Everybody talks about blockchain but I’m pretty sure that only a few of us really know what’s behind that buzzword. You might have heard that blockchain is the base for crypto currencies like Bitcoin or Ether. In the past days, you might have read headlines about $32 million of Ether getting stolen by hackers.
Or maybe you have heard that this technology might not only change how we are paying for stuff online, but how we are actually conducting business as a whole. So what is blockchain really about? Why do we need this technology? What is the idea behind the technology?
This is what I wanted to find out from Gavin Wood. Gavin is the co-founder of Ethereum, the system that used the crypto currency Ether, and of Parity, an Ethereum browser. I met with him during Tech Open Air in Berlin and he explained to me what blockchain actually is – and how much this technology will change our everyday lives.
Blockchain is a huge topic but a lot of people have no idea what it really means. Can you try to explain it in the easiest way possible?
Sure. So it’s a technical solution to a social problem. The social problem is one of trust. Now, if we want to buy a loaf of bread or shop for some sneakers on the internet, we normally have to trust somebody.
I go and buy a loaf of bread and I trust that the bread won’t be mouldy, I trust that the baker is a good baker, I trust that it’s actually made with flour and not with concrete, I trust that my expectations will be met and normally, it’s fine, because bakers normally don’t bake with concrete. And if I go to Amazon, most of the time something does arrive and it more or less resembles what I expected it to be. But this is costly. In terms of the baker, it’s costly because there is only one baker that I go to and if I go to another one, the bread is mouldy, it reduces my decision and it makes me more likely to go to one and stick to one and if that quality goes down, I put up with the lower quality because I don’t want to move.
Similarly with Amazon. Amazon takes a fairly substantial cut of all of the transaction that go through it. Why? Because it’s a seal of quality, right, and they are the intermediary. Intermediaries always want to make money and normally, the profits are not well-bound, normally they can take a percentage of everything that is going through. Like banks. Banks are very rich because they take a percentage of all of the money that’s moving through and sometimes, that’s a really large percentage, too. Intermediaries really are a drag on the economy, and sensible economies will want to remove the drag one way or another.
And this is where blockchain comes in?
Blockchain can be seen to be just a means of making our economy more efficient, it can be seen as a means of automating trust. So at the moment we are building central intermediaries we can all trust so we can interact with each other, we can transact with each other, we can sell and buy goods from each other.
Blockchain is really a way of allowing the economic interaction to happen without trust and because we’re automating them, we get all the benefits of putting things on computers, so we get the speed, the cheapness and the flexibility. That’s something we’re not really used to, so in that sense, Blockchain is a very disruptive game-changer for how we interact with each other economically speaking.
Ethereum-Gründer Gavin Wood beim Tech Open Air (Screenshot: Youtube)
When most people think of blockchain, they think of bitcoin or other cryptocurrencies. How do technology and money get together here?
Money is being made on two different sides. On the one side, there’s the consumer. Consumers, and the people who are on the last hop to consumers, will be able to save money by putting their transaction through this automated transaction system rather than having to go through traditional intermediaries.
I’ll give you an example: Supply chains. Suppose I’m a trader in Turkey, I want to buy some China-made clothes, they are very cheap, I have to pay for them, I go to my bank, my bank sets up a credit line with a Chinese bank, costs ten percent of the deal, I tell the Chinese to send the clothes, clothes arrive, all is good.
But it costs time, it costs ten percent and potentially, as a businessman in Turkey, maybe I haven’t done many deals before, maybe my bank doesn’t trust me, maybe the Chinese on the other side doesn’t trust me, maybe I can’t do the deal at all through traditional systems, maybe it’s even more expensive to do.
If we move that deal to the blockchain, what we can do is basically get rid of the idea of having to use a bank to do this, and we can start building what we call smart contracts, which are simply process flows that are guaranteed to be executed as they are written, as they are described. And that’s all banks are doing. In reality, all the office-based corporations are just process flows, they are process flows with people in it and they do really what computers should be doing but that they are not doing, because hey, we need to trust these guys.
And on the other side?
Now on the other side, we can also look at businesses, and businesses can start using blockchain in order to change how they operate with other businesses and also how they operate within themselves. This also comes down to trust and it’s a case of how much do we trust that the employees will follow the processes that we want them to follow, and how do we manage things like sensitive information, how do we manage things like bringing together many disparate parts of the business into one single IT system.
In principle, these can be handled my traditional IT architectures, but in reality, they are really difficult to actually get them working exactly as you want and they have very particular drawbacks. One of which is with any IT system, there is normally at least one system administrator who has full access to everything in it. And it might be that the use case is where no individual can have full access to everything in it apart for the CEO.
So we’re increasingly finding that the strong crypto-economic guarantees that blockchain systems give us for trust, for guaranteeing how processes are followed, are better, cheaper, more flexible than traditional human-based process flows.
How important is blockchain going to be in the next couple of years? Will everything change or will it just impact a small fraction of our lives?
I think it’s a game changer. In terms of our interactions with each other, both as individuals and as organisations and businesses, are still in many respects stuck in the stone age. We’ve moved a lot of things over to machines and devices, from shopping a pencil to flying an airplane, we got machines to do our work for us. But when we’re talking about following processes, when we’re talking about managing and executing a deal, we still fall back onto humans. And i see really no reason why we do this other than both inertia and the fact that this technology is relatively young.
Time spans are always very difficult to determine, but I would say in the next five years, we are going to see an increasing number of real consumer-level experiments that are running on the blockchain. Now whether those experiments really turn into real mass-market use cases, I don’t know, but I think within 20 years, they certainly will. I think it will be more or less the same as the internet.
So that it will be used by everyone and everywhere, basically, no matter what people say?
I think in much the same way that TCP/IP, the foundation protocol of the internet, is pretty much used everywhere (even though nobody knows they are using it) because it makes everything so much easier and quicker and faster and the solutions that you can build on it are so much better. And I think it will be the same for blockchain. Whether those blockchains in the future look all that much like the blockchains now, perhaps not, computers in the early days didn’t look a lot like computers do now…
And the internet didn’t either.
Indeed, the technologies were far far more immature. But nonetheless, the underlying idea of a decentralised packet-switching network that is very easy to access has remained the same. And in terms of having a decentralised consensus-mechanism, so a mechanism of coming to an agreement without having to trust any authority, will remain the same and that will be a transformative technology for society.