November 20, 2016
Ever wondered why anything legal still requires lots of paper work and paying a visit to a legal or notary office in person during office hours? It is because such transactions need a third party to verify that everything is in order. This means that all involved parties are upholding their commitment to the transaction. The same holds true for (complex) financial transactions. Blockchain does this differently. The involved parties can verify their transactions directly via the chain.
Blockchain has made the news for quite some time now. Especially its most prominent implementation Bitcoin. Recently, the World Economic Forum even named it one of the top 10 emerging technologies of 2016. Amongst other technologies such as autonomous transportation, it has a promise of being disruptive on a global scale. Disruptive meaning that we attach a new meaning to how trusted third party transactions work.
The Blockchain is typically explained as a distributed ledger of transactions for which all participants agree that completed transactions are valid. New transactions are collected in blocks and undergo a verification process before they can be added to the ledger. This process is (in theory) cryptographically secure and irreversible. This way the ledger always shows proofs of transaction and retains the complete chain of transactions: this is the block chain. This is exciting and innovative because it resolves the need for a trusted third party in transactions, such as an escrow account for a mortgage transfer.
Although still in infancy, there are a number of Blockchain implementations next to Bitcoin available. Ethereum for example, provides a platform to create smart contracts, which are digital contracts that have the capability to self-execute. This could be part of a society in which the “Internet of Things” is common with appliances somehow connected to the internet. An example of this is a washing machine having a smart contract to order –and pay for- more washing detergent when it is running low. Another implementation is ShoCard, which is a digital identity solution. Akin to having a digital driver’s license for all kinds of authentication meaning that passwords are no longer needed.
These new implementations set expectations for what is yet to come. However, that does not mean there are no risks in adopting them. Although the core concept is safe and secure, implementations on top of the Blockchain might not be. Both Bitcoin and Ethereum applications have been hacked, causing a lot of financial and reputational damage. This results in people being weary of Blockchain technology and not feeling safe at the thought of using it: “What if someone steals my money and I have no one to turn to?”
Essentially, the conventional “trusted third party” mechanism is being replaced by software. Transaction validation is fully performed by software, and you’d have to trust that to use it. Traditional contract executioners such as notaries are people whom you recognize and trust. On top of that, they have a certain level of quality control in their professional registration, reputation and educational degrees. This is not the case with Blockchain technology. There is no person to talk to, no face to trust. How can you trust an app to handle your legal matters if you have no idea about its quality and ‘educational degree’? How do you trust a faceless system? Take for example ShoCard. Sure it is nice not to need a password for logging everywhere, but can you trust it to still work after a year? Or prevent others to see which sites or applications you log into?
Trust should be built on reputation and quality. For a Blockchain application it means getting to know the system: is the software well-constructed, are proper security measures implemented, is user privacy guarded? Knowing this allows you to decide what you are comfortable with, similar to having an appraisal report when buying a house.
Users need this trust in order to adopt these innovative solutions, but they do not yet know what to look for. Regulators can and should play a leading role here. I foresee requirements for Blockchain technology that demand quality control in terms of e.g. source code transparency, security audits and a quality certification. It will take quite some regulation for any of these innovations to reach the maturity needed to completely replace the old fashioned way.
You can expect that extensions for Blockchain solutions will be developed, but it will take some time for us humans to trust them to be safe and secure. I will follow the developments closely, but for now I wouldn’t move all my transactions to Blockchain technology until I see a more mature industry appearing.
<<dated Sept 2nd>>