This article was co-written by Geoffroy de Pimodan, Anne Jean, Mathis Pinos, Marie-Huguette Rutazihana, Baptiste Varcin
At the beginning of April 2020, Binance, a crypto currencies platform, announced that it would invest $50 million into Indian start-ups specialized in blockchain. Not only does this decision show that this technology requires a lot of money to be developed but it also underlines its growing appeal, especially among young start-ups. But how does blockchain work? What are its economic consequences? What debates are rising? Let us dive into the promising world of blockchain.
Blockchain is a transparent technology which records the transactions between two users efficiently and in a trustworthy and permanent manner. Blockchain literally means “chain of blocks”, but the words “block” and “chain” in this context refer to digital information (a “block”) which is stored in a public database (a “chain”). Blocks are differentiated from one another with a precise code called a “hash”. Fanny Rabouille, Co-holder of the Digital Research Chair in Grenoble EM, defines blockchain as “a register which records all the transactions into a crypted block waiting to be validated by miners before being recorded in the blockchain”.
Blockchain technology is very recent. Experts have divided the history of blockchain into at least two important stages[1]. The first stage refers to the most famous and first concrete application of the blockchain technology: Bitcoin. This cryptocurrency, which was launched in October 2008, was developed by a mysterious man (or maybe by a group of people), better known under the pseudonym of Satoshi Nakamoto. As a matter of fact, “today, blockchain is essentially used for virtual currencies (including bitcoin)” Fanny Rabouille explained. The second stage has seen the development of smart contracts. The term “smart contract” describes a self-executing contract, written into lines of code, which follows the terms of the agreement between a buyer and a seller.
Let’s focus now on the functionalities of blockchain. Blockchain has four major functionalities that make it unique.[2]
- The database is decentralized: There is no central organization in charge of monitoring the collected data. According to Elise Alfieri, a French doctor in Finance whose thesis dealt with cryptocurrencies “there is no legal safeguard to defend the blockchain”.
- Transactions are restricted to two participants. Pairs communicate without an intermediary in a central chain. One problem often witnessed is that the information between two participants is lost when it needs to be transferred to other chains. With the blockchain, the information does not miss any chain of information.
- Transparency and privacy also represent key assets of blockchain. Each transaction is recorded and visible by everyone. Users can choose to remain anonymous or declare their identity.
- Transactions are irreversible and unforgettable. Once the transaction is written on the database and the other accounts are updated, the user cannot go backwards.
Blockchain mainly solves the time delivery issue of a transaction. For example, in our current system, it takes a week to make a transfer of title deeds mainly due to the need of double-checking by an intermediary. With the blockchain technology, such a transaction is achieved in a few seconds! The system automatically updates all the other registers and proceeds to the transaction safely and verifiably. Therefore, blockchain eliminates the need for third-party verification and the costs that go with it. It also solves the issues of security and trust. Once a block is added to a blockchain, it becomes arduous to edit and impossible to delete.
So, it goes without saying that blockchain is extremely powerful. Blockchains can store up to 1 megabyte of data. Depending on the size of the transaction, this means a single block can house a few thousand transactions. Transactions are then checked by thousands or even millions of computers on the blockchain, which confirm whether the details of transactions are accurate or not.
Source : https://unsplash.com/photos/zt0HWquGXlQ
“Blockchain is expected to […] lead to a new economic paradigm”
Blockchain is expected to create a new economic system by revolutionizing the way humans and businesses interact. Blockchain seeks to improve information security and transparency by sharing encrypted data among peer-to-peer (P2P) networks. All these expected benefits have led to an increased demand for blockchain’s concrete applications in a variety of business sectors, including in areas suffering from poverty and corruption. The decentralized nature of blockchain has shaped the new concept of “token economy”, in which the community’s revenue can be allocated to the actual content producers and service users who create value. Hence, blockchain is expected to be a key technology of the 21st century that will shake and transform current institutions, leading to a new economic paradigm. But in concrete terms, how will these changes occur?
First, blockchain could eliminate credit card companies. Everyday transactions like buying food from the groceries store will be validated by a blockchain node and written into a blockchain. The corresponding bank account will be debited, while the merchant’s account will be credited. The merchant will not be charged a percentage of the purchase price anymore, and the buyer will not pay any interest on the unpaid balance anymore.
Second, blockchain will change the way cross-border payments are done. Nowadays sending money across national borders is often both time-consuming and expensive. An international wire transfer can take up to five business days to settle, not to mention the time needed for the transfer to be carried out. With blockchain technology, entire sequences of transactions, where a digital currency is exchanged for a physical currency, happen within seconds and is fully traceable. The fees for this type of transfer are less than half of what an international wire transfer would cost. Also, blockchain database can hold every transaction involved in the manufacturing of a product, and it can hold every entity accountable. If there are delays anywhere in the world, all the interested parties involved in the supply chain will know exactly where and who caused the delay. Supply chain blockchains could also be used to analyze inefficiencies and redundancies within a supply chain, and this would dramatically streamline the product manufacturing process.
