Blockchain technology, having first appeared in 2009 as an enabler for the digital currency Bitcoin, is mainly associated with the financial sector. However, this new approach could well shake up the wider economy by driving disintermediation across a number of non-financial sectors. But does the blockchain hold out new hope for all those who have become disillusioned by the Internet but remain attached to the original libertarian notion of using online space to achieve a fairer distribution of power?

The promise of disintermediation

The Blockchain principle is based on a ledger, consisting essentially of a huge database, constantly updated in real time. Each user possesses a copy of the ledger, thus wielding a modicum of power and control. There is also the special characteristic that the ledger cannot be falsified. It is simply not possible to go back and alter this vast public register as all the successive lines have been encrypted, validated and then distributed to a multitude of computers across the network. The prospects for disintermediation are based on two key aspects: wide distribution and the cryptographic process. Each blockchain user has in fact two keys: a public key or encryption key – similar to an email box or bank account code – and a private (decryption) key, comparable to a bank card code or signature. It is this combination of two cryptographic keys that enables each transaction to be authenticated and its integrity guaranteed, while at the same time preserving the confidentiality of the individuals behind the supply and demand process. In fact all users take part in the verification and validation of the transaction in question. If anyone tries to alter a single element of a transaction, the fraud will be immediately detectable by all the members of the network. Under this new way of organising a transaction, the traditional intermediaries such as a banker, notary or tech specialist are replaced by a piece of computer code going by the name of Pascal, Python, PHP, Java, Fortran or C++. The rules are intrinsic to the technology and are no longer laid down, monitored and enforced by a trusted centralised third party but via a mathematical formula and IT processes. The idea is that the code itself will verify that the two parties to a deal are trustworthy before approving the transaction.

‘No central authority’ ≠ ‘no intermediary’

The Blockchain explained
  • 6 min

Thus one of the promises of the blockchain is that it frees anyone wishing to carry out a transaction from the need to involve a third party, whether a human being or a digital system. However, we have been using third parties to intermediate our transactions for a very long time. For example, until recently we used to go to a bricks-and-mortar shop to buy goods; nowadays we can go on to a web site. The blockchain will potentially do away with these intermediaries.  Suppose that you wish to buy a sofa via the Internet from someone whom you do not know. You transfer €200 to the person’s account. Although you do not go through eBay or some other sales site, your transaction will nevertheless be recorded in a sort of giant public accounts ledger. This virtual ledger will not be kept by eBay, some other Internet service company, or by your bank, any of whom would charge you some sort of fee, but collectively, by a vast number of people who use the blockchain. All these players, situated all over the globe, help to ensure the solvency, viability and integrity of the various parties involved. They collectively validate the transaction and give the go-ahead to the buyer and the seller. This vast ‘chain of blocks’ is thus theoretically capable of doing something quite remarkable: creating trust between strangers, without the need for any intermediary.

So how likely is it that these new ‘version 2.0’ trusted third parties – computers, servers and IT codes – will actually bring about a process of disintermediation? Blockchain France, an organisation that we have already highlighted in an article, says of the blockchain: “This isn’t just one more new technology but something that is going to change the way we think by abolishing intermediaries, even though today our social organisation depends on them.” However, L’Atelier BNP Paribas strategic analyst Amira Belhaj Soulami disputes this claim, arguing: “While this technology undoubtedly has the potential to shift the boundaries, creating trust between strangers without any central authority is not the same thing as having no intermediaries, it just means viewing trust in another way, creating trust that does not depend on an intermediary in the sense of a central authority. The blockchain is essentially providing a new way for people to trade, based on decentralised intermediation.” She further argues that “you’re not eliminating the need for a guarantee of trust, you’re just shifting the location of that guarantee.

Regard d'expert

Amira Belhaj Soulami

Strategic Analyst @ L'Atelier

Blockchain isn’t just one more new technology but something that is going to change the way we think by abolishing intermediaries

Amira Belhaj Soulami points out that the original idea of the blockchain was to create a P2P system, i.e. a network of thousands of computers where the users provide the servers. There is no central server and the blockchain has no single managing authority. The strength, credibility and invulnerability of the system depend upon this multitude of decentralised servers. And we are invited to transfer our trust in traditional central intermediaries – lawyers, bankers and the major Internet firms – to lines of code stored in these thousands of servers. However, while these new go-betweens are more ‘liquid’, as they are embedded in the actual technology, they still remain intermediaries. “The libertarian ideal on which the blockchain was founded is now being challenged by hard reality. While the blockchain may well pose a threat to some traditional intermediary professions, that doesn’t mean that there won’t be any intermediaries and that we’ll switch straight over to P2P pure and simple,” Amira Belhaj Soulami told us.

