With blockchain to a decentralized society

In a previous article [1] Edwin Fennema already addressed what the blockchain is, namely technology that provides a transparent record of transactions whose truth each participant can verify. This allows us to organize certain markets in a decentralized rather than centralized manner. In this article, I discuss the principles of the technology, namely disintermediation (removing intermediaries) and smart contracts. From there, I describe what applications blockchains can offer.

Two problems that Bitcoin solves

The first blockchain is the Bitcoin network, which was developed to solve two issues in the financial market: how can I send money without an intermediary? And, how do I avoid the double-spend problem? These problems are closely related.

In our current financial system, trust in a third party is required to carry out a transaction. If you send money to a friend, it goes through your bank and his bank. You don't know these banks personally; you just have to assume that they are doing the transaction correctly. The banks therefore operate as a kind of "black box. Trust in our financial system is essential here. If that is missing, then this system cannot work.

To ensure this trust, these banks are monitored by trust institutions. On a Dutch level, these are the Netherlands Authority for the Financial Markets and the Dutch Central Bank. At the European level, they are joined by the European Central Bank, the European Banking Authority and the European Securities and Markets Authority. All these institutions must guarantee the stability of the financial system; because these institutions express their confidence in the banks, we can rely on that system. Yet uncertainty about stability remains, as we saw during the European sovereign debt crisis of 2010.

Nakamoto, the anonymous developer of bitcoin, saw that any system based on necessary reliance on the intermediary has shortcomings. He therefore developed a system that processes transactions without an intermediary. In the place of that intermediary, he placed a payment system without intermediaries. We also see this in Bitcoin. In the Bitcoin network, a transaction is handled by the miners [2] who are rewarded for it. In this way, it becomes possible to make transactions without an intermediary and you no longer need to trust the 'black box' bank.

The second problem, double-spending, involves the question: if no one has the power to monitor and adjust transactions, how can we guarantee that the transactions are correct and fair? In a system with a central authority, like a bank, this is solved by the bank approving each transaction. But in a blockchain network, we want to get rid of the central authority. Bitcoin solves this problem by making the entire transaction history public, announcing transactions publicly, and getting consensus on them.

Agreements

So Bitcoin makes it possible to perform transactions within a network without a third party. But how can you perform something, like applying for a loan, within a network without an intermediary? With the blockchain Ethereum! Because this blockchain makes comprehensive smart contracts possible.

Smart contracts are similar to the way we handle a soda machine. If I enter number 31 and put enough money in the machine, I automatically get the soft drink that goes with number 31. No other authority is needed for this; someone programmed it so that money and soda can be exchanged.

Smart contracts are therefore agreements that, after a certain condition is met, automatically perform actions. For example: if I demonstrate that I live in the Netherlands and have sufficient income, a smart contract can automatically provide me with a loan. More complex rules can also be set up, as long as there are clear conditions that lead to a certain outcome. This provides building blocks for groups of smart contracts, applications, and perhaps even groups of freelancers operating united without a central authority. [3] Disintermediation and smart contracts give us insight into the direction of blockchain application areas.

Applications for blockchain

There are many intermediaries in our society that act as authorities between individuals. Banks and notaries clearly fulfill this role, but Uber, Netflix, AirBnB and the stock market also facilitate these interactions. These parties need not fear blockchain directly, although a decentralized video streaming service has been established [4] and a decentralized rental network. [5] For these new networks, there is no central party facilitating the collaboration, but the individuals make their own arrangements.

Power and ownership then lie with the individuals participating in the network. No more trust in a third party is needed for this network to operate. Also, the revenue model and profits can fall to the individual participants.

But these are still future visions. Our current systems with intermediaries are the result of long-term build-up. We cannot simply replace this with a network without intermediaries. As a result, the emergence of decentralized networks with concrete applications is slow.

Technology is now at a point where we can develop the building blocks for these future applications. For example, the role of crypto currencies in decentralized networks is being considered. And smart contracts can simplify legal issues or property transfers.

We also see non-fungible tokens emerging. They can guarantee the authenticity of products or decentrally confirm that someone holds a degree.

Within the Startup & Innovation team, in the Centric Blockchain Research Lab, we are exploring how blockchains can help unite citizens in a decentralized way. Decentralized decision making allows citizens to be more involved in their environment. Also, a direct democratic platform can help enable more customization from the government. Finally, even new forms of democracy could be founded on a blockchain network, such as multiple closely cooperating governance cores, or a blending of direct and representative democracy. In the next article, we will take a closer look at decentralization made possible by blockchain technology.