Does blockchain offer hype or hope?

These days, bitcoin is front-page news, as its price’s vertiginous ups and downs elicit glee and despondency by turns among investors. It was not always this way: the now-definitely-in-a-bubble cryptocurrency is making a comeback following years in which its association with crime and darknet drug markets kept it away from the spotlight. During that period, technologists and corporate evangelists had stopped touting the qualities of bitcoin, turning instead to a technology that underpinned the cryptocurrency without being tainted by dodgy connections: blockchain.

The blockchain was born as the digital scaffolding for cryptocurrency transactions. When devising bitcoin, pseudonymous inventor Satoshi Nakamoto’s aim was to create a stateless virtual currency, not controlled by any bank or government.

But without any third-party acting as a guarantor, how could you ensure users did not cheat and spend their immaterial coins more than once? The solution was to entrust oversight to the whole network: all transactions are etched on a public log – the blockchain – maintained by a peer-to-peer swarm of computers (or “nodes”), each holding an identical copy of the ledger. When users spend their coins, nodes take note and update the ledger.

The decentralised structure ensures that there is no single point of failure, making it nearly impossible to hack the network, forge transactions, or freeze them for legal purposes.

Nakamoto added a further wrinkle to the system – “mining”: transactions are clustered in “blocks” and added to the ledger by powerful computers (“miners”), which earn the right to do so after solving mathematical puzzles through an electricity-consuming series of random attempts.

The narrative that started spreading at some point in 2013 was that blockchain technology should be decoupled from bitcoin, and used for more than exchanging digital currency. Cryptocurrency units could be inscribed with additional information and transformed into tokens representing anything from diamonds to title deeds; in this way blockchains could be repurposed as devices to verify property rights, or track products as they changed hands throughout the supply chain. Every sector could adopt a blockchain to move value or information among a multitude of parties, without the need for a mediator. Blockchain would lead to efficiency, transparency and security.

Don Tapscott, an academic and businessman, and author of messianic book The Blockchain Revolution, has called blockchain technology “the trust protocol”. “You don’t need intermediaries to ensure parties will act with integrity, because the very platform you’re transacting on does that for you,” he says. “Trust is not achieved by middlemen but by cryptography, collaboration and clever code.”

New blockchains emerged. Banks and financial institutions – bitcoin’s original designated victims – started experimenting with their own private ledgers, in the hope that they could streamline the transfer of stocks and financial products.

A blockchain called Ethereum came to dominate the open-source landscape: launched in 2015 by Russian-Canadian programmer Vitalik Buterin, it allowed developers to code and run “decentralised autonomous organisations” – applications selling their services in exchange for cryptocurrency, and self-managing themselves according to sets of automatically enforced rules dubbed “smart contracts”.

Advocates recast blockchain as a tool for decentralising the internet itself. The Facebooks and Amazons of the future would be autonomous companies living on Ethereum, and they would store user information across the network, rather than in a data centre in Oregon – an arrangement that would make them less exposed to both cybercrime and government censorship.

That futuristic vision did not survive the appearance of the first decentralised autonomous organisations – unmanned venture capital fund the DAO was launched and immediately hacked in spring 2016. But that did not stop other, more conventional startups from popping up with the promise to crack one of the multiple problems with blockchain.

More recently, an Ethereum feature that allows anyone to mint and sell their own mini-currencies was bent into a crowdfunding tool: developers just had to float their idea for a blockchain venture and sell their tokens with the understanding that they would be of some use on a yet-to-be-built platform. Initial coin offerings (ICOs) were born, unleashing a speculative craze that would foreshadow the current bitcoin resurgence.

The question many are asking now is whether there is much to blockchain apart from hype and speculation. The technology is still too slow to be used on a large scale: Ethereum can only process about 15 transactions per second compared, for instance, to Visa’s 2,000. Mining, the verification process that keeps blockchains trudging on, is a carbon-generating disgrace – Iceland uses more electricity for mining bitcoin than it does in powering its households. And some wonder what exactly a blockchain does, that a centralised tamper-proof digital ledger – a decade-old technology – does not.

“I have seen no use cases for blockchain; there’s nothing that a blockchain in particular brings to the party,” says David Gerard, author of crypto-sceptic book Attack of the 50 Foot Blockchain. “The only use case I found for blockchain is cryptocurrency, and the only use for cryptocurrency is illicit transactions. And even for that, bitcoin is too slow.”