Trust transferred to the technology…and to the people behind it

The impact of the blockchain thus seems in keeping with the principle of ‘creative destruction’ first expounded by the Austrian-American economist Joseph Schumpeter in his 1942 work Capitalism, Socialism and Democracy. While the ‘perpetual hurricane’ of innovation which he describes may well blow away some go-between professions, it will at the same time create room for new competitors and new intermediaries. The trust that used to be placed in the traditional neutral third party – the lawyer/notary in real estate deals, the government when it comes to elections and taxes, and the bank for payments and transfer of securities – will be transferred to the technology itself. In effect trust becomes computer-programmed. Some commentators might raise legitimate objections here. After all, the mathematics, computer codes and cryptographic tools on which blockchain technology is based do not, properly speaking, constitute an intermediary. They are just infrastructure underpinning what is essentially ‘trustless’ trading – i.e. the need for trust between individuals has been eliminated from the process. So far, so good, except that behind this technology, behind these networked computers and powerful algorithms that authenticate and certify deals stand real flesh-and-blood people. Primavera de Filippi, a Research Fellow at Harvard University working with the French National Centre for Scientific Research (CNRS), told the audience at the FinTech Revolution conference: “The problem [with the blockchain] is not about trusting the math, but trusting the people who are working on the technology.

The problem with blockchain is not about trusting the math, but trusting the people who are working on the technology.

Primavera de Filippi

As we mentioned above, the original philosophy of the blockchain technology is the libertarian ideal. It arose from the need to do away with human control and replace it with autonomous, self-regulating infrastructure. However, what is actually happening with the blockchain is that trust is being shifted from certain groups of human go-betweens to algorithms, behind which stand other human beings. One might say that the chain is really a loop and that basically we have come full-circle. This seems far from the original ideal. Of course, those who are worried about the growing power of AI and robots will be quite relieved to see that the system is not yet self-governing and that there are real human beings concealed behind the lines of code. But how many people are actually in a position to alter the blockchain code that underpins Bitcoin currency? The figure varies depending on which source you take so the answer to this question seems also to be quite well encrypted…

Trust transferred to the technology…and to the people behind it

The impact of the blockchain thus seems in keeping with the principle of ‘creative destruction’ first expounded by the Austrian-American economist Joseph Schumpeter in his 1942 work Capitalism, Socialism and Democracy. While the ‘perpetual hurricane’ of innovation which he describes may well blow away some go-between professions, it will at the same time create room for new competitors and new intermediaries. The trust that used to be placed in the traditional neutral third party – the lawyer/notary in real estate deals, the government when it comes to elections and taxes, and the bank for payments and transfer of securities – will be transferred to the technology itself. In effect trust becomes computer-programmed. Some commentators might raise legitimate objections here. After all, the mathematics, computer codes and cryptographic tools on which blockchain technology is based do not, properly speaking, constitute an intermediary. They are just infrastructure underpinning what is essentially ‘trustless’ trading – i.e. the need for trust between individuals has been eliminated from the process. So far, so good, except that behind this technology, behind these networked computers and powerful algorithms that authenticate and certify deals stand real flesh-and-blood people. Primavera de Filippi, a Research Fellow at Harvard University working with the French National Centre for Scientific Research (CNRS), told the audience at the FinTech Revolution conference: “The problem [with the blockchain] is not about trusting the math, but trusting the people who are working on the technology.” 

As we mentioned above, the original philosophy of the blockchain technology is the libertarian ideal. It arose from the need to do away with human control and replace it with autonomous, self-regulating infrastructure. However, what is actually happening with the blockchain is that trust is being shifted from certain groups of human go-betweens to algorithms, behind which stand other human beings. One might say that the chain is really a loop and that basically we have come full-circle. This seems far from the original ideal. Of course, those who are worried about the growing power of AI and robots will be quite relieved to see that the system is not yet self-governing and that there are real human beings concealed behind the lines of code. But how many people are actually in a position to alter the blockchain code that underpins Bitcoin currency? The figure varies depending on which source you take so the answer to this question seems also to be quite well encrypted…

Who are the new intermediaries?

Developers, data miners, paas providers & wallets!

