Reporter’s Briefing: Explaining Blockchain

by June 14, 2017
Business journalists need to understand blockchain's enormous potential and considerable risk. (Image by "BTC Keychain" via Flickr)

Business journalists need to understand the enormous potential of blockchain technology—as well as its considerable risk. (Image by “BTC Keychain” via Flickr)

It’s been said that the companies driving innovation and forging new trails in the tech world are not run by idealistic Stanford dropouts. The true digital pioneers are in the porn business. Along with other darknet web users, these earliest adopters determine which technology will eventually dominate other sectors, from monetized internet content to virtual reality.

Given that scenario, it’s seems likely that blockchain, the technology behind bitcoin, which first rose to prominence as the currency of internet black markets, drug dealers and pornographers, will become similarly ubiquitous. And it just might.

What is it, anyway?

Blockchain technology was created for the digital currency, bitcoin. Bitcoin is a decentralized digital currency not tied to any government, financial agency or regulator. Users are part of a self-monitoring network. Bitcoin transactions are collected and stored in blocks (hence: block) along with a hash code tied to the previous block (hence: chain). The transaction is verified through a “proof-of-work problem,” in which members of the network (the computers themselves—these problems are beyond human capabilities) race against each other to find an arbitrary, randomized number that satisfies the problem.

That process creates a practically unalterable record of the transaction—think of an impossibly complicated accountant’s ledger visible to the whole network. The member that solves the problem receives an amount of bitcoin as a reward. This reward is what incentivizes members to constantly upkeep and verify the chain.

Because of the linkage of the hashes, changing the record would mean changing every other preceding block. The only other way to compromise the system would be if a majority of the network members banded together and had an advantage in solving the problem. This would give them  a sort of editorial control over the chain.

Bitcoin and blockchain have the potential to bring about a fundamental change in the way we do business. At their core, blockchain-based cryptocurrencies like bitcoin are different from fiat monies in that their value comes not from a governmental decree but only as a function of the transaction itself. And while that sounds like the dream of anarchists who want to free themselves from taxes and the SEC (and to some extent, it may be), there are real applications, even outside the digital currency sphere, on the horizon.

How can it be used?

Ironically, one example often touted by blockchain devotees is its potential use in tracking property ownership and other official records in countries with poor government infrastructure. Because every element—transaction, document, whatever—in the blockchain has a unique cryptographic ID, each can all be tracked with dependability. Google advocates using a blockchain-like system to create a ledger of all interactions with patient data in the UK’s National Health Service.

Blockchainesque ledgers could be used for something like tracking a salmonella outbreak, said Ed Finn, director of Arizona State University’s Center for Science and the Imagination. If the sale of every tomato was tracked in a ledger, for example, a disease outbreak could be quickly traced to the source and isolated.

One of the more ambitious applications is something called a smart contract. Essentially, it’s a piece of code written into the blockchain that can perform a transaction if certain conditions are met. The jury is still out on what exactly these can do, but Finn said contracts could be built into the onboard computers in cars to automatically transact with parking meters or gas pumps. A well-written smart contract would enable a computer to store funds and issue them without input from a person or financial institution. The possibilities are endless, though the probabilities are limited.

“I think that blockchain technologies offer the possibility of a new level of granularity and autonomy for tracking stuff,” Finn said.

Putting the blockchain cart before the horse

But blockchain is still weak in several areas. For one, the verification process is time-consuming and inefficient. As more blocks are added to the chain, more computers—meaning more energy and more space—are required to complete the proof-of-work problem. And, at least in the case of bitcoin, there is an artificial limit on the amount of bitcoins that can be created. Once that limit is reached, how can the users be incentivized to continue verifying the blocks?

Although it’s unlikely, there is a distinct possibility that someone could get majority control in a blockchain network. That could undermine the entire underlying philosophy, of allowing transactions between multiple entities that do not know each other. Distributed ledgers like blockchain could theoretically be controlled by governments that could  install strict meritocracies based on blockchain smart contracts.

Bitcoin-like services have also shown promise in developing countries with limited banking resources, helping consumers avoid costly exchange and transfer fees. But there’s a risk of only benefiting those with the resources to enter the complicated world of blockchain.

In essence, a technology that gained traction as an untraceable way to buy drugs on the internet has real potential. But the bad old days ain’t over yet. Whether the tech will be used to improve the world or just to consolidate wealth in Palo Alto has yet to be seen.

Reporter’s Takeaway

•   Business journalists should focus on how something like blockchain can be implemented in finance. The rise of decentralized autonomous organizations (DAOs) demonstrates how core concepts behind something like securities trading can be totally transformed by cryptocurrencies.

•   Now that you (hopefully) understand the basic technology, don’t get caught up in the weeds when writing your story. Most readers will care more about effect than cause in something as technical as this.

•  Don’t believe the all hype. It’s easy to be seduced by the swashbuckling fervor of Silicon Valley types, but business journalists need to understand the limits and dangers of this technology. Trying to compact the power structures of our world into lines of code risks misunderstanding how those power structures came to be in the first place.