Anarcho-libertarians of the Satoshi Nakamoto type might value blockchain for its imperviousness to state interference but Gerard sees no reason why conventional businesses should adopt one. Others think it is just a matter of waiting for the technology to mature. Jamie Burke, CEO and founder of the blockchain-focused fund Outlier Ventures, believes that, in the long run, blockchain could make several industries more automated, transparent and decentralised, and that the ICO model might allow teams behind open-source projects to make a profit. Current scaling hurdles are simply par for the course for a technology that is still in its late infancy. “I don’t think any meaningful application will be built on the blockchain for at least two or three years,” he says. “But then again it’s never the first generation of a technology that delivers the blockbuster hit. It’s always the second, or the third. This is the reality of how technologies are adopted: the only difference is that with blockchain, this cycle is happening very publicly, because of the cryptocurrency hype.”

Linked in: alternative applications for blockchain

Catalan demonstrators in Barcelona, 2017.

Catalan demonstrators in Barcelona, 2017. Photograph: Credit: Matthias Oesterle / Alamy Live News/Alamy Live News.

Funnily enough, one of the areas where blockchain technology could make the biggest impact has little to do with business, and much to do with politics: voting. Some think the ledger’s decentralised, tamper-proof nature make it safe enough to allow fraud-free online elections: voters would just get vote tokens and transfer them in order to signal their preference. The idea has already been proposed by Ethereum-powered nonprofit organisation Sovereign, and actually piloted and green-lighted in Estonia – although in the apolitical context of e-voting in corporate shareholder meetings. Even the European parliament devoted a short white paper to assessing blockchain-based electronic voting.

More recently, during a talk in Barcelona, bitcoin developer and anarchist firebrand Amir Taaki proposed using blockchain technology for rerunning the Catalan independence referendum online, a method which, he argued, would neutralise the repression of Spain’s central government.

Adding blockchain to the election process could change the way we think about voting, says Michael Mainelli, director of financial thinktank Z/Yen. For instance, he says, blockchain could allow for “continuous voting” – the casting of voting every week or month – and “transferable voting”. “The idea is that I have a vote but I don’t know enough about a topic, so I give my vote to someone who knows a lot about that, and let them make the choice,” Mainelli says. “Of course, this would also work in corporate governance.”

Supply chain

Scanning a tin of tuna using the Provenance app.

Scanning a tin of tuna using the Provenance app. Photograph:

How to make sure that the shirt we are wearing was not manufactured using child labour, or that the jewel in our wedding ring is not a blood diamond? Tracking a product’s history through the global supply chain is a tantalising task, given the multitude of parties involved. Some companies think blockchain technology could help make it easier. London-based Provenance, for instance, labels products such as fish or cotton with radio-frequency identification (RFID) tags that guarantee its ethical and safe sourcing; as the product changes hands, each step of its journey is automatically added to the blockchain; the end customer can then verify the object’s origins through a mobile app. Provenance claims to work with over 100 businesses, including large brands such as Sainsbury’s, and its architecture relies on Ethereum and Linux Foundation’s blockchain Hyperledger. Still, founder Jessi Baker thinks that public blockchains “have a long way to go before they can be applied at scale”. To solve the problem, some of the logging is conducted without relying on a blockchain.

Another London-based company, Everledger, uses the blockchain to guarantee the provenance of diamonds: each stone is assigned a blockchain-based ID, which follows it from mine to jeweller, chronicling its history. This makes it possible to spot and root out diamonds whose provenance is unclear – which are often sourced in conflict zones. Over a million diamonds have gone through the Everledger treatment so far.

Finance and payments

A board at the Australian Securities Exchange

A board at the Australian Securities Exchange, which now uses blockchain. Photograph: Bloomberg via Getty Images

The Australian Securities Exchange announced in December 2017 that it would start using a blockchain to keep track of shareholdings and carry out equity transactions. Its blockchain, though, is to be very different from bitcoin’s or Ethereum’s public ledger: it will be a private, invitation-only network, run by the exchange in compliance with law and regulation. Although finance seems like an obvious field for applying blockchain technology, it is only partially so. In nearly all cases, big banks and financial institutions dabbling in blockchain have ditched the decentralised element and the mining mechanism, preferring – perhaps reasonably – to create a closed, private digital transaction record book.

Something similar happened when companies harnessed blockchain technology to power payments in real-world currency. Take Ripple, a payment system backed by several banks including Unicredit, UBS and Santander. Its open-source ledger is powered by tokens standing in for fiat money – which can be transferred cross-border in a cheaper and quicker fashion than remittances. Ripple’s protocol does not use mining and is pretty centralised; it also allows for payments to be “frozen” for legal reasons.

“Our mission is not to apply blockchain to payments, but to make payments better. We use blockchain only insofar as it provides benefits,” says Ripple’s chief technology officer Stefan Thomas. “Blockchain is going to solve trust problems in transactions, but it comes at a cost: it’s more expensive and harder to coordinate. And it’s not always worth it: how often has your bank stolen money from you?”


