The Blockchain Principles and their Potential

I was invited as speaker at a conference of European Education Experts which covered the topic “The New Student: Flexible Learning Paths and Future Learning Environments” (More Info)

I am not going to wrap-up this conference but give you a extract of my contribution to this conference. The topic of my speech was: “The Blockchain Principles and their Potential”.

I will start with two completely different perspectives about the relevance of this topic. The first perspective is a historic approach related to Vienna.

A distant view to the relevance of Blockchain

In the August 23rd 2018 edition of the Economist, an article about three Viennese exiles was titled with “Hayek, Popper and Schumpeter formulated a response to tyranny”. All three emphasised the relationship between liberty and economic progress. In their days, the threat to liberty and economic progress was the totalitarianism of the Nazis and other forms of fascism. Quote from the article “Hayek and Popper were friends but not close to Schumpeter. The men did not co-operate. Nonetheless a division of labour emerged. Popper sought to blow up the intellectual foundations of totalitarianism and explain how to think freely. Hayek set out to demonstrate that, to be safe, economic and political power must be diffuse. Schumpeter provided a new metaphor for describing the energy of a market economy: creative destruction.”

The ideas of these three exiles were still (or even more) relevant in the aftermath of the second world war, as both, capitalism and communism were not immune to the dangers of centralised authorities and it’s power of execution and control.

Today in the beginning of the 21st century, concern about centralisation and power are still appropriate. Digitisation and the internet have brought new forms of centralisation, hence power to those who control the internet. Not to forget the impact of social media on free thinking.

A close view: What is Blockchain?

I am a mathematician, and my approach to blockchain started with prime numbers and Euler’s theorem. This brings us, after the Vienna excursion to 20th century, to the 17th and 18th century. Without prime numbers, which is at the heart of cryptography, we would not talk about Blockchain at all today! So, I could claim to be a distinguished expert of blockchain technology although I am aware, there is more than only numbers relevant to understand a blockchain.

It took me a while to realize, that for the time being this picture of blind man, touching an elephant is a good metaphor for the discussions about blockchain. At conferences, experts like me talk to each other about their different experience of blockchain without having a complete picture of the artifact. And, sorry for this amplification, most of the audience listens with interest because they even hadn’t the opportunity to touch the object so far!

Possible Perspectives on Blockchain

Today, the predominant perspective on Blockchain is related to its financial impact. The first Blockchain implementation was indeed a pure financial instrument, called Bitcoin.

But there are other perspectives as well, still the technical perspective is very important, many questions how to build and run a blockchain infrastructure are not answered yet. Huge improvements in technology are still necessary to scale up a global and reliable blockchain infrastructure. With the inception of the second big blockchain project, Ethereum, a whole new field of business applications emerged. The idea of automated business transactions, named as smart contracts, is the source of new business models which have already started to fulfil Schumpeter’s principle of “creative destruction”.

Of course, when things start to change, objections and concerns are close. And this gives a huge field of activities for the legal and political cast. But also, legal services will be affected by blockchain based transactions.

The problem statement of Bitcoin’s founders

To understand the principles of Blockchains it is necessary to know what the initial vision behind the first blockchain was. In the autumn of 2008 when the crisis of the financial system became apparent, an anonymous author “Satoshi Nakamoto” made statements about several shortcomings of the financial system and proposed an alternative payment system called Bitcoin. The main issues Satoshi stressed on was trust, respectively lack of trust and privacy and identity theft. It is very important to understand, that the problem statement of Satoshi was related to the behaviour of centralised authorities.

Bitcoin makes a distinguished political statement

This is article from January 3rd 2009 (print media had a good time then) announcing another bailout of British banks is literally a cornerstone of Bitcoin. On February 11th 2009 the Bitcoin software and the blockchain were released and everybody was invited to participate.

The first block of the Bitcoin Blockchain contains a short text which is not relevant for the program but makes a reference to the article in the Times. This text is stored in the Bitcoin blockchain and is also part of the source code, because is the first block. This means: This message is stored on thousands of computers around the world, and the chances that it will not disappear as long as computers are operational on this planet are quite good.

Design Principles of Bitcoin

Bitcoin is a global system which uses mathematics and computer science to build an open source software which is deployed on a global distributed network. Rules and controls of the system are connected to human behaviour and economic principles and organized with algorithms and game theory. The main strength of Bitcoin lies in the combination of several different principles:

It is a global system, where everybody connected to the internet can participate.

It uses mathematics, game theory and computer science for its algorithm. This algorithm reflects the user behaviour and is steered by laws of random and economic incentives.

The main principles of a Blockchain Algorithm

Now, leaving Bitcoin and going to the more general principles of other blockchains, we still recognize the basic characteristics of Bitcoin. If you do not see a similarity to Bitcoin, then it is not a Blockchain! Blockchains check and perform transactions from any source and store them in a public database (also called public ledger) on all participating nodes. Transactions are signed and identified by a public key, the owner of the transaction is identified by a private key.

Secure Identities and transactions with:

Cryptography

Distributed multilayer consensus

Economic incentives

Randomized execution

The potential of Blockchains

Most people talking and thinking of Blockchain refer to a focused area of application without referring to the big picture of “how the world works”. Satoshi was complaining about the role of the banks (and I agree with him), but I don’t think that he was referring explicitly to our three exiles from Vienna: But still, we can categorize the impact or potential of blockchain in their terms.

Blockchains diffuse the role of centralized organizations and systems like banks, government, companies

Blockchains give the control over identity and data to the single user

Blockchains are a seed for new structures in communication and business processes

And this brings us back to the article in the Economist, which concludes, that today we should fight for a decentralisation of the internet, so that individuals own their own data and identities, because unless power is dispersed, it is always dangerous.

One example from my personal experience: Scientific publishing, a 25 billion $ market

I would like to give you one example, which is related to Education, Research and Publication. I am personally engaged in this project, called EUREKA, which seeks to change completely the process of scientific publishing. Today, when you have research results, you send your findings to a publisher which organizes the review and publication of your article. This process has besides many shortcomings the effect that the whole financial profit goes to global companies whereas the researchers who do the whole work get nothing and the bill is mostly paid by taxpayers through research funding. With EUREKA the ownership of intellectual contributions stays with its author, and the exchange of money is directly between the authors and their readers.

Blockchains are a challenge for everybody!

This following list of impacts of blockchain for individuals comes from the JRC Science for Policy Report in Education. Download report

Self-sovereignty, i.e. for users to identify themselves while at the same time maintaining control over the storage and management of their personal data;

Trust, i.e. for a technical infrastructure that gives people enough confidence in its operations to carry through with transactions such as payments or the issue of certificates;

Transparency & Provenance, i.e. for users to conduct transactions in knowledge that each party has the capacity to enter into that transaction;

Immutability, i.e. for records to be written and stored permanently, without the possibility of modification;

Disintermediation, i.e. the removal of the need for a central controlling authority to manage transactions or keep records;

Collaboration, i.e. the ability of parties to transact directly with each other without the need for mediating third parties.

I agree very much with each of these points. But we must consider, that unless everybody understands these things and starts to accept the consequences of change, it will not happen by itself. It is still a long way to go which will need also a lot of time. Although I am enthusiastic about Blockchains, I do not believe, that they are only for our good. They will change the internet and how we use it.

But please do not let experts and lobbyist alone shape how this is done, all of us are relevant in these decisions. Thank you for reading my article, I look forward to discussions with you.

Walter Dettling