At Canadian Electricity Association’s (CEA) 125th anniversary event this past November in Toronto, Dr. Lawrence Jones of the Edison Electric Institute named blockchain as the most important technology for electric utilities to watch for in the coming years, due to its potential to completely transform electricity sector business models. But while talking to others attending the event, I heard one question again and again:
What is blockchain?
Blockchain is one of those simple-but-complicated concepts. It seems esoteric at first, but then becomes easy to understand once you have some context. The best way to do that is to understand what it does compared to what is already out there.
Let’s say I have two apples, and you have none. You want to buy one for a dollar, and I agree to the price, so I put an apple into your hand and you put a dollar in mine. There is no point in time where we both own the apple and the dollar, or at which the apple and dollar are in escrow. We just transfer them, plain and simple.
Now…let’s pretend that I have a digital apple, and you want one, but this time you want to buy it over the internet from China. Now we have a problem. How do I know that you’ll pay me if I send the apple? How do you know that I haven’t just created a copy of the digital apple, and I’m sending the copy instead of the original? How do you know I own the rights to the digital apple in the first place?
Currently, we use third parties to mediate all transactions over communications technology. These trusted parties, like banks or lawyers, address the trust issue at the cost of added time and expense. Even with this “trust model”, a certain amount of fraud is assumed, which drives up costs for everyone. And there is always the risk that the trusted party isn’t actually very trustworthy at all.
So it seems that we have some trust issues. But what’s better than trust? Proof. Proof eats trust for breakfast. And proof is what blockchain is all about.
Sometimes referred to as a distributed ledger, blockchain protocols publicly record every transaction that occurs on them. This means every user can see every single transfer that ever happened. The “distributed” part is equally important: instead of the ledger existing in one centralized location and then controlling users’ access to it, identical ledgers exist in every location on the network.
To address privacy concerns, all accounts are anonymous and are covered by the same sophisticated encryption architecture that the U.S. Department of Defense uses. Fraud on a large blockchain with many accounts is essentially impossible. Since the blockchain takes agreement of the majority of ledgers as the truth, any fraudster-to-be would have to break through military-grade encryption on over half of all accounts on the chain.
There are so many potential applications – from copyrights and currencies to pizza delivery . Once you have agreement on who owns what, you can track everything while preventing theft, fraud and administrative errors. This becomes extraordinarily powerful with things that are tenuously held by individuals and traditionally stored in a central location, like land titles in a developing country. Corrupt governments would not be able to simply destroy records and expropriate property rights if the records were held on blockchain.
You may be thinking:
“Jay, this is supposed to be an electricity blog, and if blockchain was so great, it would give me the last ten minutes back so I could read something that is about electricity. Now I’m disappointed, like that guy who bought the ten million dollar pizzas”. But like the BTC:CAD exchange rate, the value of this investment will increase exponentially in part 2, where we get into the applications for the electricity sector.
1 in 2010, 10,000 Bitcoins were paid for 2 pizzas (10,000 BTC today would be worth about $10,030,000 CDN. I hope those were good pizzas.)