Blockchain

While Bitcoin came and went—oh, and just came again—the foundation for the cryptocurrency has steadily gained ground.

I’m talking about DLT, or Distributed Ledger Technology. If you want to take this seriously, and I believe you should, your starting point is the abstract of the original bitcoin paper by Satoshi Nakamoto—who has never been established to be an actual person.

You could read the full paper, or just skim the abstract below. It all depends how deep you want to dive.

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

I like concepts, and this one is neat. The wording is indigestible, and as far as I can ascertain, the paper was not peer-reviewed, and was not published in a reputable journal, but that doesn’t mean it isn’t a good idea.

The financial side of it proposes a mechanism for avoiding double-spending and trusted third parties. At present, all the world powers are printing money digitally, well beyond what the economy can support in terms of tangible underlying value, and the only reason they get away with it is belief—the belief system is predicated on the ‘trusted third parties’, aka central banks.

Since all the central banks overprint money, whether they call it quantitative easing, LTRO, or Nellie the Elephant, the water level rises for all. The water is however infested with ever-expanding bubbles, and when these burst, the level suddenly falls—that’s when the ship runs aground and the rats go scurrying off.

So much for the trusted third parties—the lunatics are in charge of the asylum.

If you channel your transactions through the banks, one incentive is that there is a trust-based system you can depend on. When you buy or sell on eBay, you know that you can get your money back if the product is defective, or even if you change your mind—every major internet seller uses that business model—they have to, since the internet is inherently untrustworthy.

My favorite cartoon has gone through many morphs, but it’s still the best. In this version, the hound looks like he just got busted…

The financial part of the transaction is dealt with by Visa, Paypal, and others—the trusted third parties.

A peer-to-peer financial trust system would essentially dispense with central banks, but more importantly, the underlying ledger technology means that every currency unit could be traced back to when and where it was first mined. In other words, no money could be printed on an unsupported commodity—no gold, no coin.

The orange man is now pushing the Federal Reserve to go back to quantitative easing, knowing this will push the water level up—very handy for 2020, but the orange tide rises on trapped methane bubbles.

The chances for bitcoin to emerge as a potentate are slim—every major central bank hates it, and China imposed a blanket ban on cryptos in 2017.

Blockchain, however, is a different story.

Blockchain is serious business.

Some very large financial institutions are taking the whole thing seriously, and huge players like Microsoft, Amazon, Google, and IBM are selling the picks and shovels. Although the focus of blockchain began with money. it’s now recognized that DLTs can play an important role in monitoring the supply chain.

If we use a coin-based example, that dollar bill, pound note, or euro coin in your pocket provides some information on provenance, but not much. Euros in coin form have country-specific markings—these markers can be used to understand mobility of Europeans.

But that bill in your purse has little traceability, apart from DNA markers. You may recall whether you got it from a friend, a store, or an ATM, but you can go no further—when it comes to digital, the same thing applies. The Starbucks barista who accepts a five dollar payment from your contactless card knows it came from you, but were those five bucks part of a paycheck or a split Uber fare? Who knows.

Blockchain changes that—your digital cash becomes granular, and you can search through any transaction to look at the origin of the money, right back to the time it was coined (or mined). As a consequence, you cannot ‘make’ money out of thin air.

What this really means is traceability. Let’s say you’re enjoying a dozen oysters in a seaside restaurant in the small French town of Arcachon. You naturally assume you’re eating local produce, but that oyster you are about to eat may well have started life in a hatchery in the Netherlands. From there, it might have been bagged for growout in Dungarvan, a small town in SE Ireland.

Why would that happen? Because oysters now suffer from the Herpes virus, and colder waters provide more resistance. At some point, a batch of mid-sized oysters may have been relayed to France, grown to market size, and served at your table.

Blockchain means that you have a trail telling you know exactly how the animal fared on its journey to you—where it grew up, and when. If you’re concerned about animal welfare (but not so concerned that you wouldn’t gobble the little guy up), you might also find out about how it lived. Were the waters clean, did it survive a red tide, was the oxygen suitable for an oyster to live comfortably…

Supermarkets, chocolate manufacturers, and many other businesses now see blockchain as a critical part of their strategy for managing the supply chain. Farmers who sell lettuce to Walmart now enter key data about each batch into a blockchain system. The distributor that warehouses the product logs environmental conditions of shipping: inside and outside truck temperature, transport time, stoppages, damaged packaging…

If the customer who takes the product off the shelf files a quality complaint, the seller can trace a particular lettuce back to the time it was first planted.

Of course when it comes to goods, you can’t cheat the mass balance. The quantity of steel is limited by that of its constituent ores, and the amount of lettuce is limited by the carbon, nitrogen, and other elements that are available to ‘manufacture’ it.

Money, on the other hand, violates the core principles of ecology—that’s partly why I loathe the use of the term ecosystem in a corporate or business context. ‘Corporate ecosystem’ is as great an oxymoron as ‘affordable legal costs’ or ‘plastic silverware’.

Blockchain provides the traceability to change that.

In a nutshell, it’s thermodynamics for economists.

The India Road, Atmos Fear, Clear Eyes, and Folk Tales For Future Dreamers. QR links for smartphones and tablets.

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