May the Code be With You
Blockchain is a transparent online database that doesn't belong to anyone. It's the technology behind Bitcoin, but its application potential reaches far beyond cryptocurrencies. In fact, it can transform the world and change how we function as a society. Blockchain enthusiasts believe it might eliminate the need for us to trust each other. Here's all you need to know.
7 questions
1. Will blockchain transform social relations, citizen-government relations, public-private relations, and what is it doing to us as a society?2. What is blockchain technology?3. Why are blockchain companies so aggressively targeting the financial sector for implementing the technology?4. What sector could really benefit from blockchain technology?5. Why do people seem to know so little about blockchain technology, given the hype around it?6. What other historical advances are similar to blockchain in terms of changing our everyday lives?7. What are the most common myths about blockchain?

This is not discussed enough and is very important. There are many ways in which technology is transforming society: when you think about the ‘uberization’ of the economy and about artificial intelligence (AI), bots online interacting with us in customer service situations; blockchain is a part of this broader shift towards technology.

It’s still too early to tell what all this means, but one area that is potentially really important and interesting is how technology impacts human trust. Swedes were polled and asked, “How much do you trust your fellow Swede?”, and well over 60% of Swedes generally trust their fellow Swede. The same question was posed to Brazilians, and the result was that less than 10% of Brazilians trust their fellow citizens. So there is a massive trust gap between some countries. How can we bridge that trust gap? How could you ever get Brazil up to where Sweden is? That’s not an easy problem to solve, but there would be significant benefits if people trusted each other more in terms of economic activity, relationships, paying taxes, and so on. One of the big challenges Greece is facing, for example, is that people don’t think other people are paying their taxes, so why should they? What if we could interrupt this state of mistrust?

Blockchain could potentially create systems where you obviate the need for some forms of trust. You won’t actually need to trust someone, because the rules of the blockchain system would bound you to a set of governing processes, where certain things were prevented from happening (e.g., fraud). So in essence, you could replace trust with software code; “in code we trust” so to speak. We replace the handshake with a digital handshake that can’t be broken, because the rules of the system are organised in this way and are tamper-resistant (although, importantly, they are not entirely tamper-proof).

Now, what would it mean for society if we didn’t need to trust each other as much? This question requires greater attention.

Garrick Hileman and Michel Rauchs released the 2017 Global Blockchain Benchmarking Study, which can be downloaded as a PDF here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040224.
You can read the brief summary of their study here: https://insight.jbs.cam.ac.uk/2017/central-banks-are-trialling-blockchain/
The above interview was conducted on 12 December, 2017.

2/7 What is blockchain technology?

Blockchain technology is fairly easy to understand, but you need to first have a grasp of some basic terminology. For example, you have to understand what "hashing" means.


Hash - this is an encryption algorithm: it takes a text, a picture, or a file and then generates a string of symbols (numbers and letters) associated with it. The same files will always end up generating the same hash. Different files will ideally always generate different hashes, but sometimes there are coincidences and the same hash is generated for differing files. This is one of the weaknesses of this encryption algorithm.

For example, I could write a message saying "Hello world," and I want to send it to my friend. But I have to check if it got to my friend in the right form, so in the form that I sent it in. You could ask to see the sent message and compare it to the one you meant to send. But this is not always a rational thing to do, for example, if your message also has an HD video and takes up a lot of memory. So to make sure your message did not change as you sent it, you use hash. If your sent message has the same hash as the received message, that means your message has not been changed.

Let's try to hash a message. Enter the words "sha-256 online" into Google. Click one of the hash calculator links Google offers you (sha-256 is one of the hashing algorithms).=

For example, the hash from the phrase Hello world looks like this:

64ec88ca00b268e5ba1a35678a1b5316d212f4f366b2477232534a8aeca37f3c

And below we have a hash from the phrase hello world, with only lowercase letters:

b94d27b9934d3e08a52e52d7da7dabfac484efe37a5380ee9088f7ace2efcde9

There's no overlap!

You can experiment with any words and phrases. You will always get the same hash for the same words, and differing hashes for differing words.

So now we understand hash. Let's move on to the concept  of "blockchain."

Blockchain is a string of encrypted blocks of code that are connected to one another.

Let's create our own blockchain. You can put anything you want in it, but for the sake of this simple exercise let's write down money transactions.

The first block will contain the following information:

Anna → Bob :: 10 dollars

Bob →  Alice :: 20 dollars

Anna → Alex :: 30 dollars

You can write down this in information in your Notebook app and save it as a file titled 1.txt.
The first block in a blockchain of cryptocurrency is called a Gensis block, and it is written out by hand.

