very early days in the technology. It’s really only existed for 8 years. These technologies still need to be improved in every dimension: performance, security, privacy, expressiveness, flexibility. I remember the “Internet” in the early 1980s. No one then could have imagined what we have today, nor the trillion dollar economy built on it. The only constant is the crazy people on Usenet are now on Reddit. Someday they’ll have flamewars on a blockchain.

Written by Pinku Posted in Economics, Technology