What is Blockchain

Blockchain is a technology popularized by cryptocurrencies such as Bitcoin. The easiest picture of it is that of a decentralized ledger. Just this idea is complex enough as to deserve a deeper exploration. It must be noted that blockchain itself goes beyond the applications of digital currency and can be used for anything that involves a transaction, especially when third parties must be involved. On the other hand, it is important not to forget that older technologies such as digital signing are still valuable in many (if not most) contexts.

To understand in which contexts the Blockchain approach can be used, we must start exploring other digital technologies are available, and their limitations.

Generating Trust

Whenever two people are about to sign a contract, there must be mutual trust. Sometimes this is not possible out of the box, and one must use a third party to guarantee whatever agreement is about to be made.

Let's imagine one of the simplest examples: you are about to sign a lease contract on an apartment. How do you know your counterpart is the actual owner of the property and not an impersonator? One possibility is to trust a third party, such as a real estate agency, or the government's registries.

Normally, accessing the government registries is not trivial, and they will not include relevant information in the case in which the owner gives the power to negotiate lease contracts to others, such as a realtor, or in cases in which the property is owned by a company. You can ask them the contract to show you they have the power to sign a lease contract on behalf of someone else, but how can you know the contract they show is real?

In a face-to-face situation there are ways of gaining trust. For example by paying through bank transfer instead of in cash, and actually seeing that the person has the keys to the place. However, if you plan to rent an apartment when you go on holidays, you will be requested to pay in advance to someone you have never met, for a property you have never seen. This is a big trust issue, and that is why most people feel more at ease if there's a third party involved to generate trust. Even if that means spending between a 10% and 20% overhead.

Renting an apartment, in most cases, only requires trust between two parties. Imagine that you are buying food and want to know it comes from socially responsible sources. You don't want to buy cocoa that comes from the work of enslaved children. Can you trust a corporation such as Nestle?[^ 1] To build trust in the process, another company such as Fair Trade needs to step up and certify the origin of what you are eating.

I guess you see what the problem with this is. First, it takes money, secondly, there's no way Fair Trade can be everywhere all the time. What if an intermediary mixes different sources, or plainly lies about where the raw materials came from. The problem is that the entire supply chain must be verified, step by step. With global products and, especially with food, this is an incredibly cumbersome, time consuming, and resource-intensive task.

Verifying Authenticity

Let's go back to the situation of renting a house through an agency that represents a landlord. We checked the government database and we know the property is owned by someone with the same name than the one on the contract the agency showed us. The problem is how can we verify that the signature on the contract is from the person that it claims to be.

Since it is virtually impossible to have a central place that knows the signatures of every single person, you can create an intermediate structure. You store the signatures of few individuals. When you sign a contract, you do it in front of one of those persons, and in return they sign the paper right next to your signature. When I see the contract, it is enough for me to know that the second signature is the proper one.

All this procedure is cumbersome and again requires building trust on third party. For contracts such as that of a lease, it is hard to have access to the intermediate certificates. But In the real world they are called notaries. The way in which they build trust is by having a legally binding role. If they lie they can face relatively serious consequences.

Tags: #blockchain