Blockchain has captured the minds and browsers of technologists and business people throughout the online world. A popular and confusing buzzword across industries, the b-word is being dropped everywhere from Fortune 100 art laden lobbies to pizza scented startup studios. A common definition of blockchain is: a shared database for recording information in a chronological chain of data blocks. (a glossary of blockchain jargon)
Technically, a blockchain doesn’t have to be public or immutable but the way self-proclaimed blockchain evangelists have been using it, implies at least the features of a bitcoin blockchain. (bitcoin original 2008 white paper)
Put in more complex terms, blockchain can also imply real-time, always-online, digitized, decentralized, distributed, democratized, transparent, encrypted ledger, powered by nodes (miners) on a public or private network that ensure immutable record verification through trustless consensus. Blockchain technology is part of the fintech ecosystem — shelved between regtech and proptech.
The term blockchain has no standard technical definition but is a loose umbrella term used by various parties to refer to systems that bear varying levels of resemblance to bitcoin and its ledger. Blockchains are frequently presented as more secure than traditional registries — a misleading claim. (source)
Different blockchain configurations allow for heterogeneous decentralized apps (DApps), digital tokens, smart contracts and decentralized autonomous organizations (DAOs). This opens up as many application possibilities as the internet did in the early 90s.
More commonly, blockchain is known for being the backbone that powers bitcoin (a cryptocurrency) which sparked the disruptive innovation happening in finance today.
To Decentralize or not to Decentralize? And Government Transparency Questions
The oil economies of the Middle East are moving towards alternative energy and alternative revenue streams. Financial hubs are emerging in all major GCC cities and attracting Asian, American and European investors and finance MVPs.
The UAE plans to open a financial free-zone on Al Maryah Island in Abu Dhabi, which I’m sure will attract major hedge funds and fintech companies. Real estate giants are moving in early with major development projects underway. The common factor here is money. Money for developing the Abu Dhabi Economic Vision 2030, money for sustainable clean energy, money for construction, money for city branding and money for the new ADX. All this current and future money exchange needs a robust financial infrastructure, which means that legacy systems will have to be upgraded.
Money has to exchange through many hands for any major real estate deal or securities trading to take place—this always involves financial exposure to third parties and reputable custodians. Costly fees, lengthy transaction time, slow verification and information leaks are all expected in the transaction process. With blockchain technology, transactions can be made instantly, securely and directly via peer-to-peer protocol. The common example of sending money to yourself in another country should not take days. The current way of wiring money is slower than physically flying it yourself. This is the logistical bank equivalent of mailing a physical letter every time you send an email.
Banks running on a blockchain can be more efficient and cut considerable costs, ranging from department downsizing to intermediary bank elimination. They can charge their customers less for a faster and better service and still make a profit by digitizing, automating and shortening the transfer operation chain. Automating repetitive data entry jobs can translate to bank employees pivoting towards new digital services departments, where they can learn new skills and gain multidisciplinary experience. The account holder will not need to worry about understanding the new digital infrastructure and instead enjoy frictionless banking. Seamless banking and cross-border transacting should have been technologically available two decades ago, had the banks innovated internally. Banks are now being forced to rewire their internal operations because of the disruption happening in finance by startups, technologists and developers.
I don’t see the oldest financial institutions going gently into the night and I don’t see a handful of inexperienced crypto-wizards upending the whole of finance while nestled in oversized hoodies—slurping high fructose energy elixirs. Instead, I see something in between. Wise banks will identify these days of crypto reckoning and adjust at will before competitive banks beat them to the digital services race. We will see a new era of smart banking where we will talk to our robo-advisors more than bank tellers or customer service reps. The first banks to roll out these services will secure the perplexing millennial demographic—that consulting companies are charging hefty fees to advise on.
Contrary to common belief, cryptocurrencies are the most traceable form of currency available, especially potential government issued cryptocurrencies. This crypto-vation will create new job opportunities in old institutions, maybe we will see crypto-anti-money-laundering officers and digital financial forensics departments by 2020. The SHA-256 cryptographic hash algorithm used by the bitcoin peer-to-peer protocol was developed by the NSA and this area too will need capable cryptographers and cryptoanalysts for the new financial era.
Gulf Cooperation Council Coin
Speaking from a local perspective, blockchain can be the cost-effective keystone technology to pilot a GCC currency. The Euro has its advantages and obvious disadvantages. Emerging economies have learned from this naïve intergovernmental experiment but there must be another way to simulate a collective currency on a smaller scale without incurring the Euro’s deployment and post-deployment costs.
