SOCIETY | Jul 12, 2018

Back2basics: Blockchain

The meaning of the word “Blockchain”

Blockchain. For most people Blockchain is synonymous with Bitcoin, the first and most important of the cryptocurrencies which have troubled the financial world for some time, bestowing unexpected and sometime short-lived windfalls to a few, threatening many with the risk of losing a heap of money, but allowing everyone to dream a bit: and dreaming doesn’t hurt anyone, much less their bank account.

However, as often happens, Bitcoin – and cryptocurrencies in general – are only one, and not even the most interesting – of the many possible applications that use this “block chain” everyone is talking about (often ignorantly).

What is Blockchain, and why does it promise to become one of the most important innovations of recent years?

Blockchain is based on an established Distributed Ledger Technology system (with the acronym DLT),  that can be described more simply as “technology based on a distributed ledger.” And after all, DLTs are nothing more than systems that, thanks to network technology, allow us to rethink processes requiring secure registration of transactions involving different parties. E.g. the sale of a house, the signing of a contract, tracking a product along the supply chain, an exchange of goods… or of currency (in the case of Bitcoin and its imitators these don’t correspond to an officially recognized fiat currency but to a tradeable, virtual good generated through a complex process based on mathematical algorithms which represent a sort of bartering instrument, but that’s another story).

The paradigm change created by DLTs has a huge impact: this technology can become for transactions what the Internet is for information.

For centuries, we have grown accustomed to recording contracts and transactions using an instrument which has had thousands of names over time but in practice has never strayed much from the old concept of a “register”: a public record in which contracts are entered. The registration of contracts (or, more generally, the presence of a specific transaction within the register) confirms its validity. Obviously, because the register also bestows legal validity, its management needed to be entrusted to Higher Institutions: the Notary, the Town Hall, Certification Bodies (the reader is asked to use Capital Letters in order to recognise the Authority to these Parties).

But what would happen if a technology were developed that could allow everyone to possess a constantly updated copy of the register of transactions: giving them validity and making them definite, immutable, set in time, confidential and secure in terms of their contents, while at the same time eliminating the need for any Higher Institution?

A true revolution would take place in how we perceive the role of certification bodies and public registers, as well as all the traditional brokerage models (from the marketplace to the securities exchange): a revolution made possible by DLTS. Because, at its heart, the distributed ledger made possible by this technology is nothing more than that: instead of everyone needing to go to a Notary to register a deed, the recording of the transaction occurs at the moment everyone has it in their file archives.

What are its applications?

The technology is definitely complex and the model by which it functions requires an enormous degree of data redundancy, but its applications can have a very broad range: from cryptocurrencies– which are nothing more than the killer application thanks to which everyone has heard talk of Blockchain – to a “true” sharing economy, in which sharing does not require intermediaries to manage the actual users’ information (turning it into units that are not always returned to the users who generated them).

Then we have a Social Network without a central platform, in which everyone is truly the “owner” of his own data; as well as “smart” contracts, in which registration does not require the involvement of third-party entities; processes for managing supply chains which are controlled and certified by the “community” of actors who comprise it; as well as systems for managing credit in which each underwriter’s rights are guaranteed by a platform composed of all other parties.

Stefano Epifani