Singer-songwriter Imogen Heap

Singer-songwriter Imogen Heap, who wants to use blockchain to tackle royalties. Photograph: Phil Fisk for the Observer

British singer Imogen Heap has been at the forefront of an effort to improve the music industry through blockchain. The problem Heap set out to tackle in 2015, through her initiative Mycelia, was that of music royalties. Heap’s initial vision was one of total decentralisation: musicians and artists would get rid of publishers, producers and labels and get paid directly by consumers, through the blockchain.

Over the following three years, though, Mycelia’s mission has shifted, and to less revolutionary aims. Today, it is working on promoting a “creative passport”: a digital document containing a musician’s personal information, professional biography, discography and background – or, as Mycelia head of research Carlotta De Ninni defines it, “a beacon of verified information”.

These passports are to be stored on a decentralised tamper-proof blockchain and could incorporate smart-contract elements for quick direct payments. “Imogen, for instance, receives tens of emails every day from people who want to play her songs at weddings or other similar contexts; answering them all is tiring,” Di Ninni says. “A smart contract included in a creative passport could specify the terms of use for some songs, and automatically authorise the use after payment.”

The organisation plans to launch the creative passport later this year but has not decided on which blockchain platform the project is to run.

EU finance head: we will regulate bitcoin if risks are not tackled

The European Union has warned that it will regulate cryptocurrencies if the risks exposed by the meteoric rise of bitcoin and its ilk are not addressed.

The boom and bust of cryptocurrencies has seen some investors make millions where others have suffered heavy losses. Bitcoin, which now trades at about $9,000 (£8,000) a token but recently dropped to less than $6,000, leads the pack, rising nearly 2,000% to just under $20,000 in 2017, fuelling a global investment craze.

“This is a global phenomenon and it’s important there is an international follow-up at the global level,” Valdis Dombrovskis, the EU’s financial chief, said on Monday. “We do not exclude the possibility to move ahead (by regulating cryptocurrencies) at the EU level if we see, for example, risks emerging but no clear international response emerging.”

Dombrovskis was speaking after hosting a roundtable meeting attended by the European Central Bank, industry bodies and the Financial Stability Board, which writes and coordinates regulation for the Group of 20 Economies.

G20 finance ministers and central bankers meet in Buenos Aires in March, with cryptocurrencies set to be on the agenda. The EU would decide how to address the issue later this year or early in 2019, the financial services commissioner said.

Regulation of cryptocurrencies could seek to bring them in line with financial legislation designed to combat money laundering and counter-terrorism, forcing traders to disclose their identities and look to make it more difficult to use bitcoin, Ethereum or others for illegal activities.

A member of the ECB’s executive board, Yves Mersch, recently called for a global clampdown on cryptocurrencies, saying the central bank was aligned with the views voiced by Agustín Carstens, the head of the Bank for International Settlements, who condemned bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”.

Germany and France said this month that new opportunities arise from cryptocurrencies, but they could pose substantial risks for investors and be vulnerable to financial crime without safeguards. So far, however, there appears to be no strong consensus among G20 countries to regulate them closely.

Policymakers worry about losing jobs and growth to other regions if they crack down hard on innovation in the sector, especially stemming from the blockchain technology that underpins cryptocurrencies, which Dombrovskis said held strong promise.

Markus Ferber, a centre-right member of the European parliament, said a quick EU regulatory response was needed, rather than waiting years for international rules to trickle through.

“In order to make sure that retail investors do not fall prey to market manipulation and fraud, virtual currencies should be regulated as other financial instruments,” Ferber said in a statement.

A record-breaking year – the global economy in 10 charts

World equity markets boom

MSCI index

Global stock markets have roared ahead in 2017, with the MSCI index of bourses in 47 countries up by 22% and almost $9tn (£6.6tn) according to Reuters. This has been fuelled by a boom in growth among developed nations and Donald Trump’s plan to cut US corporate tax rates – which is expected to boost company profits in the world’s largest economy and returns to shareholders. China managed to maintain its rate of expansion, dispelling fears over a potential sharp slowdown as it matures after decades of rapid growth, while the eurozone also staged a recovery after years of uncertainty. In Britain, the FTSE 100, packed with companies that earn much of their profit in foreign currencies, has surged as a result of stronger global growth and the weak pound since the Brexit vote.

Buoyant global trade

Baltic Dry index

The Baltic Dry index is used as a proxy for global growth because it measures dry freight costs for commodities such as coal, rice and wheat. When there is a jump in demand for shipping these products, it signals expansion for the world economy. This year it has risen to its highest levels in four years amid a recovery in global trade. Other barometers for growth, such as surveys of business activity from firms’ purchasing managers, have shown appetite for goods and services in rude health across developed economies in recent months. Still, fears linger over a breakdown in trade from rising protectionism in the US and Europe.