Cost benefit of a GCC cryptocurrency:
- No currency design cost
- No banknote printing costs
- No coin minting cost
- No physical currency transportation cost
- No physical currency insurance costs
- No security cost (logistics, staff, cameras, weapons)
- No central point of failure (if the central bank is attacked or destroyed in a natural disaster)
- Less operating space needed (smaller bank)
- Less employees needed (automation)
Launching a digital cryptocurrency between neighboring countries is a cost effective way for regulators to test the efficiency of potential markets. In a cooperative regulatory sandbox, a GCC coin can be scrutinized between governments and central banks before being deployed on a large scale. In theory, a GCC coin can be used for products and services that are uniform in price across borders but need ID verification to abide with KYC & AML regulations. Local fiat currency can still be used by smaller vendors and people not willing to switch to crypto.
In Lebanon, the Lebanese lira and the U.S. dollar are used for payment interchangeably. Different vendors prefer different payment depending on the item price and type. You would use dollars to pay for a first edition of Kahlil Gibran’s The Prophet and in the shop right next door use liras to buy dried sage for the aromatic tea you’ll drink while reading your newly acquired book. This rule of thumb secondary currency system is widespread across developing countries that are under U.S. hegemony. Regional GCC, Levant or Baltic cryptocurrencies can reduce dollar dependence and bind neighbors closer together via a shared financial incentive—minus the continental economic risks.
Beyond Borders
I’ve attended blockchain conferences and blockchain talks to get a clearer picture of how people are absorbing the blockchain world and where the culture is going with it. What was clear to me was the divide between financial minds and engineering minds, with ICT minds stuck in the middle. Again, I stress the importance of multidisciplinary thinking. Dimwitted, rogue, pseudo-traders were in my opinion the weakest in all areas of knowledge — except for reciting market prices by heart. Perhaps I’m being too harsh but price knowledge is not real knowledge. Not really knowing about the cryptocurrency you’re buying, what technical problem it solves (if it has a practical use) or not knowing the development team’s vision is enough for most inquisitive people to stop having a conversation with you.
I had a stringent looking middle-aged lady from one of the embassies ask me about cryptocurrency taxation. Coming from a country with no tax, I understood her position but tried to see beyond it.
I answered the tax vexed diplomat with a question. If a Chinese astronaut on a space station has supplies that a NASA space shuttle commander and Russian cosmonaut need — and they transact with ethereum — under whose jurisdiction is the transaction taking place and which government is collecting what tax? This is the problem with domain dependent bureaucrats. They can’t think outside their office box…
According to Oxford Dictionaries, Cyberspace is: “The notional environment in which communication over computer networks occurs.” Computer networks are not bound to physical geography or incumbent governments. It’s our responsibility to update our minds just as we update our words, handheld devices and understanding of the ebb and flow of contemporary life.
We are taught at a very early age to learn the names of the different countries on the classroom globe, because of this our minds are wired to label and draw imaginary lines across the world’s natural landscape. We call these imaginary lines borders. These borders have tried to contain the internet with frustrating geofence messages like, ‘video/title is not available in your country.’ Anyone who grew up with the internet doesn’t respond well to data and media obstruction or exclusion. The internet is supposed to be open and for everybody. The real danger is when these borders change from keeping us safe to containing our minds.
Post-blockchain disruption scenarios:
- New digital economy interlinks existing industries and emerging economies. Blockchain can connect the sharing economy, creative economy, attention economy and several cultural industries.
- Data gathered from tracking cryptocurrency spending can help central and commercial banks forecast for the future and control the money supply since financial data will be live.
- Not all governments will embrace blockchain enabled financial transparency. Corrupt governments will resist technological change as it will shed light on under-the-table dealings and reveal government payroll cronies.
- The crypto age will encourage organizational transparency which will be followed by mandatory accountability. Wall Street execs will engage in less shady financial curation as the public will have access to more information to demystify Wall Street rhetoric.
- Wall Street builds a blockchain and current cryptocurrency market get regulated out of value. On this new infrastructure, an ‘official’ market is setup through authorized gatekeepers.
- Central banks build private blockchains for state issued cryptocurrencies. (Fedcoin)
- Abundance of peer-to-peer microfinancing and crowdfunding platforms will disrupt bank loans models.
- Standardized legal matters can be settled via smarts contracts, ensuring the rights of both parties without high lawyer fees. Future lawyers will need to understand programming language. (multidisciplinary)
- Big four accounting firm bookkeeping methods become obsolete: that is why all these firms are running blockchain labs internally, they have to continuously update their service offerings as traditional auditing becomes superfluous. Accountants are being replaced by automated systems that do their expensive work more accurately in seconds.