First of all we have the system and software developers whose job it is to implement the technology – e.g. the Bitcoin Core people for Bitcoin and the non-profit Ethereum Foundation in the case of the Ether. Then we have the operating agents, known as data miners. These are individual people or companies that connect to the network one or more machines equipped with the processing power to record the transactions, maintain network security and enable all system users to stay synchronised. For the Bitcoin network, there were an estimated 100,000 miners in operation in 2015. These are the people who validate new transactions and record them as blocks in the encrypted public ledger, crunching billions of units of data into a random sequence of letters and numbers known as a hash, which is then stored along with the block at the end of the blockchain at that point in time. Miners get paid by being allowed to create a certain number of new Bitcoins for every hash they complete, and are in a competitive race with other miners to complete the hash first so they need to bring considerable computing power to the network. Meanwhile the total number of Bitcoins that can be created by the system is capped at 21 million, which is forecast to be reached around 2140. In addition, the pace of Bitcoin creation is regulated in line with the number of miners at work and the progress of the total processing power of the computers in the network. This permissible number dropped from 25 Bitcoins every ten minutes in January 2013 to 12.5 as at June 2016.

Thirdly, there are all those Platform as a service (PAAS) providers, increasing in number every day, that enable their customers to create software applications based on the blockchain. The best-known of these, Ethereum, enables users inter alia to set up ‘smart contracts’. Among the most recent, though less media-hyped platforms is a French startup called Stratumn, whose PAAS offers blockchain-based services to companies and developers. The fact that the startup raised €600,000 from Otium Venture and a number of business angels last year demonstrates just how important these platform-as-a- service firms are thought to be nowadays. “Due to the complexity and technical sophistication of the blockchain, these PAAS providers are becoming indispensable intermediaries in the ecosystem,” stresses the L’Atelier BNP Paribas strategic analyst. Fourthly, we should also mention here the various ‘cryptocurrency’ wallets designed to make the bridge between digital money, like Bitcoin, and legal tender. The best-known of these, Coinbase, boasts 5.3 million users and 11.7 million cryptocurrency wallets. It goes without saying that these online wallet providers also charge commission, though at a lower rate than the currency exchange bureaux we know today. And lastly, what about the individual members of the blockchain community themselves, who do not develop and implement the technology but need to make use of it? The large number of these users helps to ensure the integrity of the technology. But doesn’t the fact that they are interdependent mean they are actually acting as their own intermediaries?

Fool-proof non-human intermediation?

100,000

miners

in operation in 2015

Well, OK, intermediation as we know it today is under threat, but the idea of pure peer-to-peer transactions is just a fantasy,” insists Amira Belhaj Soulami, pointing out that there is unavoidably an unknown third party in the equation when the blockchain arranges a transaction – whether that is the provider of the platform that enables the transaction to be carried out, the person or entity that validates the transaction, or the expert who wrote the code. And this third party has all the characteristics of an intermediary. Which means that, contrary to what some people would have us believe, the blockchain does not enable us to do away entirely with intermediaries but merely to decentralise the power of the intermediation process. Certainly, the technology is having a ‘disintermediating’ effect, but it is at the same time creating new intermediaries, with various differing roles. For instance, in an article on the Blockchain News site, entitled Beware of the Impossible Smart Contract, Gideon Greenspan, CEO of Cambridge-based Coin Sciences, describes a role for third-party trusties – whom he calls ‘oracles’ – who would create a transaction that embeds the necessary data in the chain. Greenspan argues that so-called ‘smart contracts’, which depend on written code, are not necessarily all that smart. They have gaps and weaknesses and may fall foul of unforeseen obstacles that a human ‘oracle’ can work around.

The legal liability issue

Who will be taking legal responsibility?

However, even if we suppose that the blockchain really can be properly governed by code, without the need for either human operator or administrator, who takes legal responsibility if an illicit should occur? As Primavera de Filippi asked rhetorically at the Fintech Revolution conference: “Is it the software producers? Even if that were the case, they would be protected by anonymity. And even if we managed to identify them, that wouldn’t stop the transactions taking place in the blockchain because they carry on in an independent, autonomous manner.” This brings us back to the famous assertion by American law professor Lawrence Lessig that “Code is law”. He argues that computer code is increasingly coming to regulate our online behaviour in place of the legal statutes, and that legal provisions are lagging behind the march of technology. Primavera de Filippi insists that lawyers will need to receive training in blockchain technology if they are to be able to decide where to draw the legal and regulatory lines. Meanwhile Amira Belhaj Soulami underlines that “the absence of regulation certainly allows innovation but nevertheless jeopardises the technology’s long-term future, especially as it is operating in a decentralised context. Might we not in fact be heading back to a type of concentration based on ‘clusters’, which would act as a sort of regulator?”. The advent of the Internet and ubiquitous websites gave rise to companies such as Google, Facebook, Amazon, YouTube, Twitter, eBay and Netflix, which have altered the face of media and commerce for ever. Similarly, in spite of its original ambition of bringing about a fairer distribution of power, might not the blockchain in turn also end up spawning a new race of giants?

By Oriane Esposito
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