It is not easy to project oneself into a world entirely invaded by blockchain. Here are two more cases where blockchain could revolutionize our society. First, bitcoin, the first ever cryptocurrency, probably best embodies all hopes and fears placed in blockchain. Blockchain makes it possible to secure Bitcoin transactions. Indeed, when you make a transaction to a third party in Bitcoin, a small file is created by the service on which you hold your bitcoins and this file is accessible to everyone. This file contains the public keys that identify the actors of the transaction, the amount and references to previous transactions that gave you possession of these bitcoins. Thanks to the PKI (Public Key Infrastructure), a digital certificate is accessible to everyone, and no one can impersonate you because any node in the Bitcoin network can authenticate this transaction. As each transaction refers to the previous ones, it is in fact the entire chain of custody of the bitcoins that is verifiable. If this financial aspect seems a bit far-fetched, there will undoubtedly be much more concrete applications of the blockchain. For example, an entirely different sector is being explored in China[3]: that of traceability of pork meat. The Walmart chain is testing a new blockchain to record where each piece of pork it sells in China comes from, where and how it was processed, its storage temperature and shelf life. If certain products need to be recalled, it will then be possible to identify the affected lots, tell exactly where they are and, if they have already been sold, who bought them. This titanic project could be extended to other products and definitely reshape supply chains in a more responsible and effective way.
“Blockchains are not immune to cyber-attacks”
But is blockchain technology as safe and promising as everyone thinks it is? Well, that may not be that simple. In the mini poll our team conducted on 16 people, 46.7% said this technology presented an increased risk in fiscal fraud and 20% cited the weakening of the State as their main concern.
Blockchains are first not immune to cyber-attacks, as Emin Gün Sirer and his colleagues at Cornell University have shown[4]. This team of academics identified several security vulnerabilities. For instance, ill-intentioned people could well take control over a blockchain and manipulate it at their leisure. Fake transactions can be accepted if a hacker gains control of one node’s communication. The content of online wallets can be stolen like in January 2018 when the equivalent of $500 million were robbed. And the list goes on and on…
What we can say however is that no technology is perfect and malevolent people will always try to exploit security holes. The main solution would be to promote private or semi-private blockchain, which are invitation-only access and in which participants are identified.
Such blockchains lose part of the decentralization advantage but are generally safer than public ones[5].
Critics of bitcoin also say that it is rather a speculative asset than a real currency. In that matter, Elise Alfieri, told us that “money has three primary functions: it is a unit of account, a store of value and a medium of exchange. Blockchain only follows the latter because the cryptocurrency is very volatile, it isn’t stored and does not have any interest rate.” The graph below shows that the value of one bitcoin fluctuates a lot during a year.
What’s more, this currency is highly controversial as it is often used in the darknet by criminals to illegally purchase weapons or drugs without leaving any trace.
These drawbacks of blockchains can easily be addressed through regulations. However, countries have adopted different approaches when it comes to regulating blockchains. Nationalist countries such as China and Russia have simply outlawed cryptocurrencies, claiming that the State should keep the monopoly on currency emission. Other economic powers such as the European Union (EU) took a more reformist approach: In the EU, the crypto service providers are now subject to the same rules as other financial institutions and must identify their customers. This is meant to fight fiscal fraud and money laundering.
Others question the compatibility of blockchains and environment protection. Concretely, the “proof of work” process consists in asking the miners to solve a complex mathematical problem requiring a significant computing power to be the next to create a block on a blockchain. This process is extremely energy consuming. For instance, bitcoin uses as much energy as Ireland[6].
Nevertheless, the “proof of work” could be increasingly replaced by “proof of stake”, in which the user must prove that he has a certain amount of cryptocurrency, which will give him the right to participate in the creation and validation of new blocks. This process is much less energy consuming.
Finally, one of the drawbacks of the blockchain technology will probably be job losses due to the elimination of intermediaries. As Fanny Rabouille, Co-holder of the Digital Research Chair in Grenoble EM, puts it: “Banks are worried about [blockchain], because they might disappear from the chain of banking transactions.”But new technologies and robotization do not always destroy jobs, they create more skilled jobs. For example, the job of “Blockchain developer” may become increasingly popular.
For a few years now, blockchain has been increasingly used by firms to improve their processes. For instance, BMW used it for the last two years in order to improve its supply chain. What was first an experiment turned out to be so efficient that BMW has enlarged it to other processes. This example will undoubtedly be the norm in a few years, as firms try to tackle the issue of stagnant productivity. Indeed, with this technology, not only do firms lower the time needed to take decisions, but they also reduce the risk of scandals such as the 2013 horse meat scandal in Europe. Therefore, blockchain will be a useful tool in sectors where information flows need to be optimized, processes rationalized, and data processing errors erased.
That
blockchain technology will dramatically change business is not in doubt. What
remains unclear is how. “Just as at the beginning of the internet, nobody could
have guessed that it would become what it is now, nobody can say what
blockchain will look like in the future” says Elise Alfieri. “But one thing is
clear: It first needs to be democratized.”
[1] Blockchain Technology’s Three Generations, Nathan Reiff, investopedia.com: investopedia.com/tech/blockchain-technologys-three-generations/
[2] “The truth about blockchain”, Marco Iansiti & Karim R. Lakhani, Harvard Business Review
[3] Walmart China unveils food traceability blockchain with VeChainThor, Leder Insights: ledgerinsights.com/blockchain-food-traceability-walmart-china-vechain/
[4] How secure is blockchain really?, technologyreview.com: technologyreview.com/s/610836/how-secure-is-blockchain-really/
[5] Blockchain Security: How Far Have We Come In 2019?, forbes.com: forbes.com/sites/andrewarnold/2019/03/27/blockchain-security-how-far-have-we-come-in-2019/#56d383422457
[6] Why bitcoin uses so much energy, economist.com: economist.com/the-economist-explains/2018/07/09/why-bitcoin-uses-so-much-energy