Forget Bitcoin, Blockchain is a gamechanger

Alex Sims of the University of Auckland explains why blockchain is the technology to watch.

The extraordinary rise in Bitcoin’s price recently has been likened to tulip mania. The cybercurrency’s energy usage is also causing alarm.

It is hard to find a person who has not heard about Bitcoin.

In contrast, comparatively few have heard about blockchain technology, yet Blockchain promises to change society and the economy even more than the Internet.

What is blockchain technology? Most people have already come across Blockchain without realising it: Bitcoin operates on a blockchain. (it created the first blockchain.)

Just as there are hundreds of other cryptocurrencies besides Bitcoin, such as Ether, Litecoin, Dash and so on, there are hundreds of block-chains.

A blockchain is a ledger or database with three key features.

First, a traditional ledger needs to be kept secure, you don’t want unauthorised people making changes.

With a public blockchain, such as Bitcoin, anyone can download a copy of it.

Moreover, copies are held by hundreds or even thousands of computers and are all updated automatically at the same time. (‘‘Copies’’ is a misleading word, as there is no master copy.)

Second, unlike a traditional ledger where someone can go back and make changes that were difficult, if not impossible, to detect, a blockchain is immutable and cannot be changed.

If a change is required – for example to show that the ownership of 0.001 of a Bitcoin that was owned by X is now owned by Y – the transfer of ownership will be appended. That way the owners of the 0.001 can be traced.

Third, before X can transfer the 0.001 to Y, the blockchain is checked to see whether X owns that Bitcoin.

If more than half the copies say yes, then the Bitcoin will be transferred. This validation system means that a blockchain is safer than single databases which can be hacked and have money stolen from them.

Blockchain technology can do two things.

First, it can make existing processes more efficient.

Second, it can disrupt industries.

Take aid sent to third world countries. Currently not all aid payments get to the right people due to corruption. Blockchain can solve this by using radical transparency so that the money can be traced the entire way.

Alternatively, the actual charity can be done away with. People may want to donate to people affected by earthquakes.

A smart contract (a self-executing computer programme) could be written that takes information from Google searches, Twitter and also reputable news providers, so that once an earthquake over a certain magnitude occurs, payments are made automatically to all those living in the area.

The use of smart contracts is seemingly endless.

Take a container load of manuka honey exported to Europe. A smart contract could be set up so that once the container reached its destination port, the agreed payment would be made instantly.

Even better, the smart contract can be programmed so the payment is split between the supplier, the bee keepers, the trucking firms, the shipping line, the IRD and others.

The potential impact of Blockchain is hard to overstate. Billions of dollars are pouring into blockchain technology across many different industries.

Despite Blockchain’s being in its early days, it would pay to learn more about it. Be warned, though, it is very easy to go down the rabbit hole.

Associate Professor Alex Sims is completing a project funded by the New Zealand Law Foundation on the regulation of cryptocurrencies.