Why does blockchain matter?

Since the invention of writing, heavily centralized, usually hierarchical, and often monopolistic public and private institutions emerged to keep authentic records. Various arms of the state, from land registries to central banks, maintain trusted records of (individual and corporate) identity, titles and deeds, or the supply of currency. Powerful private institutions, such as banks or private companies mediate our transactions, act as clearinghouses, and keep track of our accounts. We created these trusted intermediaries partly because as a society, we need to engage and transact with others whom we neither know, nor trust.

The unique technological characteristics of the blockchain technology enables authoritative sources of information to exist without trusted central intermediaries to maintain them.  We can store all kinds of data on blockchain based distributed databases. Since it is mathematically unfeasible for any individual users to alter or otherwise tamper with the data, the blockchain protocol (or rather, the mathematical foundations of the underlying cryptographical principles) can act as an authentic source of information.

To give an example: if Alissa wants to sell her house to Bobby, they need to involve at least two trusted intermediaries.  They need the land registry to confirm that Alissa indeed owns the house she is selling, and to update the ownership records after the transaction. They also need a bank to confirm that Bobby indeed has the money to buy Alissa’s house, and to adjust their balances after the transfer of property took place. On the other hand, both property ownership information and bank account data can be securely stored on blockchain as cryptographic tokens. In such a case Alissa and Bobby can conduct this transaction without the involvement of either the bank or the land registry.

For the first time in human history, society has a technological alternative to the centralized institutions that maintain authoritative records, about, for example, who we are, how much money we have, what property we own, what kind of contractual rights and obligations we have, and what kinds of transactions we were engaged in with others. This development may have fundamental implications on the established forms of social organization and control that rely on, maintain, and reproduce such trusted intermediaries.

To illustrate this point, consider again Bitcoin, the first blockchain application. By mid-2016 it conducts hundreds of thousands of financial transactions every day between anonymous accounts at a very low cost, without any governmental or institutional oversight, without any kind of regulation or control, and without relying on any trusted central agent in the network. This amounts to an unprecedented disruption of our shared financial systems that have historically relied upon central banks and supranational organizations to effectuate and control the global flows of financial transactions.

The apparent success of Bitcoin, and the promise that the underlying blockchain technology can be applied in other domains created substantial levels of interest from both public and private parties. High level experts from the European Commission and the European Joint Research Centre (Sierra 2016) stated that blockchain technology “offers the possibility of new forms of human collaboration and processes. It can change the way our society is organized by enabling decentralized education, decentralized data governance, open innovation, or privacy by design businesses”. The UK Government’s Chief Scientific Advisor (Walport 2015), warned that blockchain technologies, and their ”underlying philosophy of distributed consensus, open source, transparency and community could be highly disruptive to […] a wide range of industries and services, such as financial services, real estate, healthcare and identity management”. Analysts of several central banks and of the International Monetary Fund (Dong He et al. 2016) agree that blockchain has a strong disruptive potential in both the public and private sector. Various exploratory studies conducted by public and private institutions (Condos, Sorrell, and Donegan 2016; Dong He et al. 2016) found that particular versions of the technology may: increase efficiency; reduce fraud, transaction times, and costs; offer more secure, and lower-cost public services in a number of domains, including financial services, payments systems, identity records (identity cards, biometric records, voting registries), public records of land and property titles, rights related to physical and intangible assets (ownership, control, use, etc.).

The belief in the revolutionary nature of blockchain also attracted significant amounts of venture capital. Bitcoin, in mid-2016 had a market capitalization of approximately $10 billion, while more than $1 billion is invested in various blockchain technology companies (Hileman 2016).  As a consequence, blockchain innovation progresses at a breakneck speed. The second generation of the technology, such as the Ethereum platform successfully overcome the technological limitations of the first generation of blockchains. First, it generalized the applicability of the blockchain beyond finance, and now any type of tokenized information can be stored on the blockchain. Second, it enabled the development of smart contracts. A smart contract is a software code that encapsulate business logic, i.e. rules about money transfers, equity stake transfers, and other types of binding obligations, based on predetermined conditions. Smart contracts can create, consume, exchange and manipulate tokens which are stored on the blockchain, by executing complex transactions in an autonomous manner.

These new features pushed blockchain beyond the narrow confines of finance, and enabled its use in other social domains. Consequently, there are blockchain based versions of such traditionally centralized services as the online domain name resolution system; online fora, publication and discussion platforms; marketplaces, exchanges, clearinghouses, prediction markets; gambling or betting services; voting services; data storage; file sharing services. Entrepreneurs even tried (and partly failed) to incorporate a blockchain-based investment company with the use of smart contracts to define its articles of incorporation and other corporate by-laws.

Millions already use blockchain based services every day, and many public services and private institutions are trying to cope with the disruption caused by this venture capital fuelled innovation. Despite the wide spectrum of blockchain applications and their proven potential to disrupt fundamental societal processes and institutions, there is very little research on their non-technical, societal, economic, policy and legal implications, and we only speculate on how the rapidly evolving blockchain applications may affect our everyday practices, institutions, laws.