Blockchain is slowly but surely stealing the limelight from bitcoin, the controversial cryptocurrency for which it acts as a kind of undercover headquarters. Bitcoin’s proponents, who include the Winklevoss twins of “The Social Network” fame, face an uncertain future as they steer their darling towards greater regulation in the hopes of attracting large-scale investors. Meanwhile blockchain is grabbing attention by continuing the tradition that made bitcoin successful in the first place: freedom.
Bitcoin was lauded for reducing the cost of transactions, but the real cause lay deeper than bitcoin itself, in powers of blockchain. Blockchain stores rigid copies of the millions of digital exchanges that make up the bitcoin markets. By managing the “posting, clearing, and settling” of each transaction as it happens in real time, blockchain allows people to bypass third-party banks and government agencies altogether while still guaranteeing a level of trust. Financial institutions charge less for transactions, lowering fees and raising the specter of micro-transactions.
While this sounds like a massive operation, the contents of a blockchain server look totally different from a government clearing house. Blockchain does not store user identities or even much transaction data, only proof that transactions occurred, which, not surprisingly if one thinks about it, is often enough to make transactions happen in the first place.
While anonymity appeals to many (including the creators of not one, but two online drug marketplaces), the heart of blockchain lies in its alleged “immutability.” Like the simplest of computer programs, it will faithfully execute whatever its human operators command it to do, over and over again, regardless of the consequences. Eric Piscini, a blockchain connoisseur at Deloitte Consulting, provided a fine bit of understatement when he gave this advice to potential blockchain users: “set your rules.”
The proposition is both empowering and unnerving. Experts say a rigid transactions algorithm could help reduce fraud through double-spending and what financial wizards call “manipulation of prior transactions,” but those benefits raise as many questions as they solve problems. What is to prevent the fraudulent programming of the blockchain itself? What kind of clients will its anonymity attract? If bitcoin is any indicator, the blockchain of the future may not resemble the one its proponents envision. Like bitcoin, blockchain will probably face the prospect of regulation as its popularity grows.
But all of this might not matter if the utility of blockchain is as broad as some say it is. Because of the unique way in which blockchain stores information while safeguarding identity, it has the potential to shake up other areas of society, such as the ways people create value and maintain their health.
For example, a variation on blockchain’s ability to collect information without storing identity could potentially allow inventors to more affordably claim intellectual property without the risk of exposing their private information. Additional tweaks could put blockchain in charge of medical records, sweeping away armies of medical staff and empowering patients to share their information directly with doctors at the touch of a button.
The reason blockchain has a greater chance of long-term success than bitcoin is that it transcends any one practical application. In doing so, it engages the energy of entrepreneurs in dozens of different fields who will not only raise the prospect of new blockchain applications, but also find ways to overcome its obstacles. Even if 90 percent of blockchain applications fail to increase efficiency on account of regulation, it will probably only take one success story to shake up the exchange of information in a fundamental, cost-saving way.
Regardless of its success, blockchain will teach us a lot about the nature of regulation in our society. It is easy to forget that financial regulations, like the financial creations of today, were innovations yesterday. As the pendulum swings away from regulation, will regulation become more advanced in response? Is there a level of regulation beneath which modern societies cannot safely pass? Only time, and an army of entrepreneurs, can tell. And with any success, they will.