Something quite profound happened in early January 2016, something that not many people noticed, yet will have far-reaching effects on every aspect of our lives. A world computer called Ethereum woke up.
For centuries, society has been based on transactions between individuals: a purchase in a shop, a mortgage, a bet, getting insurance, an Uber ride. Let’s take a simple bet as an example. I want to bet $5000 with somebody whom I don’t know that the All Blacks will win the next Rugby World Cup. Because we don’t trust each other, we would need the help of a mutually trusted third party person or organisation (for example, a bookmaker or legal firm). This is how society has worked for centuries. We now find ourselves in a world where some of these intermediaries (for example, banks, insurance companies, Google, Uber, Amazon ...) have become hugely powerful global mega organisations. So powerful in fact that sometimes governments have to bail them out and they can influence government policies.
For some time now, as globalisation has increased, there have been cracks appearing in this system (aside from the huge problems that wealth inequality create). Think about our bet. If we are in two different countries: which currency and what exchange rate should we use? Which country's legal system should be used if we have a dispute? Where should tax be paid? Which country should the intermediary be in? Do we really trust the intermediary (let’s say our bet was now $100,000) to not run off with our money? Do we trust the intermediary's IT systems to be secure from external hackers so that our money isn’t stolen or our personal details aren’t leaked (somewhat of a topic given the recent Panama Papers Mossack Fonseca scandal)? Are we confident that at some time in the future the intermediary won't become corrupt and sell our financial or personal information?
So, let’s imagine there was a way for me to have that $100,000 bet with a complete stranger on the other side of the world, without the need for any form of trusted middleman or legal system. In January this year this system was created.
To understand how this works and how we got to this point, it’s useful to understand some history.
It started with Bitcoin
Seven years ago a mysterious person (or people) under the pseudonym Satoshi Nakamoto released a white paper and some code into the open source community (soon after he disappeared but that’s another story). He had invented a cryptocurrency, Bitcoin, that gave a way of storing and transferring value without a trusted middleman. He brought together a few different clever cryptographic concepts but at the heart of his idea was a peer-to-peer decentralised ledger or database, which he called the Blockchain. Probably the closest thing the world had seen before this was the peer-to-peer file transfer system BitTorrent.
BitTorrent consists of a number of “nodes” (pieces of software that anybody can install) that communicate intelligently on a peer-to-peer basis to allow files to be easily and efficiently copied across the internet. The music and movie industry would love to shut down BitTorrent but they can’t because there is no company to sue or server computers to shut down. As long as there are nodes on the network, it exists.
So Satoshi applied that decentralised concept to a database that stores each and every transaction. When I give you a bitcoin (which is very easy now with the numerous smart phone wallet apps available), I’m not sending you any kind of digital token, we are both simply agreeing to update the database (Blockchain). But the really interesting thing is that this database is checked and replicated by thousands of nodes on the network. The clever cryptographic locking essentially mean that once our transaction has been recorded in the database, it can never be changed. The system is not controlled by any corruptible organisation or hackable system, it is controlled by the consensus of all the nodes on the network (you can download the software and become a node yourself). So, in theory, if we both fully trust this system, then we don’t need a middleman.
Bitcoin was an experiment not without controversy. One of the main problems has been that to get Bitcoins you have to buy them with traditional money (dollars, ten etc) which the traditional financial organisations (banks) for lots of good and bad reasons have not made easy. So, to fill the gap, a number exchanges sprung up to give Joe public a way to buy Bitcoins. These exchanges were/are typically centralised, unregulated startups and as might be expected many failed (Mt Gox was the best known failure). However, fundamentally, the Bitcoin network has not broken, has never been hacked and the experiment has worked.
The smart contract
Early on in the Bitcoin journey people began to realise something else. What would happen if, in addition to storing the transaction (for example, a record that I gave you a Bitcoin) on the Blockchain, you could also store a set of rules on the Blockchain. For example a multi-signature transaction that need three “signatures” for the transaction to go through and/or can only go through between 8.30 and 9pm. If we can put these rules also on the Blockchain, then we have what is known as a Smart Contract.
There was, however, a problem. Bitcoin was designed as a crypto-currency, not as a platform for creating/storing these rules/business logic (that is,smart contracts). It simply doesn’t have a full featured (known as Turing complete) programming language built-in that would allow the complexities of, say, a mortgage, to be encoded. There have been attempts (many are still evolving) to put layers on top of the Bitcoin system but to date none have been successful.
So the next chapter in the story starts with a 19-year-old Russian/Canadian who three years ago decided it would be far better to take the Bitcoin experiment and start again. Except that his vision was not to create another cryptocurrency but something much bigger: to create an open source smart contract development platform that included a Turing complete programming language. He got a group of people together who were equally passionate about his vision, crowd funded $19 million and went live with the beta (Frontier Release) toward the end of last year. Nothing much happened for a few months. Fair to say that many in the existing cryptocurrency world were watching very closely but nobody knew where it would go. Then in January this year things started to take off: the number of nodes on the network began to increase exponentially and the smart contract “fuel” known as Ether suddenly became a valuable, tradable commodity (it increased in value by 1000% over a few months, currently sitting at around $US9 an Ether after a an initial bubble that hit $US15). Warning: I recommend you don't trade in Ether (or any cryptocurrency) unless you know what you are doing and can stomach often massive swings. Exciting new projects like Slock.it, Augur and Arcade City started up. Some big players like Microsoft, R3, Samsung/IBM have began investing in Ethereum. Two weeks ago Ethereum transitioned from the beta Frontier release to the secure Homestead.
Coming back to our bet. If two people can easily agree and create a set of rules, for example, we both give $5000 worth of value, on a certain date the system automatically checks one or more agreed authoritative sources of rugby match outcomes and then pays the winner. If we also agree to put those rules (a smart contract) on this immutable system that we both trust (The Blockchain) then we have created a transaction between two untrusted parties without a middleman. The same concepts could apply in theory to a will, a loan, a mortgage, a Trademe/eBay purchase and an Uber trip. The list is endless and implications are huge. If you think about it, most of our global financial/commerce system and government is made up of centralised intermediary organisations who are performing these transactions on our behalf.
New businesses and new government
Could the very notion of what is a business change? Well yes. In theory you can create a new business that lives entirely on the Blockchain – a distributed autonomous organisation or DAO. This is a self-governing organisation under the control of an incorruptible set of business rules (that is, they are on the Blockchain). Full transparency, no hidden deals. This is happening already. A number of companies are now planning this, Slock.it being one of the first.
What about government? We are already starting to see borderless governments appearing. Fascinating to see what Estonia is now doing with its e-residency initiative (the Blockchain is playing a big part in this). Shouldn't New Zealand be considering this model?
From tech to business
Blockchain technology has evolved quickly and Ethereum isn't the only kid on the block. However a growing number of people think it shows the most promise. Blockchain technology is now not science fiction, it here and can be used to solve real business problems and create new opportunities now.
Up to this point however most of the excitement and interest has been within the technical community (for example DevCon1 in London featured in this BBC clip). The conversation now needs to move to the business community and that is the primary aim of the Ethereum.nz mini-conference being held in New Zealand in May. We want to educate and inspire the business entrepreneurs, the civil servants, the politicians. New Zealand is well positioned to be a leader not a follower in this disruption, but we're going to have to take some risks and move quickly.
Mark Pascall is the owner of 3months.com
Tune into NBR Radio’s Sunday Business with Andrew Patterson on Sunday morning, for analysis and feature-length interviews.
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