Investors stay relaxed

Vix fear index

Known as Wall Street’s fear gauge, the Chicago Board Options Exchange Volatility Index is a measure of the stock market’s expectations for how much prices might swing by, up or down, over a 30-day period. The higher the index, the more likely it is investors will be in for a wild ride. This year, the barometer fell to its record low of below 9 points. Anything above 20 indicates that things are going awry, and is a common feature of falling markets.

Pound stages Brexit comeback

£ v $ graph

The pound has staged a recovery on global exchanges since the start of the year amid gradual progress in the Brexit negotiations. Although sterling is still about 10% below its level before the EU referendum, the currency has risen by almost 10% this year to stand at about $1.3505. Meanwhile, the dollar has struggled to benefit in 2017 from the Federal Reserve’s interest rate hikes in March, June and December, while the euro has gained ground amid a strengthening eurozone economy and as expectations grow for the European Central Bank to finally start tightening monetary policy by curbing its quantitative easing programme.

Eurozone on the mend

eurozone GDP chart

One of the biggest surprises this year was stability in the eurozone after years of tumult. After the election of Donald Trump, many market watchers expected the next countries to succumb to populist politics would be in the EU – which could have spelled doom for the single currency. Marine Le Pen failed to take power in France, as did anti-Islam, anti-EU populist Geert Wilders in the Netherlands and Alternative für Deutschland in Germany. Meanwhile, amid a more stable political backdrop, growth has roared ahead. Still, accommodative monetary policy that is expected to be gradually withdrawn has helped, with ECB governor Mario Draghi saying the recovery will still heavily rely on stimulus from the central bank for now.

Wage growth remains subdued

target/actual inflation chart

There has been tepid growth in the price of goods around the world, barring the UK, where the pound’s sudden devaluation following the Brexit vote led to surge in imported food and fuel costs. Wage growth in particular was missing in action in 2017, despite low rates of unemployment across most major developed economies. This has left many in the economics profession puzzled, because tight labour markets typically lead to greater levels of bargaining power among workers to demand higher wages. It also poses an additional challenge to central bankers – who would like to see stronger wage inflation before they raise interest rates, normalising the world economy after years of stimulus in the wake of the global financial crisis that started 10 years ago.

Productivity puzzle persists

UK productivity chart

The failure to drive up the productivity of workers has puzzled economists the world over this year, not least in the UK. Although the problem is particularly sharp in Britain, each of the G7 nations has experienced sluggish growth since the crash a decade ago. That’s a worrying sign for wage growth, because greater output per hour worked, or per worker, can help to support higher pay for that output. The culprit could be higher levels of employment, low interest rates, or low levels of investment in productivity boosting projects by governments and businesses. In the UK, weak productivity growth was behind a sharp downgrade to GDP growth alongside Philip Hammond’s budget in November. It’s also one of the key reasons why UK workers aren’t expected to see their wages after inflation go back above pre-crisis levels until the mid 2020s.

Oil bubbles up

oil price chart

The global oil price has recovered sharply in 2017, benefiting from increasing demand from factories around the world, particularly in China, amid a boom in economic activity. After crashing in late 2015 to spook global markets, this year has been one of calm and steady gains. Opec has reined in production to keep a lid on supply, while there have been no major escalations in tensions to drive up the price to unsustainable levels. One warning: US shale oil production may start to come back online at current prices, as the more expensive costs involved with extraction become economical once more. This could boost supply, leading prices to fall.

Bitcoin mania takes hold

bitcoin bubble

Probably the financial story of the year. Even though there are fears of a coming crash, 2017 will go down as the year of the cryptocurrency. Bitcoin’s rise has been meteoric, beginning the year valued at about $1,000 and reaching almost $20,000 by the middle of December. There have been wild swings on the way, with the currency losing more than a quarter of its value in a single day this month, before staging a recovery. Economists think bitcoin has all the telltale signs of a bubble, with worrying parallels to the Tulip mania of the 17th century, when the price of bulbs crashed in spectacular fashion after a buying frenzy.

Chinese debt worries

chinese debt graph

China’s rapidly accumulating debt pile, having quadrupled since the financial crisis, became of increasing concern this year – although has not yet roiled the global markets. The International Monetary Fund warned that Chinese debt is now high versus international norms and that rapid growth may have led to an unwillingness among officials to let struggling firms fail. In September, Standard & Poor’s downgraded its credit rating citing the risks from total debts in, which have quadrupled since the financial crisis. While China has started taking steps to rein in debt without having affected growth so far, economists worry a wrong move by officials could upset the apple cart in the near future.

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