Copy the information from the first block, and go back to the website we used for the phrase Hello world. Now enter the three lines of information into the website and generate a hash. This is what we get:

169481005b3571466ade171fa9239a898ab54e782158c8beb7cf580eaeeb0e12

Now let's create a new file called 2.txt and write down a few more transactions, and in the last line enter the result of your hashing of the previous file. Like this:

Tammy→ Paul :: 50 dollars

Julian → Kate :: 20 dollars

169481005b3571466ade171fa9239a898ab54e782158c8beb7cf580eaeeb0e12

Save this, and calculate the hash for this entry. You get the information about transactions + the previous hash:

70823a45a1fef27129b0e678f8cd18ac8fd88111002fc5a414cfe6a9c7bc5e94

Now do the same thing with a third file, and so on. Do this with all the subsequent files. You can make as many as you want. And a collection of such files allows you to understand what the simple idea of "blockchain" actually entails.

3/7 Why are blockchain companies so aggressively targeting the financial sector for implementing the technology?

That’s something we have been wondering in our research group at the University of Cambridge. I think there is some inertia in the financial sector, just because Bitcoin was the first to use a decentralised system, and it targeted finance, so people continued in that direction. Secondly, there are very clear incentives when you have something like a cryptocurrency. You can rationalise about the actions of a possible adversary: when you are designing a system that needs to be secure, you would often think about the kind of adversary you are trying to resist. In cryptocurrency, it’s very easy for me to see that an adversary is someone who wants to get richer. But what is my adversary if I am talking about a voting system? There is a whole range of real-world attacks that I would consider in that case. In the financial system, it’s easy to abstract away all the realities, and just think of incentives and design a system around that.

"There is no real reason why we should be limited in our thinking about blockchain. There is a very nice project called “Follow my vote”, where they are trying to build a voting system based on blockchain technology."

You can see a new trend in some of the new cryptocurrencies, such as Solidus. It’s all about trying to incentivise good behaviour. Those kinds of things are really difficult to pull off if there is no money involved, where there are no clear tokens or something you can gain from a system. So it’s a very natural application of the incentivising technique of designing systems.

But there is no real reason why we should be limited in our thinking about blockchain. There is a very nice project called “Follow my vote”, where they are trying to build a voting system based on blockchain technology. If I’m not wrong, there was a community project in Belgium or the Netherlands where they were trying to issue social credits using a blockchain, so that people could buy their basic necessities, and at the same time the government could monitor whether they have been used for actual social good or not.

So to me, the application scenarios that haven’t been explored yet are the most exciting ones. But soon enough, we will see the rise of those.

4/7 What sector could really benefit from blockchain technology?

I was just recently discussing with an astronomer how to create a system for collecting data on stars over many decades, and having the database be writable by many parties around the world, such as astronomers working at different universities, and putting that into a shared system - a repository they could all access, all update, and that crucially could be resilient over many decades to very infrequent but catastrophic incidents. Blockchains can help address the low probability but unacceptably high cost incidents, like total data loss. If you are collecting data over a long enough time horizon, you need to think about the once every 10 year or 20 or 100 year catastrophic events.

Amazon web services, for example, is an incredibly sophisticated and resilient system for running the web. But it periodically crashes, and when it does, a big chunk of the web goes down. Putting astronomical data into an extremely resilient, writable, shared system that’s designed to weather the proverbial ‘100-year storm’ could make some sense. It’s yet another good example of a new, interesting use case for blockchain.

Garrick Hileman and Michel Rauchs released the 2017 Global Blockchain Benchmarking Study, which can be downloaded as a PDF here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040224.
You can read the brief summary of their study here: https://insight.jbs.cam.ac.uk/2017/central-banks-are-trialling-blockchain/
The above interview was conducted on 12 December, 2017.

5/7 Why do people seem to know so little about blockchain technology, given the hype around it?

I think this is a pretty common phenomenon with major technological breakthroughs. You see something new that’s radically different and captures people’s imaginations, it’s not well understood, and people are rushing to do something with it before properly understanding it because of the fear of being left behind. Either the price of it is going up, like with bitcoin, or it promises something that is really attractive, in a “fountain of youth” kind of way. Or, possibly, there is a limited supply of it, so you better get in before the opportunity is gone. Some of the principles at work here are not so uncommon; they are not so different from what we have seen historically.

Importantly, blockchain is a technology, and many people have a hard time wrapping their heads around new technologies, especially complex and radically different technologies like blockchain. At the same time, there is a monetary component to blockchain, and I have found in my years of teaching this subject that the vast majority people - and not due to any fault of their own - don’t really understand money.