- Technocrats inherit the earth: a new technological elite gains technical and financial dominance over global markets which reshuffles economic and political power.
- Privacy concerns will be part of daily conversation if a fully digitized financial system is adopted.
- Decentralized power: solar powered micro grids will feed electricity to city blocks with reduced financial and environmental cost.
- Blockchain verified degrees and certificates: important for skilled refugees that need professional verification to find work. Blockchain verified degree holders will make recruiter jobs easier.
- Intellectual property and Creative Commons: artists, musicians and designers can freely control their own content and get paid directly without big corporations and third parties owning and profiting off their music and media. A creative blockchain can also foster open collaboration by democratizing media metadata. For example, a music video can directly link viewers to the videographer, sound engineer, graphic designer and other skilled contributors that are often overlooked or inaccessible. Access to metadata will give creatives the power to manage their content without getting entangled in the trappings of intermediaries and their contract gurus.
- Healthcare blockchain: encrypted and secure smart database that pays doctors and practitioners directly for their services.
- Research blockchain: universities and research centers will be able to buy computing power and focus on research instead of running IT labs that they once needed for expensive in-house computation.
- Real estate blockchain: property deeds become organized, digitized and secured. Timestamped transaction details and live property valuation will be available for buyers to better assess purchases without going through clustered third parties that withhold important information to make a better sale.
- Food blockchain: a farm-to-table agricultural blockchain can ensure customers that the cantaloupe they are buying is grown locally and non-GMO. If any produce is found to be contaminated, a blockchain can help isolate the contaminated food without an international reputation damaging recall.
- ID blockchain: proof of legal identity for all—via blockchain—will be the global ID standard. The United Nations plans to implement universal biometric identification for all of humanity by 2030—to counter human trafficking and track population growth. (See ID 2020) Though the ‘humanitarian’ intention is framed in the UN Sustainability Goals and weaved in with the World Bank, this move is very alarming as an Orwellian future doesn’t seem farfetched.
- UN’s financial inclusion goal met by a blockchain powered solution: the unbanked and underbanked get fair access to financial services.
- Western Union shuts down: as banking transforms, remittance companies will become obsolete. Blockchain disruption will force financial services companies to reassess their business model or join the cemetery of legacy finance fossils. Transactions will become as simple, fast and cost efficient as sending an email.
- Blockchain induced existential crisis: As menial bank jobs get automated away we will need to redefine ‘work’ and life’s purpose—especially for workaholics. Creative industries will be the norm for future generations as creative self-discovery will be prioritized over mechanized keyboard inputting skills.
Risks
- ICO scams: many so called initial coin offerings are pushing ripped off white papers on .io TLDs with polished landing pages are misleading many. Beware of scams!
- Hackers: cryptocurrencies are highly sought after by hackers looking for vulnerable digital wallets. Protect your private keys.
- High volatility: a tweet from Putin, a death hoax surrounding Vitalik or an endorsement from quasi-influential crypto-charlatans can surge or plummet cryptocurrencies before you can refresh your APIs.
- Quantum computers: A quantum computer (if built and deployed) can easily overtake 51% of the nodes and manipulate a blockchain. With superior computational capacity, quantum computers threaten not only blockchains but more importantly power grids and satellite defense systems.
- Corporate monopoly: Big banks could patent open-source technologies by reconfiguring blockchain spinoffs with corporate add-ons.
- Sustainability: cryptocurrency mining is using up more power than entire countries and power consumption is steadily increasing. This puts a lot of stress on power grids and has a negative environmental impact.
- Human error: a programming error can lock developers out of the algorithmic black box, allowing coding bugs to be exploited by those who can spot them first.
- AI: a high frequency trading AI can manipulate the unregulated cryptocurrency market better than any veteran traders.
- Solar flares: a solar flare could cause a power blackout and paralyze the computers running the blockchain network.
- Miners: if miners are disincentivized and stop mining the network cannot process transactions. Over blockchain’s short history, miners have been criminalized by governments, threatened by gangs and struggle to secure the hardware they need to operate.
- Sheriffless cyberspace: the cryptocurrency market is unregulated and is pretty much the wild west—be careful what address you enter because there is no ‘undo’ when it comes to bitcoin transactions. If you lose your private keys or if your computer is stolen, no authority can reissue your lost crypto coinage.
Blockchain Capitals
Zug, Switzerland: The town of Zug, dubbed crypto valley has attracted many pioneering fintech startups because of their pro-blockchain business regulatory framework. With its low taxes, sandboxes, up-to-date policies and political stability, Zug has become Europe’s innovation Mecca for the crypto ecosystem. Zug is home to: the Ethereum Foundation, Bancor, Dfinity, Equippo, Jibrel Network, ShapeShift, Ambrosus and many others.
