This is the final edition in an eight-week series, made possible by MYOB, looking at how technology is changing the way New Zealand businesses operate.
Anyone even peripherally connected to technology will have come across blockchain by now. The technology first appeared just over a decade ago as the transaction processing of virtual currency Bitcoin, and has been touted as being able to solve almost every problem under the sun.
What is blockchain and where did it come from?
MinterEllisonRuddWatt partner and financial services lawyer Jeremy Muir says it is the technology that sits underneath Bitcoin, and goes back to 2008 when a person using the nom de plume Satoshi Nakamoto wrote a whitepaper that tried to solve the “double spend problem” where someone could use virtual currency more than once.
The paper was published on the internet, and from it arose Bitcoin and the Wild West of cryptocurrencies.
Nobody has worked out who Satoshi Nakamoto is to this day, but a blockchain is a database that can only be written to, with records (blocks) that are linked or chained using cryptography.
The accurately time-stamped information blocks cannot be altered or deleted, and a copy of the database is held by each participant in the blockchain network so that everyone can see the transactions conducted on it.
When a block is created, others in the network verify it. It would be hard to falsify the record on large blockchains with thousands of participants as it requires control of at least 51 per cent the network’s computing resources.
Essentially, Nakamoto devised blockchain to do away with a central authority that controlled virtual currency transactions. Instead, the blockchain network would verify them and reach a consensus around them. You don’t need to trust anyone in particular, but can instead rely on the blockchain network to ensure Bitcoin transactions are correctly recorded.
If you’re wondering what the point of that is compared to existing financial and transactional systems, you’re not alone. Blockchain (and cryptocurrency) proponents point to the transparency of the system, its decentralisation and immutability as the key attractions of the technology.
As developers try to separate blockchain from cryptocurrencies to use in other fields, those features are boons and banes however. Having a large global network of computers verify transactions made Bitcoin notoriously slow and use up lots of energy in the process, with Bitcoin said to use as much power as a small country.
Transparency works well for Bitcoin’s blockchain but it might not suit say a large company’s supply-chain system where it doesn’t want suppliers and contractors to see each other’s transactions.
Immutability is a double-edged sword: if a fraudulent or erroneous transaction is recorded on the blockchain, there’s no easy way to amend or delete it. The only way to fix that is to go back in time on the blockchain, and start again at that point to invalidate the transaction, provided everyone in the network agrees to do that. This effectively creates a new version of the software, and thus a new cryptocurrency that’s not compatible with the older one.
Not being able to delete or amend information could also make blockchain data stores incompatible with tightening global privacy rules that give individuals the right to “be forgotten” and have their details deleted if they so wish. Muir says we don’t know the answer to that yet.
Likewise, accessing blockchain data requires the use of a digital cryptographic key that has to be kept secure. If users forget the password for the key, they are locked out and there’s no way to restore access to the blockchain data.
That said, there are many use cases for blockchain. For example, a blockchain based system could work very well to assure provenance of records, Muir says.
“There are some amazing projects going on at the moment, and one coming out of New Zealand between Fonterra and Ali Baba tracks the provenance of local food goods so that when they reach the other end of the journey, the records can be viewed and checked down to the original farm that some milk powder has come from,” Muir says.
“That’s a very powerful tool and the record is immutable and can show if it has been tampered with,” he adds.
Banks which are already seeing their money handling business disrupted are also exploring blockchain for scenarios such as money transfers.
When is blockchain not right then?
“If you’re not decentralising a process owned by a single party then you’re probably not using the technology well,” Blockchain software house Centrality’s chief executive Aaron McDonald says.
Centrality is only a year old, and the cryptocurrency plus blockchain concept forms a central tenet of its business. The company started off its decentralisation business idea with a so-called initial coin offering, creating its CENNZ token that investors bought using another cryptocurrency, Ethereum.
The offering pulled in over a hundred million dollars from investors, at the Ethereum exchange rate at the time. The idea is that CENNZ is used to reward people who contribute to Centrality blockchain network, and who provide the computing power and data storage, with no central authority needed.
CENNZ has followed other cryptocurrencies and tumbled in value recently but McDonald remains convinced that Centrality’s rewards-based decentralised business model that puts users in charge is the future.
McDonald recognised that as it was, the original blockchain was too difficult to use for most people.
“We really wanted to make usability the same as going to the App Store and downloading your favourite app; in order to do that, we had to fundamentally change how the blockchain works and our team is building our own blockchain to achieve that,” he adds.
Muir and McDonald believe that blockchain will become just another tool for developers who can make innovative use of it when mixed with other technologies.
It means your average New Zealand business should keep an eye on what’s happening with blockchain-based innovations, but it’s not worth losing sleep over, especially while the technology remains relatively complex to use.
“Use a database or write a list on a piece of paper if that’s easier and more effective; don’t believe the hype, but find what’s right and what works for you,” Muir advises.
Midday Wednesday, the Herald will run a live panel in which experts will discuss how this technology is changing small business in New Zealand. Tune in to participate in the live chat.