Blockchain is old hat. In 1991 blockchain was first proposed by two scientists at Bell Labs, long enough for the technology to mature and stand on its own feet. However, €347 million of EU funding has been approved to promote blockchain, while this week Irish government agencies divert resources hoping this generation old technology will be the next big thing.
Blockchain is a digital system that makes it difficult to edit past records and is frequently associated with cryptocurrencies. It is a simple technology which does not require much training for a computer programmer to use. Records are effectively stamped with the date and time and linked with the last record. This can make it almost impossible for someone to change an old record, such as forge old property deeds or making changes to a deceased person’s will, as the date stamp cannot be changed.
This has some modest uses, such as keeping track of supply chains. However, there are other methods that can achieve the same outcomes, and most of the touted benefits are simply the well-established benefits of digitalising paper records. Such uses do not need government support, let alone €347 million of EU funding.
The oldest surviving blockchain dates from 1995. Since then, other technologies have been truly transformative. Google’s search engine has revolutionised how we find information, Netflix has revolutionised how we find a film to watch, and digital platforms like Tinder have revolutionised finding a romantic partner. It is hard to find any area where blockchain has been a gain to society.
Despite the muted benefits of the technology, its advocates have been extremely vocal and have gained the support of government agencies. Blockchain Ireland, an advocacy group, includes the IDA Ireland in a leading role. Indeed, the IDA’s own strategy aims to make Ireland a leading centre for blockchain. Indeed, Minister for Finance Michael McGrath gave the keynote address to Blockchain Ireland week on Monday 30th May.
Other agencies have also diverted resources to support this gimmick. The government agency Skillsnet Ireland has training programmes, up to master’s degree level, and claims blockchain has the potential to change the very way business and government operate. Even notable entities such as the ESRI have put resources into estimating future demands for blockchain workers as part of an EU funded project, though without looking at whether the technology is useful.
Advocates are fervent in their view blockchain can revolutionise business and society. It gained greater attention when in 2009 the inventor of Bitcoin combined it with another technology called distributed ledger. This is where most of the excitement, and danger, lies.
Rather than one entity, such as a bank or land registry, keeping note of records, with distributed ledger this is decentralised among potentially thousands of users. When a new record is made, it is broadcast to all the users. After some time one of the users consolidates these new records into a block. If the majority agree that this block matches their own records, it is added to the previous block, forming a chain.
If the claims of advocates were met, blockchain and distributed ledger would eliminate the need for intermediaries, such as banks and land registries. The only accepted version of the truth would be what is recorded on the blockchain. More radically, there would be no scope for courts to settle disputes - what each person owns would be publicly visible. This could be transformative in a country where the legal system and government are perceived as incompetent or corrupt.
The public visibility of transactions raise privacy concerns. However, there are also more fundamental flaws.
As the majority of users determine what is accepted as the truth, the network can be flooded by a bogus user setting up thousands of accounts and simply voting to transfer all the assets to themselves. Therefore, all users may be asked to perform a costly activity (such as solve a puzzle), making it too expensive to set up bogus accounts. This leads to extremely costly transactions. In the case of Bitcoin, the cost in terms of electricity used to validate transactions is the same as that used by Norway. Cheaper electricity would just mean more needs to be used, to maintain the costly deterrent.
A proposed alternative for deterring bogus users is to ask each user to prove they have a stake in the network and pledge something of value, before they validate transactions. However, this means whoever has the majority of the wealth can determine what is a genuine record. This would be like allowing a bank’s wealthiest customers decide which transactions are valid and create bogus transactions that transfer assets towards them.
Advocates keep promising that these problems will be overcome. It is a consistent theme among them that soon solutions will be found, soon blockchain will change, and soon it will achieve the great things for which it is destined.
If a teenager said such things, we might offer some encouragement or support. Blockchain is 32 years old. It should be old enough to support itself.
Dr Rory O'Farrell @r_o_farrell
Rory O'Farrell is an economist lecturing in TU Dublin. He previously worked for the OECD and for NERI.
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