As a whole, Switzerland needs no defense. It's the most decentralized country in the world and is ranked 1st/137 in the World Economic Forum Global Competitiveness Index.
Estonia: After the Soviet collapse, newly independent Estonia started planning for a digital future to gain a competitive advantage in a relevant industry. Known for Skype and Kazaa in the early 2000s, Estonia quickly established its technological dominance by rolling out a full-fledged e-government providing citizens with e-services—commonly referred to as e-Estonia. Early digital infrastructure investment allowed Estonia to establish X-Road and become a model for a digital governance before the launch of bitcoin. The republic of Estonia was the first country to launch an e-residency program and the first country to permit e-voting.
Today, the fact that every interaction with, and within, the Estonian government happens digitally has had subtle social effects. For example, apart from only carrying two cards (driving licenses, donor cards and the like have been subsumed into identity cards), Estonians have complete control over their personal data. The portal you can access with your identity card gives you a log of everyone who has accessed it. If you see something you do not like — a doctor other than your own looking at your medical records, for instance — you can click to report it to the data ombudsman. A civil servant then has to justify the intrusion.
Dubai, UAE: Over the past decade, Dubai has been aggressively developing as a business hub and commercial port, and getting left out of the blockchain wave is not in the emirate’s agenda. The Dubai blockchain strategy is part of Dubai’s mandate to become a leader in the global smart economy.
With its reduced market entry barriers, Dubai hosts the headquarters of many business consulting, aviation and tech heavy hitters. The establishment of the Global Blockchain Council shows how serious Dubai is about investing in blockchain technology.
Conclusion
The Ford Model T was an all-round terrible car. It had no doors, no signal lights and was unsafe to drive. Nonetheless, it revolutionized transportation and paved the way for the automotive industry and the infrastructure developers that connected the physical world. It created new jobs, drove combustion engine innovation and fueled complimentary markets.
Bitcoin is to cryptocurrencies what the Model T was to cars, and today we have the all-electric Tesla Roadster. Even if most ICOs fail, the crypto bubble bursts, and bitcoin goes to zero, we will learn what not to do. Trial and error helps us build a better bitcoin for the next crypto wave.
I think the blockchain hype will die out when it becomes an industry standard. Blockchain will join bluetooth and become a background technology we use every day and don’t talk about.
Investing in the semiconductor companies that power blockchains and cryptocurrency mining might be the rational thing to do if you want to profit of the cryptocurrency craze indirectly from a safe distance.
Q: Who is guaranteed a profit during a gold rush?
A: Those selling the mining equipment.
Concluding Lessons
(cited from: Bitcoin’s Academic Pedigree)…most of the ideas in bitcoin that have generated excitement in the enterprise, such as distributed ledgers and Byzantine agreement, actually date back 20 years or more. Recognize that your problem may not require any breakthroughs — there may be long-forgotten solutions in research papers.
Academia seems to have the opposite problem, at least in this instance: a resistance to radical, extrinsic ideas. The bitcoin white paper, despite the pedigree of many of its ideas, was more novel than most academic research. Moreover, Nakamoto did not care for academic peer review and did not fully connect it to its history. As a result, academics essentially ignored bitcoin for several years. Many academic communities informally argued that Bitcoin could not work, based on theoretical models or experiences with past systems, despite the fact it was working in practice.
We have seen repeatedly that ideas in the research literature can be gradually forgotten or lie unappreciated, especially if they are ahead of their time, even in popular areas of research. Both practitioners and academics would do well to revisit old ideas to glean insights for present systems. Bitcoin was unusual and successful not because it was on the cutting edge of research on any of its components, but because it combined old ideas from many previously unrelated fields. This is not easy to do, as it requires bridging disparate terminology, assumptions, and so on, but it is a valuable blueprint for innovation.
Practitioners would benefit from being able to identify overhyped technology. Some indicators of hype: difficulty identifying the technical innovation; difficulty pinning down the meaning of supposedly technical terms, because of companies eager to attach their own products to the bandwagon; difficulty identifying the problem that is being solved; and finally, claims of technology solving social problems or creating economic/political upheaval.
In contrast, academia has difficulty selling its inventions. For example, it’s unfortunate that the original proof-of-work researchers get no credit for bitcoin, possibly because the work was not well known outside academic circles. Activities such as releasing code and working with practitioners are not adequately rewarded in academia. In fact, the original branch of the academic proof-of-work literature continues today without acknowledging the existence of bitcoin! Engaging with the real world not only helps get credit, but will also reduce reinvention and is a source of fresh ideas.
