Blockchain — panacea or bubble?

Blockchain — panacea or bubble?

Blockchain technology is taking the world by storm. From banking to health care, many tout block chain and the bit coin it enables as a cure-all. Others think bit coin is heading towards the edge. In between are those who see practical applications of block chain but caution on addiction to bit coin. On February 26th at the University of Copenhagen, I will be making a presentation entitled “Blockchain technology — good, bad, or somewhere in between?” This entry gives you a sneak preview of that talk.

Many of you have heard about “bit coin” but most of you don’t realize that block chain is what enables bit coin. If you are not a technologist, I believe the best way to understand block chain is by analogy. Take the poem by Shel Silverstein entitled “Where The Sidewalk Ends.” Below are the first two lines:

There is a place where the sidewalk ends

And before the street begins . . .

Now imagine that you enter into a Google documents session with your best friend to edit the poem. Instead of “ends” in the first sentence, you put “begins.” Your friend replaces “before” in the second sentence with “after” and “ends” in place of “begins.” These changes are all recorded on Google docs. Both of you can see the changes. Envision, now, that instead of just you and your friend making changes to the poem, there is a community of millions around the world who are making the changes to the poem. This is what is commonly known in computer software as an “open source” network.

Blockchain enables bit coin to work in a similar way. You and your friend do a transaction with bit coin. This transaction will be represented by an idiosyncratic number known as a “cryptographic hash.” It will then be placed on a block and added to the chain of other blocks. The block chain runs sequentially. So your transaction’s hash “777XYZ . . . 1” will be inserted into the next block, and that block will follow hash “777XYZ . . .0.” This would be akin to each word you put into the poem above, “begins,” “after,” “ends,” being represented by a hash. For the poem to rhyme, each word must fit. Similarly, any inserted block that doesn’t fit in the chain will change subsequent blocks’ hash tags, making the chain resistance to tampering.

There are many benefits to block chain. One is that your identity can be represented by a cryptographic hash or signature so as to protect you from hackers. Once your identity is verified, all of your personal information is then erased. In some ways, then, you become a numerical avatar. The benefit of this is that hackers can’t get to your personal information, such as your address, because this information isn’t stored.

But bitcoin is likely another story. For one, there is no centralized regulator given its open sourced nature. This means that the value attributed to bit coin is arbitrary, and there is no floor under which it won’t go. Such decentralization and lack of a central regulator can cause it to crash without warning, since bit coin transactions can be fantastical in reality but nobody would know until its too late.

Blockchain technology is likely here to stay, since it can be used to protect identities, encrypt financial transactions, or even sensitive national secrets. But bitcoin may be a bubble in the making.

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