We are on the verge of an economic revolution
It’s said that blockchains will dramatically transform the world. But is this just hype? Yes and no.
Blockchain technology is indeed in the Gartner Hype Cycle. By googling the words ‘blockchain’ and ‘revolution’, you’ll discover that blockchains will revolutionise the housing market, the financial sector, historiography, energy production, consumption, and even the entire world.
In blockchain technology, the meat of the matter is a decentralised database that cannot be manipulated. All users have the same, updated version of the blockchain, and every change must be made as a new entry. Every entry remains visible and cannot be altered afterwards.
Many people know that bitcoin is based on blockchain technology. Both bitcoin and another popular blockchain application, Ethereum, are based on the use of a public blockchain rather than a private one that is only accessible to certain companies.
However, most of the debate surrounding blockchains deals with private blockchains that fail to harness the power of the public blockchain. An example of such a project is the electronic register of housing company shares, which will be introduced next year and enable digital real estate sales.
Professor Pekka Nikander of Aalto University is one of Finland’s best-known blockchain experts. He points out that calling private blockchains blockchains is largely a marketing ploy.
“Private blockchains are transactional databases that belong to single companies or corporate clusters. I wouldn’t even call them blockchains. If you want to maintain a database that isn’t under the control of any single company, a closed blockchain – that is, a decentralised database – is very useful,” says Nikander.
Price restricts the use of public blockchains
Many people are familiar with bitcoin, but few actually use bitcoin to pay for purchases, even though it’s now possible in some stores. Using bitcoin in grocery stores isn’t very convenient – for a long time, a bitcoin transaction cost over 10 euros and currently still costs an average of over one euro. And you could wait up to an hour before the bitcoin network has given adequate verification of payment.
“Using Bitcoin and Ethereum is really expensive. For example, using bitcoin to pay for data storage would cost about ten million times more than storing the same data in a fault-tolerant cloud. Likewise, the bill for using Ethereum would be in the range of a million times more expensive than using a cloud. There would need to be a really good reason for using an open blockchain to justify the vast costs,” says Nikander.
One reason is lack of trust. A lack of trust and poor traceability means that drug and arms dealers, for example, are willing to pay a high price for transactions and wait for verification.
“Applying traditional business thinking to open blockchains only occurs in certain rather narrow sectors,” says Nikander.
How will blockchains revolutionise the world?
Although open blockchain technology is currently expensive and impractical, it may not necessarily be so in the coming decade.
Nikander quotes US economist Jeremy Rifkin, who says that, thanks to advancements in communications devices, we’re already experiencing a third industrial revolution. During this upheaval, blockchains have the potential to become the drivers of the century.
“I believe that we are on the threshold of a fundamental economic revolution,” says Nikander.
He gives China as an example. China made a quick leap from cash to the immensely popular payment applications Alipay and WeChat, which can in practice do everything a modern urbanite needs: borrow books from the library, pay almost everything from electricity bills to grocery bills, and order takeaways or taxis.
Alipay and WeChat users receive a form of credit rating based on, for example, purchasing behaviour, friends’ ratings, qualifications and assets. A sufficiently good rating brings a variety of benefits, such as free upgrades in hotels. For companies, it’s just a matter of business, but an unofficial credit rating system is needed in China, as corresponding information has previously hampered the granting of credit.
“In this case, a blockchain could enable the creation of a more democratic system. We could have a reputation passport based on an open blockchain – one that would be independent of major corporations. The development costs associated with this new type of economy is how open blockchains will change the world,” Nikander says.
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