How money comes into existence is not something that’s taught in secondary schools, let alone many Economics 101 courses; it’s something that is taken for granted. I ask audiences that I’m lecturing where they think the coins and banknotes in our wallets come from. Some people say, “they come from central banks”, which is true. However, what most people don’t know is that these central bank notes and coins are a tiny percentage of our money supply, 5% roughly in most countries. The other 95% of our money is mostly created by private commercial banks when they make loans. That’s not a widely known fact. So people already have a hard time understanding money, and then layered on top of it we have this new technology called bitcoin and blockchain, and people quickly get lost. But at the same time, the pace is moving fast, and there is a fear of missing out, and so it’s creating this kind of frenzy right now where people are like “oh my, I want a piece of this!,” and they don’t understand what it is.

Garrick Hileman and Michel Rauchs released the 2017 Global Blockchain Benchmarking Study, which can be downloaded as a PDF here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040224.
You can read the brief summary of their study here: https://insight.jbs.cam.ac.uk/2017/central-banks-are-trialling-blockchain/
The above interview was conducted on 12 December, 2017.

6/7 What other historical advances are similar to blockchain in terms of changing our everyday lives?

The internet gets mentioned a lot as a historical parallel, and I think that is actually a pretty good analogy for the blockchain phenomenon. 20 years ago, I was in San Francisco working at a tech incubator, so I was at ground zero during the internet phenomenon. People didn’t understand this thing called the internet; all these new businesses were being built, prices were going up. And then there was a crash, and a lot of companies were wiped out. At the same time, a few companies, Amazon for example, survived and flourished.

Between 1998 and 1999 Amazon’s stock price went up approximately 1400%, which is roughly equal to bitcoin’s price appreciation this year. While Amazon’s stock price, like most tech stocks, crashed in 2000-2001, the price has subsequently risen so much that the 2000 crash is now an unrecognizable blip on Amazon’s price chart. Bitcoin’s price chart, and the then big 2011 and 2014 price crashes, looks similar in many ways to Amazon’s. So not only is this an interesting comparison because these are technology-driven phenomena, but you also have similar price action with some of the longer-term winners, like Amazon, flourishing following a bubbly crash.

To me, that is a more appropriate historical analogy than, say, something like tulips, where the price went up and then crashed, and never really bounced back. Bitcoin’s price has gone up, crashed, gone up higher, crashed, gone up even higher, and now many people are expecting another crash. However, many people are becoming more familiar with Bitcoin’s resiliency following previous crashes, so if there is a big price correction I’m not sure we’ll see the same type of 90% drops in bitcoin’s price from peak to trough we’ve seen previously.

Garrick Hileman and Michel Rauchs released the 2017 Global Blockchain Benchmarking Study, which can be downloaded as a PDF here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040224.
You can read the brief summary of their study here: https://insight.jbs.cam.ac.uk/2017/central-banks-are-trialling-blockchain/
The above interview was conducted on 12 December, 2017.

7/7 What are the most common myths about blockchain?

Myths we hear often are that blockchains are immutable, that they are unchanging and unchangeable, permanent. This is simply not true; certainly, they are tamper-resistant, but they are not tamper-proof.

For example, there are ways in which a blockchain can be reorganised so the transactions that previously occurred were reversed. A good example of that was the Ethereum hard fork last year following the DAO hack, when roughly $60 million in funds were siphoned out of it by hackers, and after that a significant portion of the community decided to basically rewrite history. That is a good example of how blockchains are not permanent; they can be changed.

There is also an idea that blockchains are fully decentralised, and this is something that is not discussed enough. In fact, there are actually clear concentrations of power in the blockchain ecosystem that can influence the types of events I mentioned above. The best way to to characterize a blockchain on this point would be to say that it may be more decentralised as compared with traditional financial structures, systems, databases, but the idea that it is somehow completely decentralised is misleading.

There is also the view that somehow blockchains are immune to censorship, that they are “censorship proof,” meaning that if you want to send say a bitcoin transaction nothing can stop that transaction from being completed. In practice, that is basically true. In reality, however, there are ways for the censorship of blockchain transactions to occur. For example, if there were a sufficient concentration of mining hash power within a group of people, or a single entity, that wanted to block a particular address on the blockchain from transacting, then that address could be blocked. In other words, a powerful enough miner (or group of miners) could censor certain addresses on the network from actually sending coins to other addresses. So while blockchains may be more censorship-resistant than other networks, they are not 100% censorship-proof.

Garrick Hileman and Michel Rauchs released the 2017 Global Blockchain Benchmarking Study, which can be downloaded as a PDF here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040224.
You can read the brief summary of their study here: https://insight.jbs.cam.ac.uk/2017/central-banks-are-trialling-blockchain/
The above interview was conducted on 12 December, 2017.